Coworking IPO boom: Can India's flexi-office giants turn profitable?

Mint

5 hours ago

On 17 July, Smartworks Coworking Spaces Ltd listed on the stock exchanges and the shares traded marginally above their issue price. The coworking space provider was following in the footsteps of its industry peer Awfis Space, which listed in May 2024 and has gained 60% from its issue price.
Another leading player, IndiQube, is expected to list on 31 July, while the biggest coworking player in India by revenues, WeWork India, is expected to go public in August.
Riding a post-covid surge in customer acceptance, the sector's business models are rapidly maturing. They are all in the throes of trying to turn profitable—and sustainably so—amid a rapid scale-up.
Coworking spaces have undergone a dramatic transformation in the years following the pandemic. The top six Indian cities together boasted 32 million sq ft of flexible office space in March 2020, as per Icra Research. This is likely to have soared to 85 million sq ft by March 2025, growing by an average rate of 22% a year. Icra expects this growth to continue until March 2027, and vacancy levels to remain low, in the 15-17% band.
Once seen as catering to individuals and small teams, coworking office spaces are increasingly on the agenda even for medium and large establishments. This wider acceptance is driving a change in customer profile. Until March 2020, nearly 70% of the occupancy in coworking spaces were with the information technology (IT) and IT-enabled services (ITES) sectors. In four years, this dropped to 39%, and startups as well as sectors beyond engineering and financial sectors have become clients.
Benefit of size
Larger customers are a win-win arrangement for both coworking companies and customers (i.e., businesses taking up the spaces). For customers, it frees them up from the more expensive proposition of owning their own space, while facilitating a flexible and hybrid model of working that many employees have come to prefer. For coworking space providers, larger clients translate to relatively less effort on the sales side and more surety on the revenue side, especially if they can negotiate longer tenures in such deals.
For both Smartworks and IndiQube, about 60% of the revenue is coming from clients that have taken up more than 300 seats each. Including clients that have taken up 100-300 seats as well, the share jumps to 85-88%. Such scale in how they earmark their office spaces is a big way in which coworking companies are optimising their revenue and sales efforts.
Journey to profits
These companies are also exploring new cost-side strategies. There is a conventional 'straight lease" operating model, in which coworking companies typically lease bare-shell properties for extended periods (often 10 years with a 3-5 year lock-in), fit them out, and then offer them to customers. This is the principal model for both WeWork India and Smartworks.
Another emerging model is the 'managed aggregation" model, which Awfis is additionally adopting. Here, the space owner bears the fit-out costs, in part or in full, in return for a fixed guarantee, plus a share in revenue or profits. This reduces the capital requirement for coworking firms.
At present, these companies are making healthy margins at the operational level, but are struggling to generate net profits. In their business model, capital investments (in fit-outs) are front-loaded and depreciated over time. Being a relatively new and expanding business means this burden is large right now.
Exits amid expansions
The four coworking companies named earlier, which have all gone public or are about to do so, are all generating strong cash flows at an operational level. That's because coworking spaces typically charge customers upfront. Those strong cash flows, boosted by periodic fundraises, have gone a significant way in enabling them to finance their expansion and also manage debt.
As a result, other than IndiQube and to some extent Smartworks, the other two are not looking to use the IPO proceeds for expansion. In fact, in all four companies, promoters and investors have sold their shares in their IPO, a transaction in which no money goes to the company.
While the offer for sale (shares sold by promoters and investors) is 80-100% of the issue for Awfis and WeWork India, it is smaller in case of the other two, with a greater share of the proceeds going to the company. Capital infusion or not, converting expansions into profits will take time and will be a key marker of how the market values coworking space providers.
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