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WeWork adds to the growing co-working scene in Shanghai

Megan Zhao is a reporter withS&P Global Market Intelligence. The views and opinions expressed in thispiece are those of the author and do not necessarily represent the views ofS&P Global Market Intelligence.

Atthe beginning of July, WeWork,a global co-working space provider recently valued at US$16 billion, opened alocation in Shanghai, its first in Asia. The new WeWork venue occupies two1,600-square-meter floors of a six-story building in the central district ofJing'an.

Bychoosing Shanghai as the first stop in its Asian expansion, WeWork is countingon a diverse and fast-growing startup environment in the metropolis.

Likeother Chinese startup hubs such as Beijing and Shenzhen, Shanghai takes supportfrom Chinese authorities' effortsto promoteentrepreneurship in recent years. In the first five months, more than 70,000enterprises had been set up in Shanghai, up by 40% from the year-ago period,Vice Mayor Zhou Bo saidduring a phone-in radio program on May 26.

Newbusinesses, which are finding their feet and typically have few employees, willoften prefer flexible leases over a long-term lease commitment with a landlord.Co-working companies like WeWork tap into such unconventional demand, as theytypically rent space from landlords on long-term leases, redesign it into openworkspaces and sublease it to small businesses or freelancers at a markup on amonthly or weekly basis.

Onthe global stage, New York-based WeWork is arguably the leader of theco-working phenomena, with 111locations in 30 cities worldwide. But in Shanghai, it could face challengesgaining a foothold.

Priorto WeWork's entry into China, a number of local companies had already beguntesting the market.

People Squared was founded inShanghai in 2010. UR Work, foundedby former China Vanke Co. Ltd.executive Mao Daqing in early 2015, is flush with venture capital investmentand has expanded into 16 cities. Office developer also rolled out the SOHO 3Q shared office platform last year andhas more than 10,000 desks across 12 properties in both Beijing and Shanghai.Others, like Kr Space, are operating under theso-called incubator model, which provides office space as well as services suchas coaching, mentoring and introductions to investors.

Localpeers are competitive in pricing and flexibility. For example, WeWork, whichoffers leases on a monthly basis, has higher rates than SOHO 3Q's week-longleases. When monthly figures are translated into weekly rates, WeWork'sShanghai facility charges about 669 Chinese yuan for a desk and 762 yuan for asingle-person private office, whereas prices at SOHO 3Q's center in the samedistrict are 560 yuan for a desk and 728 yuan for an office on a weekly basis.

Nonetheless,a lot of the Chinese co-working solutions are real estate projects that provideonly a space for working and do not screen their tenants, according to Xu Tao,an executive at shared office brokerage firm Ma3Office.

"WeWorkstill has advantages in China, as it comes from where the co-working concept ismore mature. It is not just providing real estate, but also the communityculture and networking opportunities," Xu said in an interview.

Asnew supply of shared offices in China continues to be driven by the rapidlygrowing number of innovative sector startups under the favorable policyenvironment, the co-working space market will gradually saturate and operatorswill have to offer more than a polished space to be unique, Xu said.

Andas the co-working trend that galvanized WeWork takes off in Shanghai, it isalso expected to help with office absorption in the city, according to CathyHuang, assistant manager in JLL Shanghai's research team.

Thisis meaningful as more office supply is coming — the property consultancy firm predictsthat Shanghai's grade A office market is expected to nearly double by 2020,reaching 13 million square meters and surpassing Hong Kong as the largestcommercial market in Greater China.

Mostco-working office operators, though, are expected to rent and renovatelower-grade buildings at decentralized locations, Huang told S&P GlobalMarket Intelligence. "In order to maintain their profit margins, theoperators typically don't go for traditional central business districts such asNanjing Road West and Lujiazui," Huang said.

Instead,decentralized areas of Shanghai like Hongkou and Zhabei are likely to benefitfrom the growing co-working trend, she added.