Co-working spaces: Road to achieving ROI goals

Nakul Mathur

Over the past one-and-a- half year or so, the unthinkable has happened. No, we have not yet developed a cure to AIDS or destroyed all the nuclear weapons in the world, but the prices of real estate in India have stopped rising. In fact, the real estate prices have  dropped significantly at some places that were once considered a better investment option than gold. So, as far as ROI is concerned property is no longer on top of the list. As a result, owners and landlords have had to shake themselves up from their complacent seats and renegotiate terms of rentals with tenants as the rental market corrects itself every year.  In such a scenario, leasing out to co-working/multiple office spaces has emerged as a great alternative to keep the cash coming in.

The way forward for owners

Till now in a typical lease-based arrangement the owner/the landlord used to get a fixed rental for three years which was then increased by 15-20 per cent. 

However, in the present situation, taking a realistic projection, it is highly unlikely that rents will increase by 15 per cent every three years. In such a scenario, it is only by entering the co-working space domain that owners can  hope to realise the ROI goals from their properties. By letting co-working space operators’ work from their property, owners can optimise the returns from their spaces as these players keep on adding value which ensures better returns than the market price of the property. 

Models to opt for

Some of the revenue share and management contract-models that owners can opt for include: 

• In revenue share model, an operator guarantees a minimum amount of rent to the owner and additionally, would share some percentage of the revenue from operations. This fixed and variable component of the revenue varies with factors such as location of the property, transportation options etc. From a property in  a prime location operators would typically pay 50-60 per cent of the market rent as minimum guarantee and 40-60 per  cent of the operational revenue over and above. The owner gets to cover at least half of the risk associated by recovering 50 per cent of the rental and most of the times, tend to make more revenue from operations with growth in the business.
• The management contract model ensures that the operator assumes complete responsibility of marketing, staffing, sales, day-to-day operations of the business and in lieu takes a percentage of the revenue operations. This percentage taken by the operator/manager typically falls in the 15 per cent bracket. While this does not provide the owner with an assured income, he/she can earn greater amount of revenue as the expenses are borne by the operator.

Things to watch out for

• Carefully evaluate the number of services provided by the operator. It takes a lot of services to run a business centre and the operator, post providing all of these, needs to keep a profit margin as well. Each service can add to the bottom line. Thus, it is necessary for the owner to keep a track of the services guaranteed by the operator.
• Know about the features that distinguish your property in the market. These may include location, transportation, public amenities, nearby markets etc. 
• It is better to stick to a reputed operator as the business centre industry is fiercely competitive and even if a reputed operator is not promising you high returns, it is better to opt for him. 
• Whether it is start-ups, SMEs or MNCs, every market segment has certain pros and cons and it is important to develop a sound understanding of the same before joining hands with an operator.

— The writer is managing director, Avanta India