Office rentals - WeWork prepares IPO, but is Regus a better bet?

Two different office rental companies embrace the concept of co-working.

Article updated: 11 September 2019 8:00am Author: Michael Baxter

WeWork — the ‘co-working office rental company’ — and its parent We Company, has been planning an IPO, initially hoping for a $47 billion valuation. Then problems set in. But the tale of WeWork also offers a pretty good illustration of what’s good and bad about tech, and then there is Regus.

I used to rent a serviced office, this was when I was young and used to make a lot more money than I do now. It was great, you only had to commit to one month of office space at a time, a reception/telephone answering service, and access to such high tech as photocopiers and fax machines, were all thrown in. But then, the office I rented was set amongst a rabbit warren of tiny offices and I had no idea who my neighbours were.

Many years later, two things happened. Firstly, laptops and other technology that supported communication such as smart phones, came along. This was a big deal as, for certain businesses, you no longer needed filing cabinets. You could pretty much work anywhere.

The other thing that happened was the Android. It was only recently that I became aware of how significant the Google operating system for mobile phones was. Because it is open-source, startups could more easily develop products that built on Android. Of course, it was not the only open-source product. I really cite Android as a metaphor. Other open-source products such as Word Press or Drupal meant it was possible for companies to build websites for much lower costs than before. Thanks to open-source and other related technologies, and indeed thanks to the internet, barriers to entry tumbled.

These two developments led to a rise in the number of startups looking for a new way of working. They didn’t need a fixed office, but they did want to work alongside ‘like minded’ people.

So the co-working office was born. Typically providing open planned centres and designed to encourage communication between different companies in the centre, they supported a new way of working. I first discovered a co-working space five years ago when I stumbled across the RainMaking loft in London, by Tower Bridge. Sadly, it’s no longer there, but when I walked through the centre on the way to a networking event, I felt as if I could smell entrepreneurial endeavour, dynamism, but also collaboration.

If you speak to entrepreneurs in shared-offices they talk about the benefits of getting to know other entrepreneurs, their businesses might be entirely different, but they have in common an understanding of the highs and lows of running a startup.

This is the market that WeWork operates in. They take the idea of encouraging interaction between the individuals that work there to the extreme — an area where you can obtain free beer on tap, lots of communal areas — table tennis, etcetera.

And WeWork, the leading co-working company, with offices around the world in many locations — in central London it is the single biggest office occupier — has been a phenomenon.

Of course, it’s not really a tech — you can book space in the centre online, but a good proportion of its customers are techs.

That’s the first problem — an awful lot of non-techs are describing themselves as techs in the hope of getting another zero stamped on their valuation. We see it in AI too, many companies boast about having AI technology inside their products, when in fact they don’t. It reminds me of the late 1990s, when some companies put after their name in an attempt to increase valuation.

The second problem relates to good old fashioned profitability. While WeWork’s revenues rose four-fold last year, for every dollar it makes, it seems to lose two dollars. Revenue hit $1.8 billion last year, but frankly, generating lots of revenue by subsidising the price you sell your product at, is not so clever. What We Company has done brilliantly is persuade investors, in particular SoftBank, to invest lots of money in the company.

The third problem relates to corporate governance — I guess the open source era, which has helped the company, stands as a metaphor for transparency. But while WeWork offices are often surrounded by walls of glass, the structure of We Company is not so transparent. It also emerged that Co-founder Adam Neumann owns a number of the properties the company leases and the planned dual share structure for the company vexes would be shareholders.

At one point, slated market cap on IPO was $47 billion, now there is talk of $20 billion. SoftBank, which is busy trying to raise money for its second Vision Fund has urged We Company to cancel the IPO, because, or so I understand, if We Company is valued at just $20 billion, SoftBank will have to show that in the Vision Fund books. These things are delicate, if We Company is revalued downwards, what Vision Fund investee will be next?

Regus on the other hand is profitable, but it has got challenges related to the rise of WeWork, as it is forced to embrace the provision of co-working.

Shares in the Regus parent company, IWG, are up by more than two thirds over the last year, but profits fell in 2018 relative to the year before.

What this company has going for it, is that it operates in a business area that is extremely fashionable — to meet this demand for co-working, it had to change, but the core business was already there.

But it has a fight on too.

Barriers to entry in this business are low, that’s a problem for both Regus, trying to expand market share, and WeWork, trying to convert its global market share into higher revenue by increasing price and not overheads.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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