Big name revival boosts managed business space
Copyright: David Lawson - published Property Week October 2005
Business centres have a love-hate relationship with big names. They love the extra attention given to the industry but hate the impression no-one else exists. Public humiliation of top firms when the market crashed was greeted with barely concealed mirth – until it sank in that when they sneeze, everyone else should expect pneumonia. So the revival of Regus, MWB and HQ Executive has brought a warm glow to the whole sector.
Share prices are rising and vacancy rates are down. This rude health indicates how sniffles have cleared up across the whole sector. Occupancy rates in London, home to half the country’s serviced space, rose 2% to 84% in the year to June according to consultant Instant Offices. Large corporates are leading the turnaround, says managing director Richard Hamilton, who has handled five big deals in the last quarter totalling around 1,000 desks.
These household names are being increasingly drawn in because they recognize the value of all-in fees, adds Richard Smith, managing director of another leading agent, Serviced Office Search. Many smaller ones and start-ups have yet to catch up, as they still compare prices with conventional offices. But big tenants are not taking the huge slugs of space that led to problems for some centres when several tenants left at the same time. Average demand is for 10,000-15,000 sq ft, says Smith. MWB’s focus on smaller lettings has helped boost occupation levels from 65% to 80%, according to its half-year accounts.
Smaller tenants are meat and drink to most centres, of course, and they are just as buoyant. The Business Centres Association estimates 78% average occupancy across the UK, well above break-even levels. In some regions these dipped below 50% after the dotcom bubble burst. One of the brightest stars in the sector has built its success by focussing on smaller tenants. MLS has rapidly risen from a single centre in west London seven years ago to the third largest operator in the UK, growing 60% in the last year alone to 57 centres. Sales director Ian Kibby expects no slowdown, taking the firm to top spot with 200 centres within three years.
MLS anticipated from the start that the SME [small/medium enterprise] would be the main driving force for growth and sailed through the recession because this slice of the market was least affected. Centres are designed specifically for three or four desk units – the average SME size - rather than huge open floors. Everything is geared to the smaller firm’s mindset. They don’t want glass and marble. This gives the wrong impression to customers about how they spend money, he told Property Week when we picked out the firm last year – a choice which was justified when MLS reached the top 20 in the 2005 Sunday Times Fast Track List.
But that does not mean skimping on services. The smallest tenant can be just as reliant on IT as a giant, but have little in-house expertise. All main centres have hefty internet connections and MLS includes advice on technology in the monthly fee, provided by a specialist firm spun off from its own support team. It also offers a bespoke fit-out service. ‘People seem to think that if you take a serviced office you have to take the box exactly as it’s presented, but you can make it as personal to your business as you want,’ he says.
Tenants stay an average of two years – significantly longer than the industry norm – which gives MLS an edge on operators facing higher costs because of faster churn. Kibby does not attribute this just to service levels, however. Tenants are no longer looking at serviced space as a stop-gap before moving to conventional leases but as a permanent home, he says.
To Boon, the combination of growth and longer tenant tenure shows this is no longer a fringe market but a healthy and mature sector which will continue to grow and eventually become a mainstream method of occupying space. Investors have already cottoned on. Regus shares boomed more than 30% this year as occupancy improved to 76% and revenue per workstation rose 13% to more than £5,500. MWB topped the Property Week performance league. Much of its recovery came from hotels but MWB Businesss Exchange, which covers serviced and managed space, is expected to raise £14m through a float on the alternative investment market later this year.
This could set a benchmark for private operators to judge their own worth, just as the £220m takeover of HQ Executive indicated the value of prime London centres. Smaller firms could find it a lot easier to raise money for expansion. This is taking place at a level not seen since prior to the dotcom boom. Newcomer KBC has opened eight centres this year and Easyspace added another four. Harvard has reached a management agreement with Threadneedle for 25,000 sq ft in Bath Road, Slough, for its seventh Locartis centre, and is negotiating for several more.
Richard Smith says demand is so high that SoS has taken on an extra role finding premises for operators to complement its usual task of providing tenants. Even a giant conventional property company like Land Securities has given a vote of confidence for unconventional leasing, buying a 97,000 new block in the City to expand its Landflex system. Once dismissed by agents as a way to fill hard-to-let existing buildings, the fact that Land Securities is willing to buy something new will add enormous weight to the sector’s credibility.