Investors pile into business centres
Copyright: David Lawson - published Property Week October 2005
There is a key moment when a good idea turns into a gold mine. Anyone who defied convention and dived into retail parks, leisure developments or east European investment at just at the right time came away with bulging pockets and a reputation for clairvoyance. Has that time come for business centres?
John Carrafiell, head of Morgan Stanley Real Estate Fund and one of the sharpest minds in property, appears to think so. A few months ago he paid around £220m for Executive Offices, set up by Peter Kershaw, who also built a reputation staying ahead of the pack. Within weeks he was joined by another budding legend, when Vincent Tchenguiz grabbed a stake in managed office company Stonemartin. They are not the first big investors. Hammerson, Warner Estate and MEPC have stakes in Stonemartin, institutions hold shares in big names like Regus and MWB while Kodak Pension Fund put up £100m to fund Evans Easyspace.
But this palls beside the majority of investors and vast number of operators. Can they expect a gold rush as the pack strains to catch up? There is no shortage of business gurus anticipating such excitement. Manishe Chande, who showed a doubtful market there was money in facilities management by setting up Trillium before selling to Land Securities for a huge profit, has forecast that minnows will be gobbled up by bigger operators, who in turn will be targets of hungry investment funds. Several more firms are understood to be on the market but not one has been snapped up. Perhaps that is because they are asking steep prices – more than £600,000 per centre rumoured for one small chain. Or maybe the sector is not quite ready for such enthusiasm.
Jonathan Price, managing director of Close Business Centre Capital, who has launched two funds backing operators such as Start International, sees early movers like Carafiell as the tip of an emerging iceberg. Shares in the top two names, Regus and MWB, have doubled or tripled in the last year as shadows of a calamitous collapse after the dotcom boom recede. ‘The fundamentals of the industry look good,’ he says in the current Business Centres Association newsletter. BCA chairman Richard Boone takes up the message, enthusing that this surge of investment is a vote of confidence for the future of business centres.
But anyone dreaming of retiring to a luxury yacht might have to wait a little longer. Operators face a catch 22: several catches, in fact. New money will come in only if it also sees a way out. That requires an investment market full of buyers and sellers - which can exist only after new money comes in. All but an adventurous few are playing a waiting game, fearing that business centres are still vulnerable to a sharp recession. Big players have yet to recover full strength and medium-size ones are not big enough to attract the attention of institutional investors, says Price.
Lack of players makes it difficult to work out values. Property is no benchmark, as even the most successful operation makes freeholds worth far less than comparable buildings with conventional leases. But anyone with a boat on order should tell doubters to look across the Atlantic for a hint of the future. ‘In the dark days of 2002 it was difficult to imagine any business centres in Silicon Valley surviving the dotcom collapse,’ says Price. ‘Today it is almost as difficult to get space there as in the West End of London.’
A market has developed, proving a set of values and an investment exit. It can only be a matter of time before the same happens here. The sheer weight of money looking for a home and the added demand when REITs are approved could breach the barricades. But not without the kind of hard information on prices and returns necessary to underpin a market. Joe Valente, research director of DTZ spent the last couple of years burrowing into the sector and came away amazed at how much information is swilling around. ‘Operators can tell you everything down to the numbers of cups of coffee provided,’ he says. Yet most of that information is unused.
Meanwhile, potential investors remain confused. ‘You may know the difference between serviced, managed and flexible space, but no-one else does,’ he told the annual BCA conference earlier this year. Terms must be standardised and business drivers clarified. Information must be sorted and analysed to show vital benchmarks such as relative performance compared with other types of property. DTZ has started the process with a quarterly study of the sector, which it terms ‘flexible managed office space’ in an attempt to cover the whole spectrum. It will be watched with interest by Ian Marcus, European Head of Real Estate Investment Banking at Credit Suisse First Boston (CSFB), who helped launch Regus and MWB into the big time and shares the view that to the sector must make some hard decisions.
‘Are you property companies or service companies,’ he asked the BCA conference. ‘The City does not like hybrids.’ Even private companies with no immediate ambition to sell out should separate these two elements into different holding companies to maximise value for the future.
So is this the dawn of a new age of plenty? For Price, that’s a definite maybe. Occupancy is rising, fees improving and consolidation is starting, but there are still a few more steps ahead. Perhaps it would be best to postpone any sailing until next year.