Vivid Invest partners with the Hive on its latest coworking space in Lai Chi Kok. 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. It 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. You can read the full interview here.
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, the operator manages the asset on behalf of the landlord for a fixed or variable fee. Instead of paying rent, the coworking operator is paid for its services. The landlord on the other hand collects all revenues and pays all expenses of the coworking operation.
Management agreements better align the interests of operators and landlords and enable both to focus on their strengths. As a coworking operator, 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.
Specialized business models, like coworking, require extensive capital expenditure (capex) to develop the space to the requirements of a coworking operator. This puts a high fixed cost burden on any operator which many coworking operators try to alleviate by signing long term lease agreements of 5 or more years. However, this means that they are taking on a higher contractual risk, especially if the market does not move up as we have seen in recent history. The traditional buy-bulk-sell-piece model only works in bull 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 or prolonged vacancies. Hence the fixed lease model also has downsides for the landlord and instead of optimizing the revenue potential of his asset, he is just collecting a fixed lease.
Please read the full interview with Chris here.