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WeWork’s Latest Deal Brings a Lot More Co-Working Space to China

November 17, 2016, 5:00 AM UTC
A man enter the doors of the WeWork co-operative co-working space on March 13, 2013 in Washington, D.C. In a large warehouse-type office in Washington, software coders work on apps, while angel investors and mentors help budding entrepreneurs figure out strategy for their startups, in what is being dubbed Silicon Valley on the Potomac. AFP PHOTO/Mandel NGAN (Photo credit should read MANDEL NGAN/AFP/Getty Images)
Photograph by Mandel Ngan — AFP/Getty Images

WeWork, the office co-working space provider, is expanding its footprint in China.

On Thursday, the company announced a new partnership with Sino-Ocean Group, a major real estate company based in Beijing. As part of the deal, the companies plan to open three buildings in mainland China over the course of the next year, one in Shanghai, where WeWork already has two buildings, and two in Beijing, its first foray into the capital city.

WeWork opened its second location in Shanghai on Thursday, just a few months after its first building began operating in July. By the time it had opened, the company says its first Shanghai location was already at 80% occupancy, and it reached 100% within four weeks of operating. About 80% of tenants are locally-based companies, showing that WeWork’s office model does appeal to Chinese businesses.

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The new building in Shanghai, in the Jing’an district, can house up to 1,300 workers. The company considers it its new “flagship” location in China.

WeWork’s pitch to companies looking for office space is that it offers flexibility—they can pay by the month and for however many desks or private offices as they want—as well as a sense of community with other tenants.

However, the company has faced skepticism over its model, with some arguing that it’s too volatile because most of its tenant rent is on a short-term basis, thereby making revenue more unpredictable. In July, Bloomberg obtained documents that show that WeWork slashed its revenue forecast for 2016 by 14%, and that some buildings are opening later than predicted. WeWork had told Fortune at the time that the documents were for scenario planning purposes only, and that its buildings that have been operating for at least 12 months have 97% occupancy.

To help with this, WeWork recently unveiled a new deal with Microsoft to house 300 of its employees in its New York City buildings, as well as 37 employees in Atlanta. A major upside to the partnership is that Microsoft signed a one-year commitment in New York and a three-year deal in Atlanta.

WeWork’s deal with Sino-Ocean, which owns the buildings where WeWork will operate, is also unusual in its structure, and potentially less risky for the office co-working company. While it usually signs very long-term leases at low rates with its landlords, WeWork won’t be paying any rent to Sino-Ocean, according to sources familiar with the deal.

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Instead, the two companies will share the revenue evenly in a 50-50 split, and Sino-Ocean is also funding the remodel of the buildings according to WeWork’s designs, while WeWork will manage the building and wrangle in tenants. Subsidies from landlords for remodeling buildings are often part of WeWork’s deals, though the amounts vary.

This alternative model brings both less risk and likely lower margins for companies like WeWork, as the Wall Street Journal recently noted. But it’s becoming increasingly attractive to companies in the space.

Elsewhere in Asia, WeWork already has operating buildings in South Korea and Hong Kong. Its first locations in India are opening soon.

Founded in 2010, WeWork has raised more than $1.4 billion, and it is valued at more than $16 billion.