Property legend backs managed business space

Copyright: David Lawson

Published in Property Week October 2009

Mike Slade is a smart guy. Smart enough to get out of property just before the Nineties crash, dive back in to become one of the highest paid operators in the boom and then repeat the trick by escaping before the latest slump. Investors are keeping a close watch on where Helical Bar’s chief executive is now putting money.

  A relatively small deal in Milton Keynes involving the modest 11,000 sq ft Luminous office block might easily be overlooked, however. A long-standing joint venture with local developer Abbeygate is converting the hard-to-let block into a business centre. This is nothing new, as landlords are falling over themselves to sign agreements with management specialists to fill empty space. Most see it as a stop-gap until traditional leasing resumes.

  Slade, however, has gone on record with the kind of ringing endorsement the sector has been desperate to hear as it struggles to be recognized as a serious long-term contender to traditional leasing.  “Serviced offices are here to stay,” he says. “I see them as a key element of the commercial property mix of the future, allowing smaller businesses to occupy Grade A space thanks to the shared overheads with the business centre set up.”

  Only time will tell whether good intentions survive the revival of interest in conventional leasing as the economy recovers but Slade is not the only big name joining the party. Philip Grace, who founded and built UBC into a major player before launching new firm i2 with this project, is about to announce several more backers. He has ambitious plans to create as many as 50 centres along similar lines, taking around 10% of the market.

  Grace admits that not everyone may want a long-term role. In fact i2 will offer to take conventional leases once centres are established. This could attract investors keen to buy property at today’s low prices, pocket the income from serviced space but have a clear exit strategy. Selling a traditional lease is far easier than disposing of space under a management contract.    

   Aggressive expansion might ring alarm bells following the race for growth which led to the collapse of MLS earlier this year. But Grace has always attacked growth for its own sake. “It has to be based on profits,” he says. “The sector is digging its own grave by cutting prices rather than raising quality and attacking administrative costs. If operators sell workstations at £150 per month they’ve only got themselves to blame if their business gets into trouble.”

 Another mistake is using client deposits to assist short term cash flow. Grace has promised to only rarely charge deposits and these will be put into separate accounts.  Luminous is 27% booked and will be profitable in the month it opens. Grace believes this is because of the quality of space and the fact that i2 is keeping overheads low by intensive use of IT, eliminating the need for accounting and call centre staff.

  Grace is also challenging current wisdom by planning a nationwide chain rather than concentrating on the safe South East. The regions have just as much potential, he says, as long as quality space is chosen in the right location – which is bad news for landlords aiming to sign him up for tatty leftovers.  He has evidence of success from 23 centres built while running UBC. One of the last he set up was in Oldham, which might not seem the most promising of locations in a recession. “We were overwhelmed by demand,” he says.

   Turning On Technology

Technology will play a critical role in the future of i2, says Grace. It will cut administrative costs, enabling the new company to compete without slashing fees to unprofitable levels. But it will also be a key selling point for tenants looking for sophisticated new services.

  A decade of dealing with IT suppliers and watching rival operators has convinced Grace that many do not understand modern demands from tenants. He aims to avoid that pothole through partnerships with telecom operators and IT specialist Essensys to provide:

• ‘Cloud’ computing: tenants can cut costs by relying on remote servers to run software, provide back up and kick in when required for disaster recovery.
• Free phone calls and wireless: some operators are in a dangerous position relying on income from phone calls, says Grace.
• Internet phone links on leased lines [VoIP]: these will have the capacity and flexible routing to prevent line drops which cause tenants to be cut off
• Plug-and-play: a web site where a virtual office can be set up in minutes.

  Grace admits that it helps to be starting with a clean slate. He says that lack of capital investment means that even some major names are struggling with antiquated systems that cannot cope with modern demands such as virtual offices, mail forwarding, voice recognition and translation.They also fall short on business continuity and disaster recovery. “Operators may talk about this but their investment and skills often stop at providing desks,” he says.