Will serviced office companies survive?

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Serviced offices one would surmise, offer the ideal solution in a post-Covid world. Mainstream office investments are struggling in a world where a good proportion of most company’s office staff are working flexibly, either at home or on the move. Serviced offices, it would seem, offer many advantages.

The benefits of serviced offices include cost-effectiveness: they offer short-term leases so no long term commitments; all the useful facilities needed are provided on site; they are easy to move in and out of; they are usually well situated in business districts; they are maintenance free; they have fast internet access; and they easily facilitate networking.

Dispute all of this, many providers are experiencing the same difficulties as the general office market. The technology that’s enabling home and mobile working is having a similar impact on serviced offices.

The WeWork problem

The US listed company WeWork – a $47bn company with 44 million square feet of office space world wide – the so called world-changing office space provider – is evolving into a shaky entity that is casting a shadow over the whole flexible office sector. If you listen to the hype around this company, it can provide cheaper office space in a work-from-anywhere post-Covid-19 world with all the benefits listed above.

The reality, it seems, is something far different. Operating as the middleman is proving to be tough in the current environment. WeWork rents commercial office properties off landlords on long-term leases, it provides all the necessary facilities and services for a modern serviced office operation on site, and then it lets off piecemeal, offices and meeting rooms on short term (monthly or weekly) flexible leases and day rentals – something akin to a business hotel.

But WeWork announced in August that it had “substantial doubt about its ability to continue as a going concern” with­out a rapid turnaround in its business. Although there’s since been a share price bounce driven by speculative buyers who are keen to see the turn-around phenomenon seen with other strug­gling US companies, nothing can hide the fact that WeWork has lost 98 per cent of its value since its initial public offering (IPO) in late 2020.

Covid losses

Both WeWork and IWG (formerly UK based Regus) rely on generating their revenues by renting offices off office landlords and then subleasing them on flexible terms to their short-term tenants. Both have recorded years of losses, and Covid has driven these to a new level.

Covid drove down down the demand for office space, so both companies, tied in to long-term leases, found the cost of providing services to their custom­ers was exceeding the amount of cash they were bringing in. The last time IWG posted a pre-tax profit was in 2019 and WeWork has never posted a pre-tax profit.

There is obviously an appetite for a more successful version of a large serviced office operation, says The Investor’s Chronicle. In the UK, IWG’s share price recovered 10 per cent of its value when the last results were announced and after management said it was considering a US listing. Perhaps its inves­tors were pondering the potential positive impact for IWG of WeWork’s potential collapse. The development could also provide a growth opportunity for UK listed real estate investment trust (Reit) Workspace which specialises in providing serviced offices and workspace for London based tech start-ups.

A high debt base

According to The Investor’s Chronicle IWG’s latest results show that it is spending more than £500mn every six months on leases, while its net debt on the balance sheet, includ­ing lease liabilities, is £6.2bn, that’s 34 times larger than its shareholder equity.

While the company did manage record revenue and an operating profit for the six months to 30 June this year, by contrast, WeWork, which has even greater debt, negative shareholder equity* and billions more in lease payments to manage, posted an operating loss of $555mn (£436mn) for the same period.

WeWork has warned investors that its survival depends on a new plan to improve liquidity and profitability over the coming 12 months. This will involve a cost-cutting programme, a drive to retain existing tenants and an effort to attract new tenants.

A deal with its major funder, Softbank, meant that its debt maturities have been pushed back and a $1bn cash injection provided. WeWork is obviously looking to better times, but for IWG, despite its own heavy debt loading, revenue growth and talk of a US listing, and WeWork’s troubles, could see the UK company “stealing a march”.

Landlords enter the fray

One headwind that both WeWork and IWG are coming up against in the business of serviced offices is landlords with vacant buildings. These traditional office landlords are becoming their competitors. The UK’s two biggest office Reits are Land Securities and British Land, both of which are growing their own flexible workspace brands, known as Myo and Storey.

