WeWork is in a world of its own

WeWork, the flexible office provider, knows what people want, but is expanding too quickly.

931_MW_P21_Inv-Prop

WeWork, which rents premises and then sub-lets them as trendyco-working office spaces, was recently valued at $47bn after Japanese investor SoftBank said it would invest a further $2bn in the group. While $2bn might sound like quite a vote of confidence, this was way down from an original $16bn. Moreover, the money is no longer coming from SoftBank's $100bn Vision tech fund, whose investors had apparently "balked" at the commitment, reports the Financial Times. Little wonder WeWork's offices might be pretty, but it needs to show that it can make the profit needed to justify its stratospheric valuation.

The company's recent rebranding (as the "We Company") and its addition of co-living and education branches is an attempt to show that it has growth potential beyond co-working. As co-founder Adam Neumann told business magazine Fast Company, even "if the world goes into a real downturn, the one thing you are not going to see us do is be afraid or slow down or take less risks".

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WeWork launched in New York in 2010, and now runs 554 office locations across 97 cities. In 2017 it took on another 1.2m sq ft of office space in London, making it the capital's largest private occupier of office space. WeWork now has £3bn of UK leasing commitments over the next 20 years, says data provider CoStar.

"WeWork's expansion is an attempt to show potential beyond co-working"

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In effect, WeWork's business model is similar to that of a bank. It borrows long (signs long-term rental leases) and lends short (sublets to short-term renters at a higher rate). And the most pressing issue for the company is whether it will be able to meet its future commitments. In 2018, its European arm doubled its UK revenues. Yet after a year of expansion, it saw its losses triple to £32.3m. The idea that it might be risky to take out long-term leases on the assumption you'll be able to sublet them is apparently not lost on Neumann, who seems to be hedging his bets. The Wall Street Journal notes Neumann owns stakes in many of the properties WeWork has leased. "In a public company,that would be considered highly controversial," Charles Elson of the Center for Corporate Governance at the University of Delaware told the newspaper.

Is co-working the future?

Although We Work is not listed, looking at its valuation gives a good context if you are considering a potential investment in the sector. As the Financial Times's Lex column pointed out last summer, WeWork's steep valuation "depends on a blinkered faith in its originality despite a crowded market of competitors".

In contrast to WeWork, for example, IWG, which owns office hire group Regus, is profitable. But after two takeover approaches from private-equity firms last year, the company has hired an adviser to sell its own flexible-working unit, Spaces. Property developer British Land (LSE: BLND) also operates its own co-working brand, Storey, but plans to focus on flexible working in the future, while selling out of underperforming retail premises (a restructure that prompted the exit of two bosses). It recently bought its first building that will be specifically geared towards co-working. Of its £16.8bn portfolio, it owns £12.9bn. As Investors Chronicle notes, the group has a "modest" loan-to-value ratio of 26.7% and speculative development exposure of just 3.7%. Its shares currently trade at a steep discount to the value of its portfolio a bargain next to WeWork.

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