Management contracts are on the rise! We spoke to Chris Bannerman, Managing Partner at Vivid Invest, to learn more about the benefit of management contracts, and the unique partnership between Vivid Invest and The Hive’s newest Lai Chi Kok location!
The Hive, Asia’s leading flexible workspace operator, recently announced the upcoming launch of The Hive Lai Chi Kok, its 10th location in Hong Kong, and 20th in the Asia Pacific region. Boasting an impressive 8,000 square feet of open-plan workspace, The Hive Lai Chi Kok comes equipped with a pantry, meeting rooms, and keyless entry, providing the perfect home for businesses at every stage. The 4,000 square foot rooftop terrace will also be fully-fitted with a high-end BBQ setup, cosy lounge areas, and a fully-stocked bar, all of which will be used to host a myriad of member events, from Open Air Cinema nights to Happy Hour Fridays.
The Hive Lai Chi Kok is a partnership between Hong Kong Hive Limited and boutique Hong Kong real estate developer and private investment fund, Vivid Invest. Although the usage of management contracts has been steadily increasing in popularity in other markets, the management partnership agreement between The Hive and Vivid Invest is the first of its kind in Hong Kong, and is indicative of how the coworking industry is moving away from traditional leasing agreements and towards management contracts with local property owners and developers. Hive Life sat down with Chris Bannerman, Managing Partner at Vivid Invest, to learn more about management contracts and why Vivid Invest chose to collaborate with The Hive.
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Hello Chris. Could you define what a management contract is?
Broadly speaking, management contracts aren’t a completely new tool – even here in Hong Kong, they’re omnipresent if you work in an office building every day. On their way to work, most people will pass by a reception desk, and see some signage on the wall indicating that the building is managed by a certain operator. It’s very common that real estate owners sign management contracts and hand over their assets to management firms who handle that professionally, from services like reception, security, cleaning, even up to lease management.
However, the majority of coworking spaces are currently still managed based on a traditional fixed lease agreement, where the coworking operator signs a lease for a couple of years and has the freedom to use the asset as he likes during that period. After the lease period ends, he’ll hand it back to the landlord.
With a management contract , the landlord becomes the de facto owner of the coworking space. Instead of leasing out the asset for a fixed lease, a management contract is signed with an operator to manage the asset for the landlord for a fixed or variable fee. With this agreement, the coworking operator doesn’t need to come up with a fixed lease payment each period but is instead paid for his services. The landlord on the other hand collects all revenues and pays all expenses of the coworking operation. So it’s quite a different approach compared to the traditional lease model.
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What are some of the benefits of management contracts that make it superior to a fixed lease model?
The best way to illustrate the benefits of management contracts is by talking about the shortcomings of classic lease agreements. If you’re a coworking operator, normally your expertise and strategic focus is on creating communities, developing a strong brand, and building your customer base; and not so much on asset development or asset management – elements which the coworking operator automatically takes on when he signs a classic lease agreement.
Secondly, specialszed business models, like coworking, require extensive capital expenditures (capex) to adjust the space to the requirements of a coworking operator. That includes upfront investments but also further investments when the lease expires and the operator is required to restore the space to its original state. That puts a high fixed cost burden on any operator which he needs to basically earn back within the lease period, because he doesn’t know if he’ll be able to renew the lease, what kind of new terms there will be, or if it would still be beneficial to lease the space. Many coworking operators try to alleviate these problems by signing long term lease agreements of 5, 10, or 15 years. But it effectively means that they are taking on a higher contractual risk – if the market doesn’t move into the direction they expect, these kinds of deals can sour very quickly as we have seen in recent history.
Lastly, operators are exposed to unsteady revenue streams due to market cycles and competition. Their buy-bulk-sell-piece model usually only works in bull markets but not in bear markets.
