IWG (Regus) at war with its landlords

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With it’s share price in free-fall by 42% and debt levels increasing from from a half £bn to nearly six £bn the company has declared war on its landlords by threatening to dump some of its existing leases, unless rents are drastically reduced.

Jersey based Regus PLC, a subsidiary of IWG, is threatening to place £790m of lease guarantees into insolvency in days, which has brought consternation amongst its landlords who see the move as unethical and one which is using Covid as an excuse to wriggle out of its obligations.

The company has form on this kind of behaviour as in 2010 Regus was rebuked by the British Property Federation for threatening to put sections of its business into administration unless rent cuts were allowed. And in 2013 the US operation was put into Chapter 11 bankruptcy to force landlords into waiving rent payments and renegotiating leases.

In contrast, IWG approached its own tenants at the start of the Covid lockdown by promising to reduce its own rents only if its tenants were willing to sign up to longer leases.

Sector Growth and Peril

Services offices have grown relentlessly in recent years but the very flexibility they offered in the good times has somewhat worked against them with Covid. A serviced office letting agreement will typically be one year or less and can often be terminated with just 2 – 3 months’ notice, depending upon the length of the agreement.

In contrast, conventional non-serviced space will usually have signed leases for periods ranging between 3 and 5 years, sometimes longer, though the uncertainty brought about by the Covid experience means that conventional tenant occupiers may well demand even shorter lease periods in the future.

While initially the service office sector was focussed on central London, its rapid growth increasingly rippled out to the provinces and the office markets across the UK. The rise of the serviced office market was largely on the back of the growth in the technology sector and flexible working patterns already appearing before Covid.

But the increasing turmoil brought on by the COVID-19 pandemic means the vulnerability of the serviced office sector has been shown up for what it is: flexibility works two ways, so occupiers previously providing lucrative and premium level short-term rent payments have proved fleeting.

Other service operators, such as the US based start-up WeWork, have also suffering massively from the effects of Covid. Their business model of taking out long-term lease commitments on large office buildings in city centres and letting individual offices on short-term lets, although lucrative in the good times, now takes on a different stripe. WeWork has also had to borrow massively in order to survive.

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