London based Workspace PLC is another UK listed company that competes directly with WeWork and IWG, but their product is slightly different. Whereas Workspace has a model based on short-term leases, usually measured in months or years, WeWork and IWG generally let out space based on months, weeks or even days.

Most office landlords would prefer the traditional long-lease model, without the hassle of providing additional management and services. The traditional FRI lease offers “let it and forget it” “clear return” capabilities, but needs must: a building generating short-term income, albeit with additional services to be provided, is preferable to an empty building with no income and generation running costs.

According to real estate data provider CoStar, WeWork rents more office space in London than any other tenant, and with central London office occupancy still far below 2019 levels, its demise would be a terrible blow to their landlords.

Between a rock and hard place

It leaves these landlords in the unenviable posi­tion of having to decide between giving lease incentives to WEWork to keep the company going, or taking the opportunities that may arise to re-let their empty city centre buildings, at a time when the future of the office market is so uncertain.

As Mike Prew, property analyst at Jefferies, has said: “[WeWork’s] rental obligations have little or no landlord recourse”. These two companies, WeWork and IWG, currently cleverly maintain the “whip hand” with a model of leas­ing buildings using subsidiaries that they simply allow to collapse if they are unable to pay the rent.

IWG threatened to do this during Covid. It’s a nasty practice that upsets landlords, but it does offer these service companies protection, though given their precarious position right now, WeWork may be too far gone for that.

The future is flex

Meanwhile there are many hundreds of flexible office space and serviced office space providers running profitable small-scale businesses throughout the UK. These are on a much smaller scale that the large PLCs mentioned above, but they can offer exactly the facilities businesses need on a local level.

International property agents Savills says:

“Over the past couple of years we have seen a number of forward-thinking landlords recognising the benefits of flexible office space and become early adopters of including it within their overall office offer.

“As we move further into 2023, we expect this trend to continue as the need for agility that allows occupiers to scale up and down as required, becomes a vital requirement. This will either be through landlords offering flex space directly or through a serviced office operator.

“We also anticipate that significant service charge inflation will play a part in some businesses looking to reduce footprints by circa 10 per cent as they grapple with the conundrum of rising costs vs the need for quality.

“The provision of flexible space in the same building as conventional offices will not only provide an ability to flex up and down, but it will also act as insurance against businesses who may underestimate the desire and need of colleagues to be in the office.”

The jury is still out as to the true long-term impact of working from home (WFH) and flexible working. There is a distinct trend of a gradual drift back to the office as some of the downsides of scattered operations become apparent.

It is likely that some form of hybrid working will persist but it is unlikely to be on a scale we’ve seen during Covid or even in its immediate aftermath.

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London police get lessons in protecting tenants’ rights

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The Met Police has issued new guidance for frontline officers around illegal evictions, starting with the presumption against eviction, and for the tenant to remain in their home.

Its updated approach also states that if it is out of hours, and there isn’t a court-appointed bailiff present, then it is considered illegal.

The Greater London Authority has worked with Safer Renting and Generation Rent to help make the changes. Mayor of London Sadiq Khan says that for too long, rogue landlords have been able to take advantage of the fact that there were few protections in place to safeguard London’s renters from illegal evictions.

Robust guidelines

“These new, robust guidelines will ensure that London renters not only have a much clearer sense of their rights, but that frontline police officers are far better equipped to respond to incidences of tenants being harassed, threatened or illegally forced out of their homes by their landlords,” adds Khan.

Police aren’t usually called to the vast majority of evictions, unless there’s a fear of breach of the peace or an incident, according to Landlord Action’s Paul Shamplina. Tenants have typically already left or will wait for the court warrant document in order to get rehoused.

Squatting laws

However, he tells LandlordZONE that educating the police makes sense. “I’ve taken calls from police officers asking me for advice because there’s an issue of landlords carrying out unlawful evictions.” However, he notes that forces still don’t fully understand the laws around squatting – despite a law change back in 2012.

