SINGAPORE (Oct 4): Things have not been working out these past couple of weeks for co-working space operator WeWork.

First, its controversial co-founder and CEO, Adam Neumann, stepped down following concerns about corporate governance and the money-losing startup’s aggressive spending. Then, WeWork withdrew the prospectus for its initial public offering (IPO), pulling the rug from under one of the most hotly anticipated IPOs this year.

See: WeWork withdraws IPO after tumultuous month marked by CEO's exit

With management changes ongoing, investors have been raising questions on the sustainability of the group’s growth plans and ability to fulfil lease obligations.

In a Thursday report, DBS Group Research analyst Rachel Tan says, “While investors are concerned on the viability of having these operators as a tenant, we believe that the co-working business is here to stay with demand from entrepreneurs, freelancers, and start-ups.”

According to Tan, the important consideration is in the operator, and those backed by landlords or developers, such as Distrii by City Developments, Justco by Frasers Property and The Work Project by CapitaLand, are more viable options.

Riding on the sharing economy trend, flexible workspace in Singapore has tripled to 3.7 million sq ft in NLA terms since 2015, according to Colliers. With this, Singapore has the second-highest number of co-working centres in Asia, behind Tokyo.

“Since 2015, we estimate that 30%-90% of absorption has been from co-working operators, and this may slow down in the coming years. In view of the slowing economy and a mini hike in supply of 1.7 million sq ft in 2020-2021, we believe that there is rising risk of slower than anticipated take-up rates, and potential stagnating of prime office rents, which stands at $11.30 psf as of 2Q19, up 26% from the lows in 2Q17,” adds Tan.

Earlier in July this year, WeWork leased CapitaLand Commercial Trust’s (CCT) entire 21 Collyer Quay for seven years starting 2Q21, after HSBC’s lease expires next year. Furthermore, WeWork is a current tenant at CapitaLand Mall Trust’s (CMT) Funan, taking up two floors.

Since WeWork is already operational at Funan, the IPO postponement is unlikely to have any impact on CMT.

See: WeWork's cancelled IPO to have limited impact on CCT [Subscribers only]

Nonetheless, CCT has the highest exposure to co-working tenants at about 10% of NLA, with WeWork taking up 4%. DBS has a “buy” call on CCT with a target price of $2.30.

According to Tan, CCT’s worst-case scenario would see WeWork failing to take delivery of the lease at 21 Collyer Quay. But the analyst believes that the trust will still have ample time to restrategise.

“That said, we believe that even in the case of weaker spot rents, there is ample buffer for positive rental reversions given the low expiring rents in 2020-2021 for most office landlords,” says Tan.

Overall, the analyst believes that the bigger concern lies if office demand potentially softens as co-working space demand tapers off after a few years of aggressive expansion and slowing GDP growth.

If demand falls to the lower end of historical average of about 0.6 million sq ft, it will fall short of new supply of about one million sq ft per year over the next two years.

“Hence, we see rising risk that prime CBD office spot rents which have risen to $11.30 as of 2Q19, may start to stagnate at current levels. That said, most office REITs will continue to enjoy strong rental reversion given the low passing rental (leases expiring in 2020-2021 were generally signed in the lows during 2017-2018), but the upward momentum in terms of rental reversion will likely slow in the medium term,” says Tan.

Units in CCT closed 1 cent higher at $2.05 on Friday.