Last year, US co-working space operator ‘WeWork’ made headlines in Hong Kong by leasing a combined 105,400 sq ft in Tower 535 (Causeway Bay) and MassMutual Tower (Wanchai). Shortly after, Shanghai-based ‘naked Hub’ announced plans to also set up in the city, leasing 55,000 sq ft in EIB Centre in Sheung Wan.

In a market where net demand growth has been thin—a net withdrawal of about 105,700 sq ft in the overall Grade A office market in 2016—the arrival of co-working space operators represents a welcome source of new demand for the leasing market.

Both WeWork and naked Hub have plans to expand their footprints while a number of other operators, including some of the city’s incumbent serviced office operators, are exploring options to also establish new locations in the city.

Co-working companies limited by their business model

The arrival of co-working space operators on the leasing market, however, will be restricted by their business model.

Operator revenue is derived primarily from the leasing of ‘seats’. For members, this usually translates into a monthly fee. At present these monthly fees can range from HK$2,000 – 12,000 (US$258 – $1,545) per seat, depending on location and type of membership. By taking into account monthly membership fees, office seating density levels, capital expense (capex), operating expense (opex) and business margins, one can quickly deduce the rental tolerance of operators.

Using a monthly membership fee of HK$6,000 (US$773) per seat at a density of 70 sq ft per seat, an operator can generate revenue of about HK$ 86 (US$11) per month on a square foot basis. Deducting monthly opex, estimated to be HKD18 (US$ 2) per sq ft to account for labour and utility costs, and a 20 per cent operating margin, leaves just over HK$50 (US$6) per sq ft for monthly rent.

Based on the above calculations and current asking rents, there are fewer than 110 Grade A office buildings, or about 37 per cent of all Grade A building stock, that could accommodate the rental level of co-working operators.

Most of these buildings are located outside of Central such as Wanchai/Causeway Bay (12 per cent of total stock), Tsimshatsui (20 per cent), Hong Kong East (20 per cent), and Kowloon East (19 per cent). So while co-working may prove to be a driver of demand growth, it is likely to be focused on only a particular segment of the market.

Will co-working firms rent Grade A office space in Hong Kong?

Still, that doesn’t mean that co-working operators won’t establish locations in Central. Though most Grade A offices may be beyond the reach of their current business models due to rental rates, Grade B and C offices are very much in play. Indeed, naked Hub’s lease at EIB Centre—a Grade B office building with relatively smaller floor plates—is testament to this. Moreover, some operators are now reviewing business models to assess whether there is sufficient demand to open locations in premium Grade A office buildings at premium membership rates.

The proliferation of co-working space operators is likely to only directly benefit a particular segment of the office leasing market. This will likely be at the lower end of the market where demand from PRC occupiers has been noticeably weaker.

Figure 1:  Co-working’s Revenue and Cost Calculation
Sources: Market Sources, JLL Research

For more information on co-working in Asia Pacific, download our Co-working report here.

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