Business Environment raises £100m to double size

Copyright: David Lawson- first published Property Week March 2007

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David Saul is enjoying himself. High above the City, pampered by attentive waiters in a fashionable top-floor eatery, he leans back puffing on a cheroot, relishing a rare break from frantic wheeling and dealing. The phone has not stopped ringing since the founder and MD of Business Environment revealed he had raised more than £100m to double the firm’s portfolio of office centres.

  Managed space is hot.  Agents no longer recoil at unconventional leases, landlords see a way to revive surplus space and investors are panting for what was recently a fringe sector. But many callers will be disappointed.  New buildings don’t interest Saul.  Floorplates are too deep to divide into myriad offices without leaving large windowless areas.  His latest purchase, a 30,000 sq ft Eighties block in London’s Westbourne Terrace, illustrates the preferred choice.

  It also plugs a gap in the W2 market – a process set to extend into even bigger holes outside London, with centres planned in cities such as Manchester, Birmingham, Leeds and Liverpool.  Leases get short shrift because BE deals only in freeholds. So do joint ventures unless they are genuine partnerships, with BE sharing ownership rather than the increasingly common management agreements where landlords outsource space but hold on to ownership.

   Saul came into the market 15 years ago as a hard-nosed property investor and sees no reason to change.  He points out that many operators learned to their cost during the slump that leases could be a crushing burden when customers disappear overnight but landlords still demand rent.  Rivals say freeholds tie up capital: Saul contends that BE’s approach gave the strength to survive downturns. Lenders also fell over themselves to back expansion because its 11 centres in London, Milton Keynes and Reading totalling 650,000 sq ft had soared in value to £135m.

  Surely that settles the fierce debate whether managed space is a property play rather than something new?  Surprisingly, Saul disagrees. Tenant care, a missing factor in the ‘let and forget’ mindset of traditional leasing, is critical, he says.  Rising property prices may boost value but when tenants can move almost at will, income flow depends on keeping them happy. BE has spent £10m refurbishing centres to this end over the last year. It also offers loyalty payments of ½ % to 10% of fees on renewal. This has kept occupancy rates up around 82% - which would be even higher but for the disruption of renovation.

   BE has also refused to shift from the idea that tenants want a clear picture of occupation costs so they can plan forward. Conventional leases offer certainty until the next rent review but managed space is meant to go further, bundling uncertain extras like rates and service charges. This crucial advantage appears to be slipping away as operators boost income with charges for extras such as telephones and IT.

   BE has again countered the flow. Its BeFirst package includes everything from telephone calls to a concierge to plasma TVs. This has proven so successful that Central Point, the City of London centre where BeFirst was launched, was 100% occupied within nine months. Saul warns that operators who rely on income from extra services are storing up trouble.  ‘I made £40,000 a year from two fax machines when I started but that  disappeared as cheap machines appeared on tenant desks,’ he says. Now phone profits are shrinking as occupiers switch from conventional lines to VoIP services over the internet.

  BE plans to have £250m worth of centres by the end of this year and twice that by 2009. This rising profile is bound to attract predators but a takeover would be difficult. Few, if any, other operators could afford such a huge chunk of property and most would have to sell and lease back the space.  A float or a partnership with an institution or investor is possible, as this would provide an exit for Saul’s long-term associates. Saul has already brought in a new generation of managers to handle the explosive expansion but he has no immediate plans to let go.  ‘I figure I have another 25 years in me yet,’ he jokes.

Saul on Agents: Getting better. Fewer blanket referrals and more ‘matchmaking’ of tenants to the right operator. Conventional agents are realising they can make more by taking 15% of a fee which is bigger than a conventional lease because it includes service charges. ‘Money talks. I should know, as I was once an agent.’

Saul on Management Agreements: Not always as good as they are painted. Tenants face ejection if landlords want the space back when demand for offices rises, which harms relationships with operators. ‘There will be fewer in hot spots like the City.’