A New Model: The Inside Story Of WeWork’s £580M London Megadeal
WeWork has completed the £580M acquisition of Devonshire Square in London — but not in the way anyone expected.
The structure of the deal and the way it was completed gives insight into the way the $20B flexible workspace giant will go about future property acquisitions, and how major global investors could forge new partnerships with the company to share in its explosive growth.
WeWork exchanged contracts to buy the 620K SF, 13-building Devonshire Square estate opposite Liverpool Street station from Blackstone in December. In addition to offices, the estate includes restaurants and a private members club.
WeWork then appointed Eastdil Secured to source debt and also went looking for equity partners to reduce the capital it was putting into the deal.
TH Real Estate, the real estate fund management arm of TIAA (via its European Cities Fund), and Danish pension fund PFA Ejendomme are the equity partners. WeWork will retain a 10% stake in the equity, with the other two owning 45% each.
Bank of America Merrill Lynch provided a loan of around £240M to finance the purchase, according to CoStar, with a loan to value ratio of about 40%. That puts WeWork's equity cheque at around £34M.
WeWork’s other most significant property acquisition was also completed through a partnership structure — in October the co-working giant bought the 650K SF Lord & Taylor department store in Manhattan for $850M (£592M) in a joint venture with Rhône Capital.
WeWork occupies around 20K SF of the estate, and will expand that footprint to 200K SF, making the estate fully leased.
But it is the nature of those leases which is significant — traditional investors are shedding their skepticism of WeWork and becoming hungry to find ways to share in its success.
Rather than conventional leases where the company pays a fixed rent with periodic reviews, the joint venture has put in place revenue sharing leases, where WeWork pays a certain proportion of the revenue from the space it occupies.
Revenue leases, sometimes called turnover leases, are common in retail but rare in the office sector, making the deal innovative.
“Conceptually we back WeWork — they are the company that is gaining market share, they are the No. 1 occupier in London and you can’t ignore that,” TH Real Estate Head of European Offices Nick Deacon said. “We want to participate in that success.”
If the company does well, so do its joint venture partners, and vice versa, with a certain amount of downside protection in place.
In a further departure from the norm for big real estate investors, WeWork and TH will have a co-asset management role, with WeWork doing much of the day-to-day work in asset managing the entire estate, not just its own space, and setting the strategy to try and grow income. Typically an investor like TH would not cede this amount of control to an operator.
“This is a set of buildings that [haven't] been maximised for years,” Deacon said. “If you look at it through a WeWork lens you see a different proposition — it’s about them controlling the estate and making it a super cool environment for their members and visitors.”
He added that part of the appeal of Devonshire Square was the location and the ability to manage a wider campus.
“We like the ability to control and [manage] property such as estates. We advised AustralianSuper to acquire Kings Cross Central, and although that is a much bigger scale, this has the same dynamic. There is also a scarcity value to 5 acres of freehold land right in the middle of the City.”
WeWork's expansion at Devonshire Square would take its London footprint to 2.9M SF, making it the largest occupier in London after the U.K. government, a status achieved in just three years.
According to data from Cushman & Wakefield, the company occupies 1.4M SF and has a pipeline of a further 1.5M SF.