HONG KONG (Reuters) - Real estate developers and financial investors are capitalizing on fast-rising demand for leasing of “co-working” spaces in China, as Beijing encourages startups and small businesses in a bid to offset slowing growth at traditional industries.

A presentation room for tenants' use is seen at UrWork coworking space in Shenzhen, China, December 7, 2016.REUTERS/Clare Jim

Developers, including China Vanke 2202.HK, Soho China 0410.HK and Singapore's CapitaLand CATL.SI, are renting out property space that hordes of self-employed persons or small-sized companies then share, company executives said. The lease deals with the startups are usually short-term and are done mainly through specialized operators.

Financial investors are also jumping in on the bandwagon, amid a growing belief that shared spaces deliver greater synergies by driving up innovation and productivity. Citic Capital, whose seven-storey shopping mall “Shanghai 189 Lane” is due to open later this month, will rent its top two floors to a co-working space operator.

“A new economy is here, we need to bring in different tenants … in the past the anchor tenant may be a gym, theater or supermarket, but now it may be co-working offices,” Citic Capital’s head of real estate group Stanley Ching told Reuters.

Co-working’s popularity is helping developers and financial investors tap new revenue sources in China and cushion the impact of the softening retail and office property sectors as the world’s second-largest economy slows. But the highly cyclical nature of the startups business model also exposes them to new risks.

The number of co-working spaces in China has grown rapidly this year, with currently over 500 sites in Shanghai and Beijing alone compared to just a few in 2015, according to real estate services firm Jones Lang LaSalle.

The segment is expected to account for a third of the office demand in the long term from around 5 percent now, predicted UrWork, China’s largest co-working space operator in terms of number of sites, which is just a year-and-a-half old and is valued at $800 million.

Leasing a desk for $260-$400 a month, landlords can often earn a higher return renting upper floors of a shopping mall to a co-working operation than to retailers, and get around a 10 percent premium renting office space compared to traditional corporate tenants, said service provider Colliers.

As once-flourishing sectors such as steel and coal lose their luster, China is facilitating the development of new industries and services to transform the economy. Cities such as Beijing and Guiyang in the southwest provide rental subsidies to startups, while Suzhou in eastern China plans to have 300 incubators by 2020.

“China’s freelancer market is not as mature as those of London, New York and Paris, but we have a lot of SMEs and the number is growing exponentially especially under government support, so there’s great potential,” said Mao Daqing, founder of UrWork, which aims to raise the number of co-working sites to 60 next year from 40 across 10 cities at end-2016.

FLEXIBILITY

Even some mature companies, such as HSBC, Lenovo and Alibaba’s Aliyun utilize co-working spaces. The spaces provide established firms with the flexibility to hire more contract workers or downsize labor.

Developers and others are lining up to tap co-working’s potential. CapitaLand announced a collaboration with UrWork this month to provide co-working spaces in its properties in China and Singapore.

Beijing-based Sino-Ocean Group 3377.HK has signed an agreement with U.S. co-working operator WeWork, while Vanke rents space to operators including UrWork, and in some cities it also operates its own co-working business.

Kailong, backed by private equity firm Warburg Pincus, bought a Shanghai three-star hotel in 2015, refurbished it into an office building, leased it to WeWork and then sold it to a fund controlled by Tianli Holdings 0117.HK last month for more than $74 million.

WeWork, which earlier this year received a $430 million funding round from China’s Legend Holdings and its private equity group Hony Capital that gave it a valuation of more than $15 billion, has opened co-working sites in Shanghai and is expanding into Beijing.

But the co-working business also brings risks, analysts said.

“The very nature of such short-term leasing exposes Soho to significant risk, as startups and SMEs are highly vulnerable to changes in macroeconomic conditions,” Morningstar said in a research note, commenting on Soho China’s co-working business.

($1 = 6.8784 Chinese yuan renminbi)