MLS clears decks with cut-price deals

Copyright: David Lawson

Published in Property Week October 2008

Grannies can ruin your childhood. As friends swarmed to soccer and rugby each Saturday, I was dragged around markets to scramble for bargains. When playground debates turned to missed goals and spectacular tries, I watched silently, munching on a squishy orange. Perhaps that is why I’m a sucker for cut-price supermarket deals and £1-a-scoop fruit on street markets. But I always worry that I might be missing out on something more important.

    Similar doubts are rolling around the managed space market after one of its biggest operators ran the equivalent of a £1-a-scoop deal last month. ‘It is not economically feasible,’ said one disgruntled competitor. ‘There must be a catch.’  MLS sales director Ian Kibby is the first to admit that £1 a month would not cover costs. ‘It’s a loss leader,’ he says. ‘Supermarkets do this to draw in customers. It is a sign of the immaturity of the managed space market that it can’t grasp that we can do the same.’

  There is a catch of sorts, as tenants also have to pay an £80/month charge for phones and IT, which competitors feel should be made clearer. The space is also the lowest of three grades offered by MLS – often in basements or other poorly located offices. But, again, Kibby is unapologetic. ‘We analysed sales and found this kind of space rarely achieved long lets,’ he says. The special deal has filled vacancies, often for the maximum 12-month contract, on space which normally makes up around 15% of each centre.

  In fact, total sales have doubled to 1200 since the deal was introduced at the beginning of September. While 400 have gone at £1 a time, another 200 Grade 1 and 2 desks have gone at full rates to tenants drawn in by the campaign   The friction this is causing across the industry probably has a lot to do with the fact that MLS is involved. The group has grown faster than most over the last few years and raised fears it may have over extended.

   The ‘Quids In’ campaign seems to some as the first sign of a problem clearout. Competitors feel this could send out the wrong signals about the industry as a whole and they could suffer any fallout. Kibby swats away any fears about meltdown, saying the company ‘is secure because of way it is compartmentalised’. It was set up this way to ‘give flexibility’ in any downturn, he says.

   He objects anyway to the claim that MLS has driven blindly for growth in its bid to rival Regus as the largest managed space operator in the UK. Only four new centres were opened in the last year compared with 20-plus a few years ago. The firm has been consolidating, he says, concentrating on pushing up yields by 14-18% across the board.

  Management deals now play a big role and MLS is widening its market with the launch of its first ‘six star’ centre under the Synergy Executive Centre brand in Birmingham, where 50 of the 300 desks were pre-sold before opening.  Kibby suspects a whiff of fear among critics. He predicts a price war in London as huge amounts of space comes onto the market as the finance sector contracts. ‘We have got our retaliation in first,’ he says.

The response to MLS’s fire sale of hard-to-let space has varied from bemusement to horror among competitors.  Most operators know each other personally as many worked together at some time, often graduating via serviced office ‘universities’ Regus and MWB, so they tend to know what each is doing.  Any carping usually happens in private over lunch.

 Online agents such as Officebroker, SoS and Instant Offices are also a public indication of who is letting what and for how much. But some things slip through the cracks. When Regus took over Easy Offices, competitor MLS withdrew property from the agency’s lists. This time around, MLS special deals may go offline because agency commissions are unlikely to cover costs at £1/desk.

  A few dissenting voices have gone public, however. Philip Grace, managing director of operator United Business Centres, is open about his dismay. ‘It provides a false image of the industry, implying that we need fire sales,’ he says.  ‘We can’t see the need for such measures when business is so good. Inquiries are rising and we have no trouble filling space.’

  David Saul, MD of BE Group is another critic. ‘This sort of thing does not help get across the right message to clients. They will discover extra charges on top of the headline rate and then face increased costs when the special offers end.’

  This will harm efforts to persuade occupiers that managed space is preferable to conventional leasing because charges are fully transparent. Every operator has special deals, but none has reached this level of discounting, says Grace. They should be shouting the benefits of flexible space, not diluting the product, cutting income and running the risk of being unable to deliver services to high standards.