Room To Grow: Co-working Spaces And SMEs

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This article is part of a series exploring co-working spaces in Malaysia. Stay tuned to Smart Investor for more updates!

As offices in Malaysia face a veritable onslaught of supply, with real estate consultancy Knight Frank Malaysia estimating a total of 100.1 million sq ft of purpose-built office space in Kuala Lumpur and Selangor alone as of 2H 2017 and 16 million sq ft incoming this year, co-working spaces are helping to ease the pressure on the segment, capitalising on the appeal of flexible working solutions to small and medium enterprises (SMEs) as the gig economy becomes more widespread.

Now a frequent sight in Klang Valley, coworking spaces were popularised by WeWork, an American firm established in 2010 to provide shared workspaces for the technology startup community as well as services for SMEs, according to Colony Space Asia Executive Director and Co-Founder Timothy Tiah. As of July 2017, WeWork was valued at US$20bil.

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The coming year may see more than 70 co-working players in the segment, says Tiah.

Domestic entrepreneurs, recognising the opportunity for such ventures on local shores, have scrambled to duplicate WeWork’s success closer to home. Tiah estimates that Malaysia was home to no fewer than 36 co-working operators in Kuala Lumpur alone in 2017, with this number likely increasing to up to 70 firms this year.

Millennials Driving Demand

These facilities run the gamut from Colony’s luxury serviced offices, with an emphasis on amenities and services, to Nestspace’s café-inspired approach, as players such as Common Ground Works, Nomad Malaysia and Spacebar test the waters with diverse strategies in striving to capture a slice of the  merging collaborative working spaces market.

“Co-working space will continue to grow across Malaysia in the coming years as the concept is cost-efficient. It allows tenants to have more flexibility, as people who opt for serviced space need not get into the hassle of hiring staff or buying furniture or paying other utility bills. When they rent serviced office space, all that comes in a single bill,” says Knight Frank Malaysia Executive Director Teh Young Khean.

“We expect co-working spaces to be in demand among start-ups and SMEs. We also do not view co-working spaces as a fad; they will be here to stay. Millennials are becoming prevalent in today’s workforce, and their presence has redefined social norms in business interactions. Co-working spaces will likely suit this generation of workers, who demand more flexibility at work.”

Co-working spaces can also reduce the initial capital outlay incurred in setting up an office. According to Knight Frank Research, other factors contributing to the growth of collaborative spaces in Malaysia include government-led initiatives such as the launch of the Malaysia Digital Hub and Malaysia Tech Entrepreneur Programme, driving demand for such spaces across industries and professions, particularly tech start-ups and SMEs.

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Businesses can leverage on co-working spaces to reduce costs, says Teh.

As of 2H 2017, flexible working solutions accounted for some 500,000 sq ft of occupied space across Malaysia, or approximately 0.5% of total office stock. While lower than the Southeast Asia average of 2%, analysts project that over the next 10 years, this figure will be closer to 30% of office floor space across the region, representing a market worth US$5bil annually, according to Common Ground Works Sdn Bhd Cofounder Erman Akinci.

However, one curiosity of the collaborative workspace segment in Malaysia is that it is primarily a Klang Valley phenomenon, with the real estate consultancy noting that such spaces are still in their infancy in other metropolitan areas such as Penang and Johor. Knight Frank Malaysia Executive Director Ricky Lee attributes this to an ample supply of shop-offices and smaller office buildings, with comparatively lower rental rates.

A Tale Of Two Target Markets

“We do see co-working spaces eventually taking off in other states, some more so than others. Some co-working spaces are catered more towards corporations, and will likely stay within downtown areas, particularly in Kuala Lumpur. Others target the mass market and suburban areas and will expand to those areas, including second-tier cities and places which are more remote,” says WORQ CEO and Co-founder Stephanie Ping.

She notes that collaborative spaces can be thought of as “plug-and-play” solutions for both SMEs and large corporations, though these two client types have contrasting requirement profiles. In general, SMEs are amenable to a wide range of co-working arrangements, with added elements of service and amenities as a bonus for their convenience.

In contrast, large corporations will only tend to shift operations to collaborative spaces if they see definitive value in the work environment for themselves or for their teams, according to Colony’s Tiah, as attracting and retaining talent is more of a consideration for such players.

As co-working facilities grow in popularity and oversupply issues continue to flood the office segment with unoccupied space, particularly in Klang Valley, does this represent a fundamental paradigm shift in the preferences of the workforce towards flexible spaces, at the expense of conventional office facilities?

“We see co-working spaces as complementary to office spaces. We work with landlords to bring vibrancy into their office buildings, and when our customer base grows too big for our space, they move into the larger units offered by our landlords. We have had building owners tell us that because we create a brand new market of space for SMEs and freelancers, who were never their tenants previously, we are not their competitors, and therefore they want to work with us,” says Ping.

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Collaborative spaces have viable markets outside hotspots such as Klang Valley, says Ping.

Taking the view that co-working operators differentiate themselves by the lifestyle elements they package with their shared spaces, Common Ground’s Akinci  attributes the proliferation of players in the collaborative workspace segment to diversity in terms of lifestyle preferences among Malaysian working professionals.

However, the adage “too much of a good thing” may apply here, with rapid growth in the segment echoing the proliferation of educational institutions in Malaysia just a few years ago, leading to an extended moratorium on the establishment of new institutions of higher learning since 2013.

“We do foresee a huge influx of players in the next two years. Beyond that, I imagine that 80% to 90% of those will be gone in the next four. It’s the nature of how businesses develop now. You enter the market because the initial barriers to entry are low, but as time goes on, the leaders in the space set benchmarks that newer entries just can’t compete with,” he concludes.

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