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WeWork’s sparsely populated China offices drain company’s cash

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Via Financial Times

China has emerged as one of WeWork’s worst performing markets as a local operation once seen as critical to the office provider’s global growth suffers from ultra-low occupancy rates and is “bleeding cash”, said people with direct knowledge of the business.

The Chinese subsidiary, which last year was valued at $5bn in a dedicated funding round led by SoftBank and its Saudi Arabia-backed Vision Fund, has proven a drain on the company’s cash position. Occupancy figures recently reviewed by the Financial Times underlined the poor performance in several key cities in the country.

WeWork locations in Shanghai, where it has installed 43,600 desks, had a vacancy rate of 35.7 per cent in October. In Shenzhen, where the company has 8,000 desks, 65.3 per cent were vacant, while 22.1 per cent of the group’s 8,900 desks in Hong Kong sat unfilled. The company was also expanding in central China, with multiple offices in Xi’an. There, it suffered a vacancy rate of 78.5 per cent.

The group is now evaluating properties in China for closure.

Executives at WeWork, which averted bankruptcy through a rescue deal with SoftBank, are planning to significantly scale back its operations in China, parts of Asia and Latin America as they ready to restructure the company. The turnround plan will also see the group axe 4,000 jobs as SoftBank attempts to position the company on a path to profitability.

The rapid global expansion put WeWork into a precarious financial position, with the company facing a cash crunch in the coming weeks had it not sealed a deal with SoftBank — its largest investor — for a $6.5bn capital infusion.

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The brisk pace of new building openings has also weighed on WeWork’s overall occupancy levels, which slipped from 79 per cent in September to 78.1 per cent in October, according to the figures reviewed by the FT.

As part of the turnround effort, WeWork is looking to boost occupancy rates to above 90 per cent.

WeWork declined to comment.

The push into emerging markets like China, which generated $99.6m of revenue last year, has weighed on the company’s margins. WeWork was offering private offices in its new Xi’an location for as low as Rmb2,100 ($300) a month. That is less than half the price for a comparable space the company offers in Chicago, Frankfurt or Paris.

WeWork was not alone in its zeal to crack the Chinese market, selling more than 40 per cent of the subsidiary to other investors in 2017 and 2018. SoftBank entities paid $650m for a stake in the unit, while private equity group Hony Capital invested $150m. WeWork went further still to establish a foothold in Asia, buying Chinese rival Naked Hub for $480m in cash and stock last year.

The expansion across China, where WeWork operates more than 120 buildings, coincided with a softening property market there, several property groups told the FT. Vacancy rates in 17 major Chinese cities have climbed to 21.5 per cent, the highest level since the financial crisis, data from commercial property group CBRE showed.

“There has been a lot of speculative office development [in China] and there is a high vacancy rate compared to Hong Kong, Singapore or Tokyo,” said Jonathan Wright, head of flexible workspace services in Asia for Colliers, the real estate company.

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WeWork is especially exposed to some cities like Shanghai that have experienced sharp declines in occupancy rates this year. Cushman & Wakefield estimated vacancies had surged to 18.5 per cent of the commercial property market in Shanghai in the third quarter from 14 per cent a year earlier. WeWork operates 50 locations there.

“Overall office leasing demand has recently softened in mainland China . . . [with] a general cost-saving strategy adopted by most tenants given ongoing trade tensions and economic growth slowdown,” said Catherine Chen, a researcher with Cushman.

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