South African real estate investment trusts (Reits) are looking to the boom in flexible or shared workspaces internationally as one of the solutions to the glut in the local office property market.
Mid-cap Reit Emira is the latest local property counter to enter the shared workspaces scene. It pulled off something of a coup in the space by beating some of its much larger sector peers with the announcement on Monday that it had secured global shared workspaces giant WeWork as a client. WeWork will house its first presence in Cape Town at one of Emira’s jointly-owned properties.
Flexible or serviced offices are not new to SA – the likes of Regus and The Business Exchange have been operating in the country for years. However, WeWork seems to be the hottest thing in commercial property right now, with deep pockets, more creative co-working spaces beyond just serviced offices, and a growing global footprint.
WeWork seems to be working
The US-based group co-founded by Adam Neumann and Miguel McKelvey in 2010 is signing deals across its home market as well as Europe, Asia, Australia and SA. It is reportedly worth $47 billion and is now the biggest landlord in major cities including New York, London, Washington DC and Chicago.
While WeWork’s first site in South Africa has been confirmed for Redefine Properties’ landmark new Rosebank Link tower in Joburg, Emira’s latest move in Cape Town is one to watch.
Speaking to Moneyweb on Tuesday, Emira CEO Geoff Jennett confirmed that the fund is in discussions with WeWork on another of its properties in Cape Town.
“Right now, we’re just thrilled to have secured the first WeWork site in the Mother City, located at the recently revamped 80 Stand Street building, which we co-own with Swish Property Group. WeWork will be taking up four floors of the 11-floor building in the Cape Town CBD on a 10-year lease that includes the option to take up more space in future,” he says.
“I believe that Cape Town, as a globally-recognised city with a strong entrepreneurial culture, is even better suited to WeWork. Now that we have secured the Stand Street deal, we are in discussions with them on another of our buildings.”
Office vacancy rates in Cape Town and Johannesburg are now in the double digits. Moneyweb reported last week that office vacancies in Sandton Central are at more than 18% due to poor economic conditions and an oversupply in the market. Other property players have put office vacancies at more than 20% for the broader Sandton node.
Opportunity for landlords
Jennett says flexible or shared workspace groups like WeWork present landlords with an opportunity to lower office vacancies in a tough market.
Patrick Nelson, WeWork’s head of real estate for the Europe, Middle East and Africa (Emea) region, says that as WeWork prepares to launch its first location in South Africa, it was pleased to announce its expansion to Cape Town.
The group now has more than 100 000 members in the Emea region, which represents about a quarter of its global customer base.
Responding to questions from Moneyweb, Nelson said Rosebank Link, which will house SA media and tech giant Naspers’s Joburg team, will open in August as the first WeWork location in Africa.
“We’ve had great interest from a mix of companies – from small start-ups to large companies – to take space with us in South Africa,” he says. “While I can’t mention other companies right now, what I can say is that our enterprise membership is expanding. Some 40% of our global membership is now made up of these larger companies like Naspers, and we’re excited to welcome them to the space. Globally, we’re home to a variety of enterprise companies, including HSBC, Barclays, Deloitte, Salesforce, Bosch, Citi and Refinery29.”
In addition to Rosebank Link, WeWork will also be opening at another Redefine property in Sandton. Located at 155 West Street, the building has undergone an overhaul after being vacated by Discovery Health over a year ago. Both 155 West Street and 80 Strand Street (Cape Town) will open in Q4 this year.
“Right now, we’re fully focused on growing our community in South Africa, [however] I have no news to share in terms of our expansion plans outside of Johannesburg and Cape Town,” says Nelson. “Our vision is to expand WeWork to new markets around the world. We’re excited to open the doors to our first location in Africa this summer, and see WeWork expand across South Africa.”
Commenting on WeWork’s entry into the local market, Craig Smith, Anchor Stockbrokers’ head of research and property, said WeWork’s model is set to disrupt the office sector in SA.
“WeWork is a formidable player,” he says. “There is nothing like it in SA — it is able to cater to both entrepreneurs/freelancers and corporates/enterprises.”
Smith points out that in the growing flexible and co-working space there is also Growthpoint’s Workshop17, as well as Spaces, which is owned by the same global group as Regus.
“WeWork is likely to compete with traditional landlords in my view, but a positive is that it will force traditional landlords to up their game and customer service,” he adds. “It has a core focus on the customer experience and provides users of space with an array of additional services. WeWork has also made significant inroads into the enterprise market in recent years. In SA it has secured Naspers, and I’m sure more will follow.”
However, Garreth Elston, chief investment officer of Reitway Global, is not so convinced, saying the current WeWork business model is unsustainable.
“I have concerns about WeWork, primarily driven by the scale of the company’s losses [$1.9 billion in 2018], its hyper-aggressive growth trajectory, and the use of WeWork-created accounting metrics to claim profitability [such as community-adjusted earnings before interest, taxes, depreciation, and amortisation (Ebitda), which excludes items such as marketing, general, and site development and design costs].
“WeWork though is undoubtedly an attractive proposition for South African office landlords, taking up space in a declining, oversupplied market,” he says.