On the other hand, with a fixed lease contract, the landlord is exposed to potential problems, such as lease forfeitures by the tenant, if his tenant goes bankrupt, or prolonged vacancies. So the fixed lease model also has downsides for the landlord, and he’s not really optimising the revenue potential of his asset either – he’s just collecting a fixed lease, but it doesn’t necessarily mean that this lease fee is the most he could earn with his asset.
That’s where the benefit comes in for coworking operators as well as for landlords to use management contract deals. It allows the coworking operator to focus on his core strengths, which is building communities, building a brand, and to grow quickly. At the same time, it gives landlords the opportunity to optimise the underlying revenue potential of their own assets. In that sense, it’s a mutually beneficial arrangement – but it requires a coworking operator who’s really good at building communities and has a strong brand, and a landlord who understands the underlying value proposition of his own asset and is willing to explore it.
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If management contracts are mutually beneficial, why is this the first time we’ve seen coworking spaces use one in Hong Kong?
The coworking industry is still very young. People have been talking about it more in the past couple of years, but looking at the overall trend, it’s still an industry in its really early stages.
The industry will naturally evolve towards more management contracts, but I think many coworking operators – specifically those who have already been in the industry for quite some time – are already aware of this fact and are more willing to switch to management deals. The current COVID-19 crisis might even be accelerating this – asset owners who are suddenly faced with vacancies or falling rents are becoming more open to exploring new ideas.
What drove Vivid Invest to collaborate with the Hive?
When we decided to collaborate with a coworking space, we needed a strong partner, so we had quite an extensive vetting process – we talked to more than half a dozen other coworking operators keen on operating the space.
An element which was quite key to us was an entrepreneurial mindset, meaning somebody who was similar to us; comparably still a small player. That brings a lot of entrepreneurial spirit and it’s easier to work with a partner who has a similar kind of mindset. That’s something which we definitely found when we met with the Hive’s management team, and I think that’s something which sets the Hive apart from a number of other players we talked to.
One other factor which we valued was that the Hive was not one of the coworking operators who just jumped on the bandwagon back in 2017 and 2018, when everything was booming and everybody was opening coworking workspaces left, right, and centre. The Hive stuck to its original strategy of promoting organic growth and maintaining its current locations instead of suddenly over-signing a lot of new capacity, which quite a number of other players did. We had a feeling that the Hive team knew what they were doing, that they had a very clear strategy for taking on new locations, and possessed a very strong team to develop those locations – that was one of the defining factors in making this decision.
How can companies interested in management contracts get started?
Most landlords do not realise the value potential locked in their assets, and they only refer to going market lease rates as reference points to assess the value proposition of the property. The real value proposition is usually considerably higher but requires extensive market knowledge and capabilities. So, the first step for an operator interested to strike a management contract with a landlord opposed to the traditional lease assignment would be to illustrate to an asset owner the true underlying value proposition of his asset.
What are some trends you see in management contracts in the next few years?
Management contracts lend themselves to any kind of business which require specific asset customisation, like coworking spaces, or, for example, data centres or wine storages – any business which requires a large upfront amount of capex to be invested in a property which they do not own. If an asset owner (landlord) puts in the capex, he can depreciate it over long periods, or he can also use the asset for other use cases, such as storage or leasing out the units long term, both things which a coworking operator can’t do.
If you have to invest some considerable capex, and it’s not into your own asset, then management contracts might be a good idea to consider.
It’s clear that management contracts are a fast growing business tool in many industries, but coworking is still a relatively new concept, which makes the Hive’s collaboration with Vivid Invest even more significant. We’re bound to see more management contracts in the future, as business owners and property managers come to realise that such arrangements have the vast potential to be mutually beneficial. Come see how the Hive Lai Chi Kok is making the most of this arrangement when we open for business in mid-January!
Come visit us!
The Hive Lai Chi Kok: Wing Hong Factory Building, 3 Wing Ming St 13F, Liberal, Cheung Sha Wan, Kowloon. Membership prices at the Hive Lai Chi Kok start at HKD1250 per month.