The price of free beer!

With a previous valuation round of $47bn, and a meteoric rise from its origins as a small flexible workspace operator offering a collaborative environment and free beer, WeWork is widely seen as having taken ownership of the ‘prop-tech’ and flexible working trends. So does its widely reported IPO struggles represent a risk to growth and funding in this rapidly growing ecosystem? No, and here is why…

Despite the publicity surrounding WeWork, the proposition of an arbitrage between long-term and short-term leases is not particularly new. IWG, Regus (now part of IWG) and Landmark were all well established businesses in the short-term office leasing market by the time WeWork was founded in 2010. WeWork’s pace of growth has undoubtedly been faster; however the group’s impressive performance has acted as a positive spotlight on the ‘prop-tech’ sector in general, raising awareness and subsequently interest.

The Prop-tech ecosystem is still developing and continues to see a rise in new entrants. These new entrants are enabling a “Space-as-a-Service” model to emerge, aimed both at increasing utility and productivity within exiting corporate workspaces, as well as expansion into new geographies using strategic flexible workspaces. This has the combined benefits of improving the working environment for employees while providing cost efficiencies for CFO’s.

Returning to the flexible workspace market in which WeWork operates, attractive growth rates are being achieved by many small start-ups, whilst established players such as IWG maintain steady growth (H1’19: +10% y/y l-f-l) and are profitable (without resorting to community adjusted EBITDA).The entrance of real estate giants such as Tishman Speyer and CBRE, attracted by the strong utility rates and high yields, is also an encouraging signal.

A key driver behind our positive view on the space, and why WeWork valuation concerns are not a signal of wider trends, is the changing mix of underlying tenants. Flexi-working is a maxim increasingly adopted by Enterprise customers seeking to attract and retain talent, and it is exposure to these customers that make us believe that flexible working has truly begun to embed within the real-estate psyche. Strong fundamental growth in this space is expected to continue, and we recommend players in prop-tech raise a cold one to WeWork for shining a light on the opportunity.

Winners and losers: Commercial property owners and managers are expected to benefit strongly from the flexible working space and space-as-a-service themes. Higher utility of space leads to higher yields, and in the event of downturns, we also believe flexible working spaces can provide Enterprises with the dynamism necessary to weather storms. A number of facilitators of flexible working offices and improved commercial office productivity have already emerged, expanding the prop-tech ecosystem and supporting higher utility rates. Losers are likely to include commercial property builders driven by higher utility reducing demand for new space.

AIM prop-tech companies:
essensys: IT provisioning for flexible workspace
SmartSpace Software: provider of Integrated Space Management Software

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