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WeWork to the rescue in Brexit dispute – and it’s here to stay

WeWork to the rescue in Brexit dispute – and it’s here to stay

On Thursday the European Medicines Agency brought to an end the major Brexit-related legal dispute over its London headquarters by agreeing terms with shared office provider WeWork to sublease 280,000 sq ft over ten floors at the prominent 30 Churchill Place in Canary Wharf. 

Already one of the largest commercial property tenants in London (second only to HM Government), WeWork certainly seems to have come to the EMA’s rescue in this case (the EMA have now dropped their appeal against the initial High Court decision, much to the dismay of our litigators who were looking forward to the appeal ruling…), but what do landlords think of this Silicon Valley-born industry disruptor?

At its core, WeWork’s business model involves securing a mid to long term lease and re-renting to users at a premium. Such a model will always be subject to the ebbs and flows of the prevailing economy and is one of the primary reasons why some landlords are apparently reluctant to release space to the co-working provider. 

Another frequently expressed concern relates to WeWork’s covenant strength. Although recently valued in excess of $47 billion, this needs to be read alongside the fact that – at present – WeWork is not a profitable business, at least in terms of its balance sheet (US media reports indicate losses of $1.9 billion in 2018, up from $933 million in 2017). That said, the same question marks over profitability apply equally to the likes of Uber, Tesla and Netflix, and seems to be par for the course when dealing with venture capital backed start-ups - not (necessarily) cause for undue concern if the underlying business is sound. 

The bulk of WeWork’s losses stem from the fact that unlike the likes of Uber or Netflix, WeWork has to deal with major and tangible 'front end' expenditure when they expand into new sites. Acquiring real estate in the likes of LA (20 locations), New York (60 locations), London (32 locations) and Shanghai (35 locations) plus the associated capital expenditure and set up costs unsurprisingly comes with a hefty price tag. 

WeWork’s valuation also reflects the fact the business is still in its aggressive expansion phase, seeking to capture the maximum market share as quickly as possible. The company is agile enough to react to opportunities as and when they arise - the EMA deal is a perfect example of that. In due course, it expects growth will stabilise and profitability will increase (WeWork is already taking steps to reduce its overhead risk, including purchasing properties rather than leasing and incentivising tenants to lock-in to longer lease terms). 

Landlords are wary of WeWork’s potential exposure in the event of an economic downturn where, given the demographic of their tenants, WeWork could find it challenging to maintain pricing, occupancy and cashflow – key performance indicators for any property business. To counter this, WeWork is working more and more with ‘institutional’ tenants (think along the lines of Facebook, IBM, Amazon, Microsoft, Deloitte and HSBC (HSBC recently signed up for over 1,000 desks in central London). WeWork offers a ready-made ‘Headquarters’ concept to enterprise clients and the group is also diversifying its operations into sectors ranging from WeWork Labs (an incubator for tech companies), WeGrow (education), Rise by We (gym and spa) and WeLive (residential), all of which serve to hedge exposure to economic shifts. 

As for falling occupancy rates which accompany any economic slump, WeWork says that “Community is our catalyst” – we think any business would be hard pushed to disagree with that. In our own offices, the resounding feedback is that people enjoy coming into the office and being around their colleagues. While we have the flexibility to work from anywhere in the world at any time, more often than not our people tell us that they want to be around colleagues - collaborating, exchanging ideas, having ‘face time’ and generally living in the physical world for a few hours - exactly with what WeWork is offering in abundance. 

WeWork also appears to have the flexibility to react to changing market conditions where many institutional landlords do not, while attractive pricing policies, dynamic product offerings and a considerable market share put WeWork in a strong position to capitalise in distressed economic conditions. 

Whatever the economic climate, companies will always have a basic need for bricks and mortar buildings to bring their people together. 

With its innovative approaches to core business needs, WeWork is certainly forging its own path in the commercial leasing world and beyond and definitely one to watch. Who knows, WeWork may well ride to the rescue of a few more well-known names in the near future…

Paul Coyle
Associate
Burness Paull LLP 

Burness admin