Shamplina adds: “There are 32 London boroughs – let’s hope that they are all educated to the same level.”

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Novel apartments are a swanky home-from-home for renters

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Renters looking to live in the capital can sign up for a new alternative renting concept that blurs the lines between traditional hotels, serviced apartments and private lets.

The Other House in South Kensington is a residents’ club that combines apartment-style living with hotel services, a brasserie, cocktail bar and free access to its private club and gym, available from a night to a year or more. As part of the rates, bills are all inclusive – even the TV licence, Wi-Fi, weekly flat cleaning and gym and club membership.

Working flexibility

The new Stay As You Choose service gives tenants the flexibility to split their time between staying in London for a few days, and working from home during the rest of the week, without incurring the rental prices and utility bills associated with a long-term traditional tenancy contract.

Guests can rent a flat when they need it, by purchasing packages of 25 to 100 nights, for use over a three to 12-month period. The more nights, the better the rate – and residents can even leave their luggage and belongings to be put back into a flat on their return.

Repeat stayers

The Other House is already attracting significant interest from tenants, according to Naomi Heaton, CEO & founder, who says that since opening last year, 25% of residents are repeat stayers and 33% of all stays are for extended periods.  

“The Other House is a game-changer for the private rental sector,” she adds. “We combine the best of residential living enabling our residents to live like a local with the best of hotel life. We are redefining the accommodation market, blurring the lines between hotels, serviced apartments and long-term rentals.”

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Probe into zero deposit schemes aims to uncover poor practice

admin    Uncategorized     agents

The Competition and Markets Authority (CMA) is to dig deeper into zero deposit schemes and rental guarantees after its study found that a “significant minority” of landlords and letting agents may not be following consumer protection rules.

It is prepared to amend guidance or take enforcement action following concerns that tenants may be unaware of their liabilities under zero deposit schemes, alongside reports of pressure selling and undisclosed commissions earned by letting agents. These schemes are unregulated and it says concerns include landlords or letting agents failing to provide adequate information about them.

Onerous clauses

Guarantees will also come under the spotlight as the CMA explains it has seen examples of onerous guarantee clauses which impose wide obligations on tenants, such as requiring them to provide extensive evidence of assets. “Concerns have also been expressed that requiring extensive guarantees may disadvantage those who are less well-off or who lack a network of support able to provide a guarantor, as too may an insistence on the payment of several months’ rent upfront,” it reports.

“We were told lengthy and potentially intrusive information…could potentially be used to discriminate against some consumers on the basis of their personal circumstances and specific characteristics.”

Updated guidance

The body will also investigate retirement housing fees and sham licences as well as updating its guidance for letting agents to reflect recent legislative changes. This aims to raise consumer and landlord awareness of their respective rights and responsibilities.

The CMA report adds: “A consistent theme from stakeholders is that there is a lack of understanding on the part of consumers and landlords about their rights and obligations. There is also consensus that tenants find it hard to exert their rights against landlords, despite the existing statutory and contractual protections that are in place.”

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Fire alarms – do I need to carry out a weekly test?

admin    Uncategorized     agents

Hello, I am aware in properties such as blocks of flats it is now required to have a six monthly safety test on the fire alarm, which includes the control panels, sounders, call points and emergency lighting batteries, tested with a drain down.

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How to deal with a former tenant who is still using my address?

admin    Uncategorized     agents

Hi there, I found similar topics on this forum, but none addressing this specific question – so I posted a new one.

We had a lady staying with us for nearly a year. She did not leave on great terms

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Where should I carry my mortgage debt?

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Hello, I’m reaching the end of my large family home mortgage and the end of 2 BTL company ones. In the past I’d always leveraged the large personal interest only one as the interest is so low and only took up company ones as I expanded.

View Full Article: Where should I carry my mortgage debt?