Survivor will feed off dying firms
Copyright: David Lawson
Published in Property Week June 2009
John Spencer ought to have been out of a job long ago but the chief executive of MWB Business Exchange is proving too good to lose. Parent company MWB came out of the last recession promising to wind down and hand money back to shareholders, including those who bought into subsidiary MWBEX when floated separately in 2005. Yet deadlines have come and gone and Spencer is still there. In fact, far from winding down he has just cemented a position as the UK’s second largest flexible space operator.
Rival MLS collapsed in a spectacular burn-out last month, crippled by withdrawal of an overdraft necessary to carry loss-making centres acquired in its race for the top. Spencer has no such worries after making £14m profit last year. He even managed to benefit from MLS’s demise by cherry-picking 15 of its centres around London – all without drawing on reserves. Hardly any cash changed hands as he bypassed the administrator to woo landlords, who welcomed a replacement manager to keep centres open.
How long will the sell-off be postponed? ‘As long as it takes,’ says Spencer. The parent group reaffirmed when MWBEX was listed on the alternative investment market that it would take a decision based on profitability.
With a 70% stake in its subsidiary, MWB will be also keeping a close eye on the share price. This is currently just above the 80p float level after soaring as high as 200p in 2007 and dropping to 40p earlier this year. Spencer dismisses this volatility as sentiment against property rather than reflection of performance. The firm’s fate may be in the main board’s hands but his intention is to trade out of recession.
Conditions for growth look promising despite - or because of - current economic malaise. MLS could be the tip of an iceberg as operators weighed down with debt struggle to survive. Spencer predicts a wave of consolidations will reshape the sector over the next few years. He will feed off the dead and dying but that doesn’t mean he will take everything that crosses his desk. Centres have to be economically feasible, which could rule out many deals struck with landlords over the last few years as tenants demand rent cuts of up to 25%.
They also need to fit the MWBEX business model. MLS centres were picked from the right locations for the City & Executive brand, rated as 2-3 star. The main portfolio demands specifications in the 4-5 star bracket. MLS acquisitions involve 10 leases, two management agreements and three operating licences. They have increased the number of workstations by 25% to around 20,000 and taken the portfolio to 1.75m sq ft. All the centres are in Greater London other than two in Woking and Guildford. This reinforces MWBEX as the capital’s largest provider of serviced office accommodation.
Not everything is plain sailing for Spencer. He admits the market has been ‘bloody awful’ since last year’s record profits. Occupancy rates have remained above 85% - but at a price. Rent cutting is rampant as it only takes one operator to cut rates for tenants to use this as a bargaining tool. But the decision to concentrate on London after the last recession is paying off, as the City is performing better than anticipated with redundant professionals setting up on their own. The West End is also showing signs of recovery because mid-sized corporates such as media and recruitment consultancies are under pressure to cut property costs by taking short-term space.
Some big names have moved out but are being replaced by smaller tenants taking an average of 8-10 desks. The problem is that they can demand far lower rents in the current market. Spencer sees real dangers in filling space at any cost. ‘We could build occupancy rates very quickly but getting back to respectable yields would take far longer,’ he says.
Costs associated with ‘churn’ such as voids, marketing and agents’ fees are one of the biggest problems facing the sector. Operators should concentrate on raising service levels so tenants are encouraged to stay, says Spencer. One suggestion is to target tenants’ decision-making departments such as head office and personnel. They are less inclined to uproot themselves, while often happy to try and save accommodation costs for the rest of their firm.
It will take more than smart management for some operators to survive recession, though. Large operators have generally done well and as times get tougher they will get stronger through consolidations, says Spencer. Victims will be those which have over-expanded in the wrong areas. ‘Some centres were losing money even when the market was strong, which is criminally negligent. How can they expect to survive in tough times?’
Once through the recession, Spencer sees the sector finally set for long-term success after years of disruption. ‘We have still only scratched the surface of demand for serviced space,’ he says. ‘The years of 50,000 sq ft leases are declining as the world economy moves to smaller firms. The future is ours.’
It seems that his P45 could be locked away in a back room for some time yet.