Managed space market defies recession
Copyright: David Lawson
Published in Property Week October 2009
Fees for managed space have fallen between 25-40% this year, loss-making centres are closing and some small operators are rumoured to be on the brink of administration. Yet occupation has risen and new centres are opening in buoyant markets such as London.
Contradictions are rife as the recession reveals managers and markets ill-equipped to take the strain. There is no shortage of demand as occupiers uncertain of the future opt for short-term space but poorer buildings and managers locked into boomtime rents are struggling. Meanwhile cash-rich operators are filling up with new tenants and striking management deals at bargain rents with desperate landlords.
They would do even better if lenders changed their spots, says Harvard Group chief executive Philip Parris. Landlords are finally thinking about providing managed space but are held back by valuers who see it as inferior to conventional leases when calculating capital values. This is critical when banks are issuing dire threats where loan to value ratios fall below set levels.
Management contracts are not without critics. Avanta MD David Alberto is wary of agreements where operators have no stake in a property. Landlords take all the risk, so they also reap most reward, with a mere 5% return to managers. That may not prove enough for some to ride the recession. He intends setting up a division for this kind of service but will still concentrate on joint ventures which yield at least 25%. Under these kinds of partnerships – often called turnover leases - operators pay a lower rent and cover fitout costs in return for a profit share or performance fee.
Once the market revives simple management contracts could disappear in prime centres like London as operators have to take traditional and turnover leases again. But they will be around longer for secondary locations and poorer buildings. Those able to meet the up-front costs for turnover leases are revelling in the recession, grabbing space at bargain rents and winning long rent-free periods. But Orega director Paul Finch says big names are switching to management contracts in desperation to fund expansion rather through any long-term business plans.
“You also have to question what conflicts of interest may exist with the operators' own leasehold locations.”
Orega says it has been honing its management model for a decade. It ensures risks are shared by co-investing with the landlord via capital injections. Accounting is also fully transparent to ensure there are no hidden extras or surprises, says Finch.
Recession will benefit managed space in the long run, says Bizspace managing director Gareth Evans. Many landlords offering flexible terms will “scuttle back” to the comfort of long leases when the market recovers but occupiers who have tasted freedom could refuse to revert. “They have been forced to consider how important property is to their businesses,” he says.As newcomers disappear, long-term players that continue to offer flexible space will welcome a huge new source of tenants.
Overseas expansion once offered alternative opportunities when demand slumped at home. “But this is a global recession and everyone is suffering,” says Philip Parris, founder of Locartis, one of the world’s largest international operators, serving more than 300 centres.
Avanta is feeling the heat after writing off £8m invested in two business centres set up in Mumbai, India. Chief executive David Alberto insists that the parent group is still flying high, however, after generating earnings of £7m in the last 12 months and is on course to double its chain of UK centres over the next few years.
Parris has asked CBRE to find 15 new Locartis centres across the US but these will not open for a couple of years, when surveys show markets will be recovering. Demand will soar because occupiers have accepted the advantages of using serviced space for businesses with up to 50 desks and this is a good time to be striking deals with hard-pressed landlords, he says. Locartis will directly operate the centres, a strategic change from its long-term role as a worldwide marketing channel for operators.
Occupation levels on Avanta’s Mumbai centres remain high but income has dropped as international firms cut back as the Indian economy falters. Avanta still has to pay its landlords, however. Alberto now regrets taking onerous leases but could not dictate terms when he set up a couple of years ago in a booming market.
Overseas investment has not been abandoned. Statesman House in Delhi remains open after the landlord agreed to renegotiate the lease. Joint ventures are planned in the Middle East and a partnership set up with Regent Business Centres in the US. In the meantime, Avanta will concentrate on spending £2m opening five more UK centres.