Last month, Hong Kong-based private equity real estate firm Pamfleet signed the fourth biggest leasing deal with a shared space provider in the city. The firm described this one as “market moving.” Pamfleet leased 80,000 square feet across three floors in the podium of Harbourfront Landmark, a residential complex in western Kowloon, to Campfire Collaborative Spaces. Campfire is the solo tenant. In doing so, the firm has demonstrated institutional capital is now willing to place whole-building bets on shared space operators in Asia. Brokers say higher-risk and return capital is better suited to take a bet like this. But leasing an entire property to a collaborative tenant is broadly considered unchartered territory in the region. Indeed, other value-add and opportunistic managers, including Singapore’s SilkRoad Property Partners and fellow Hong Kong-based Phoenix Property Investors, have leased just portions of their assets to flexible operators.

Flexible amenities

Sidharth Dhawan, head of CBRE’s Agile Real Estate division for Asia-Pacific, says core managers controlling Grade A buildings would typically allocate no more than 10-20 percent to flexible operators. “However, value-add or opportunistic managers can take on the leasing risk,” he says, adding that, in some instances, these managers could potentially gain upside from a revenue sharing agreement.

Nevertheless, in Pamfleet’s leasing deal, the firm has mitigated some risk, according to Jonathan Wright, director for flexible workspace services at Colliers International, which brokered the deal. He says even though Campfire is the only tenant, it will have a variety of uses for the space – not solely co-working, for instance. Campfire will be operating one floor as a kindergarten, one floor with varied uses – including food and beverage and a learning center – and one floor with co-working.

He also believes location is playing a role for this particular lease.

“It is not out of the ordinary for someone to take 50,000 or 100,000 square feet just for co-working, if the building was in a more traditional commercial part. But in a district like Hung Hom, with a dense residential population, it was probably too much risk to just do co-working,” he said. “We needed to find an operator that could have more creative uses for the space, as part of the shared economy, to drive value that Pamfleet was trying to get out of [the asset].”

Pamfleet declined to specify the rent charged to Campfire or details of the lease. How risk is mitigated could vary according to the size of the asset and the deal structure.

For one value-add manager, which has recently leased multiple floors of an office in Hong Kong to a co-working center, requests for the short-term leases typical of flexible operators was not acceptable. He says his firm typically includes a step-up clause in the lease contract and asks for a traditional lease but with a longer duration – a three-year lease with a three-year renewal option, for instance.

“To protect ourselves, we want a normal lease. We want to have corporate guarantees as well as bank guarantees,” he said. “They are offering flexibility to their own client base. However, to maximize value on a property, we need stability not flexibility.”