Mainland co-working startup Kr Space has surrendered an 83,000 square foot (7,712 square metre) lease in Hong Kong’s Wanchai district, casting doubts over the future of one of the major players in China’s boom-gone-bust flexible office industry.
The decision by the co-working spinoff of Alibaba-backed technology platform 36Kr to hand back the rights to seven floors in the One Hennessy office building on Hennessy Road was confirmed by Donald Choi, CEO of Chinachem Group, the building’s developer at an event on Tuesday, according to the Hong Kong Economic Journal.
Kr Space’s rental belly flop on the HK$6.6 million ($840,000) per month office will cost it a rental deposit of HK$19.8 million, adding to financial challenges after the three-year-old company was reported recently to have closed several locations on the mainland after failing to close an expected funding round last year.
Chinachem Files Missing Tenant Report
Chinachem’s Choi revealed the new opening at One Hennessy at a press event on Tuesday where he said the building, which was opened for occupancy last month, would be missing the would-be occupier of its 11th through 19th floors.
The announcement confirmed market rumours that Kr Space had surrendered its ten-year lease on what had been planned as the company’s first location in Hong Kong. A notice on Kr Space’s website today indicates that the flexible office firm will soon open a location in Times Square, a landmark development in the Causeway Bay area.
Choi said that Chinachem is already negotiating with other corporates potentially interested in occupying the building. At HK$6.6 million per month, Kr Space’s eight floor lease worked out to HK$79.5 per square foot per month, with Chinachem now indicating it would seek rent of between HK$70 to HK$80 per square foot per month.
Kr Space had signed its lease for the One Hennessy location in May of last year, with the company previously having planned to occupy what would have been its flagship Hong Kong location, and first centre outside of mainland China, before the end of June this year. In a turn of events which echoes HNA’s aborted lease of eight storeys in Hongkong Land’s Exchange Square last year, Kr Space is said to have not begun fitting out its new Hong Kong home before calling off the lease.
The 21-story One Hennessy is a redevelopment project kicked off by Hong Kong developer Chinachem in 2013. The building, set for completion by Q2 2019, offers over 300,000 square feet of commercial space including offices, shops and restaurants.
Bad Luck Streak in Co-Working School
The setback in Wanchai follows reports that have been circulating since at least February that Kr Space was undergoing “business adjustments,” in both Hong Kong and mainland China.
In December last year, Kr Space was reported to have backed out of a plan for an eight-year lease of the 38th and 39th floors at The Center on Queen’s Road, after having signed a term sheet to lease the property for HK$4.3 million ($550,164) per month, according to market sources who spoke with Mingtiandi. Kr Space was also said to have backed out of a binding term sheet to lease space in New World’s Victoria Dockside project in Tsim Sha Tsui.
Back in mainland China, Kr Space was said in February to be closing down six locations spanning 30,000 square meters (322,917 square feet) according to local press accounts. Local media accounts also indicate that, despite the company’s website announcement, Kr Space has also backed away from its planned Times Square location.
Funding Failure Preceded Leasing Loss
The change in Kr Space’s plans may be due to a major funding round which never happened. The startup, which reached a total of just over $137 million in funding when it won RMB 600 million in investment from existing backers in January 2018, had in May last year announced plans to raise an additional $200 million at a valuation of over $1 billion.
However, the company, which was spun off from tech news provider 36Kr in 2016 appears never to have closed on that unicorn round even after having opened more than 60 co-working centres spanning more than 300,000 square meters of space in 12 Chinese cities.
The challenges afflicting Kr Space may be an industry-wide phenomena in China, according to a survey released earlier this year.
Forty companies in the shared-office sector vanished in the 10 months from January to October 2018, according to a report by the China Real Estate Chamber of Commerce, with the research by the real estate non-profit finding that about 40 percent of existing co-working projects are more than half empty.