Concerns about co-working giant WeWork may amplify the negative impact of a weakening economy on Singapore's commercial real estate investment trusts (Reits).
Poor sentiment on the company could further dampen demand for co-working spaces amid slowing gross domestic product growth, hurting office Reits, analysts from Credit Suisse Group led by Mr Nicholas Teh wrote in a report.
"Office Reits have mentioned in recent briefings that corporate demand has slowed, while the narrow drivers are tech and co-working," the analysts wrote. "There are growing market concerns around the sustainability of co-working demand, going forward."
WeWork this week withdrew its planned initial public offering (IPO) amid difficulties with its fund raising. The company has also been rattled by the departure of its chief executive officer and market concerns over demand.
The New York-based firm is the leading player among flexible work space operators in Singapore, which has seen such facilities triple since 2015, Credit Suisse said, citing Colliers research.
Together with other major players such as IWG and JustGroup Holdings, WeWork has contributed to co-working space being a key demand driver for Reits in the city-state.
Credit Suisse noted that the impact may vary depending on the client. While WeWork's losses have mounted, JustGroup's financials show the company is closer to profitability and IWG has already broken even, the analysts noted.
"We note that profitability across operators can vary substantially and, for now, believe concerns would be about the sustainability of WeWork's leases, rather than significant consolidation in the industry as a whole," the report said.
Global credit rating agency Fitch Ratings on Tuesday downgraded WeWork's credit rating by two notches to "CCC+", putting the SoftBank-backed office-sharing firm deep into junk territory.
"In the absence of an IPO and associated senior secured debt raise, WeWork does not have sufficient funding to meet its growth plan," Fitch wrote in a note.
Fitch also warned that there is a potential for WeWork's customers, particularly big companies, to "hesitate to sign membership agreements", given the current flux. It said there was no evidence of this yet.
WeWork's rating outlook is also negative, Fitch added. WeWork declined to comment.
Fellow ratings agency Standard & Poor's last week downgraded WeWork to "B-" from "B".
Both "CCC+" and "B-" are junk bond ratings reserved for corporate borrowers judged to be higher risk to lenders.
WeWork is in discussions with banks as well as its largest investor SoftBank about potential alternative funding, two sources familiar with the matter told Reuters on Monday.
Fitch said it could revisit the rating if WeWork was "able to negotiate a firmly committed financing plan and demonstrate successful implementation of any turnaround plan".
WeWork's 7.875 per cent junk bond was last trading at about 84 US cents on the dollar, according to MarketAxess, a significant discount to face value, which indicated investor concerns about repayment or doubts about the company securing alternative financing.
WeWork's new co-CEOs Artie Minson and Sebastian Gunningham, who replaced Mr Adam Neumann last week, have talked about the need to return to WeWork's core business of renting out trendy office space to freelancers and enterprises.
That would pull the company back from the fringe activities Mr Neumann had forayed into, such as education.
Given that, Fitch expects WeWork "will face material restructuring cash charges as it reduces its workforce, which had reached over 12,500 in the second quarter".