Hyped investments

Coworkings and creative spaces have become very trendy in modern cities. That makes them very appealing to investors. However, it is still unclear whether this new industry will become profitable.

As St. Petersburg co-working market increases by 20-30% every year, the amount of creative spaces is on the rise as well. Nevertheless, according to main actors of the market, only one of the two businesses makes profit. The major trends of the growing segment of creative real estate were discussed by the participants of the Panel Discussion “Creative and co-working spaces: an unprofitable hobby or a successful business?” The Discussion was organized within the framework of the Startup Connect project, funded by the European Union, the Russian Federation and the Republic of Finland in the framework of South-East Finland-Russia CBC 2014-2020 Programme, and with support of RBK – St. Petersburg.

A steady growth

According to the Regus’ representative in Russia, the number of co-working spaces stands at 200 and 50 in Moscow and St. Petersburg respectively. “The segment is expected to increase by 20-30% every year in the following years,” predicted Irina Baeva, Managing Director at Regus – Russia. “For example, co-working market is saturated only in Central areas, while it is poorly developed in more distant neighbourhoods.”

As analytics at BEST Company estimate, the co-working market saw even a larger growth in the last year as the number of share working spaces increased by 40%. At this moment, there is 6.2 working spaces of that type per 10.000 people in the city. Besides, this number continues to rise.

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Number of working spaces in co-workings per 10 000 people

 London           Moscow          St. Petersburg
 354,83 m2  111,94 m2  34,9 m2
 63,4 spaces  20 spaces  6,2 spaces

Expert claim that flexible offices development is a promising direction in this sector. As Irina Babaeva pointed out, this is due to the lessee’s aspiration for a greater comfort. They try to switch from an open space, which a co-working offers, to an office. Meanwhile, clients are not ready to give up the amenities which they got used to, including outsourcing, secretarial, cleaning, IT, and other types of services that are not directly related to their actual work. Thereby, more co-workings either offer private offices or rent meeting rooms for longer periods. “We expect that over 60% of co-working users will move to flexible office spaces in the middle-term perspective. Today, only the smallest co-workings don’t offer flexible office solutions,” added Irina Baeva.

According to JJL, per 1000000 citizens there are 28 co-workings in Berlin, 24 of them in Barcelona, 18 in New York. This amounts to 14, 10, and 7 co-working spaces in London, Paris, and Moscow respectively.

Co-workings bring like-minded people together

As lessee values a greater comfort, co-working owners have to concentrate more on the interior design and creating a nice atmosphere. “A client is no longer satisfied with mere walls in a modern office. For that reason, co-working owners add more bright colours while decorating rooms as well as put houseplants to refine a space,” clarified Elena Shirshova, Development Director at BEST Company.

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Elena Shirshova, Development Director at BEST Company

Besides the demand for a cozy working space, Elena Shirhova mentioned several major trends in the co-working market. The first trend, which is the most obvious, is that co-workings are adopting thematic approach. For instance, one can find co-workings designed for photographers, women, women on maternity leave, artists, and married couples.

Another trend is that co-workings are now offering extra amenities such as children’s area. Some co-workings provide services of taking care of visitors’ pets, so that people could work without being distracted. The accounting and legal services are on the list of amenities for startups.

The next trend is about more co-workings popping up in such distant areas as Parnas or Kudrovo. “This market development is obvious since people prefer working close their homes,” added the expert.

Management problems

Managing a co-working is related to different problems. The most important are the following: lack of compatible spaces, difficulties in choosing a business model, and unclear prospects of co-working’s formats development in the Russian market. One of the crucial problem is still a contract term as the most part of them are short-term. Given that, it is impossible to rent spaces for a long period like in usual offices. Thus, the problem is that co-workings are not fully occupied.

Nevertheless, the co-working business is profitable. According to market actors, payback period is from 3 to 5 years.

“Due to the rapid growth of this type of real estate, it would be a promising solution to establish Association or Cluster for that industry as a communicational platform for co-workings and external actors, including the government,” said Maxim Balanev, Executive Director at St. Petersburg Foundation for SME development.

“We should pay particular attention to potential integration of existing creative and co-working spaces into international associations and nets. This could contribute to attract more clients as well as to get familiar with best management practices. Thanks to Startup Connect project, we could help to establish contacts with our Finnish colleagues at least,” added Maxim Balanev.

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Maxim Balanev, Executive director at St.Petersburg Foundation for SME development

Unprofitable creativity

Concerning creative spaces, whose notion has recently become unclear, the situation is completely different. For example, these spaces would be better called public or thematic, as participants of the discussion claim. “They are just not designed for a stable rent as events are not held on the everyday basis,” Elena Shirshova clarified a lower occupancy of creative spaces.

“If we compare co-workings and creative spaces, we will see that a co-working is a fully commercial project, and to succeed here it is essential to manage the space in an efficient way. On the contrary, a creative space is more about cultural segment, and creativity and atmosphere are more important than financial viability,” mentioned Head of co-working chain Grow Up Konstantin Korolev.

“Open spaces, which occupy the most part of a creative space, don’t make profit, but they are necessary if holding an event, an exhibition, or a faire. For that reason, a creative space’s revenue per square meter will be lower,” said Konstantin Korolev. “Besides, we see that creative spaces are often located in the buildings of poor quality. Therefore, significant investments are needed.”

“Meanwhile, these projects don’t pay off very fast; the payback period is over 10 years,” commented Deputy Vice-President on real estate at RBI Michail Gushchin.

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Michail Gushchin, commented Deputy Vice-President on real estate at RBI

“A creative space is not a business. If investments pay off, it will be good; if you can make some money, 500000 roubles a year, for example, it will be great. If you make 5000000 a year, this will an excellent result,” added RBI representative.

“As for developers, maintaining a creative space is like a social construction: no one expects economic returns,” assured Head of commercial real estate department at BEST Stanislav Stupnikov. “However, the city needs these venues; so, the authorities could consider supporting them. For example, the city could subsidize the construction of these buildings,” – supposed the expert.

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Stanislav Stupnikov, Head of commercial real estate department at BEST Company

Top-down support

Olga Kossova, the specialist of the Department for large-scale investment projects support at the St. Petersburg Committee for Investments pointed out that the city is already supporting the development of creative and co-working spaces.

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“Today we have special mechanisms to provide real estate buildings for the implementation of new projects on the level of regional and federal law,” remembered Olga Kossova. “For example, St. Petersburg law № 282-43 allows to allocate a land plot for the construction of objects for cultural, sport, educational and health care development. By concluding a concession agreement under FL-115, the investor receives a land plot for 1,5% from cadastral value to construct educational, cultural, sport, recreational, or tourist objects.”

“St. Petersburg lacks creative spaces. These powerful attractions bring together huge number of citizens. Such projects as Novaya Gollandia or Sevkabel prove that ST. Petersburg citizens are looking for the further development of similar projects, are ready to come there to spend their time and money, as well as to locate their business,” concludes Konstantin Korolev.

At this moment, the creation of several large-scale creative spaces has been announced. For instance, one of them will be launched near the Tavritchesky Garden, while another will be located close to Konnogvardeysky Boulevard, Moika embankment, and Isaac's square.

Date: April 19, 2020
Source: RBC+
Link: https://spb.plus.rbc.ru/news/5cb6cfec7a8aa909c19a3f2d