GREEN KINNEAR

The Flexible Workspace Market Contents

Contents

1. The flexible workspace market – p3 2. Types of flexible workspace – p5 3. Drivers of the flexible workspace market – p6 4. Operator income streams – p8 5. Opportunities for landlords – p9 6. Valuation – p11 7. The future of flexible workspace – p13 8. About GKRE – p16

The Collective Old Oak, NW10

2 The flexible workspace market

The Space High Holborn, WC1

The flexible workspace market t is no exaggeration to say that there has been • Around two thirds of the flexible workspace Ia revolution in the workplace over the past run by the top operators is outside , few years. Flexible workspace has moved from as shown in our table on page 7. the fringes of the market to centre stage with demand continuing to grow year on year. • The UK flexible workspace sector is UK flexible estimated to be worth £16bn using Britain is at the forefront of this revolution, traditional valuation methods, although workspace sector leading the way in offering a working taking into account additional income from environment that meets the needs of the services supplied by operators it has been estimated worth 21st century occupier. estimated it is worth close to £19bn. This could rise to £62bn by 2025.* Key flexible office market statistics: • With 52% of global office space either £16bn • The flexible workspace market in the UK vacant or unused, the expectation is that accounts for around 36% of the world the flexible workspace market will increase market. significantly– currently, it represents 8% of global office space.**JLL estimates that 30% • There are approximately 3,300 centres of office space will be co-working space by in the UK, with over 5m square feet in 2030. central London alone. “...the flexible workspace market in the UK * Report by Capital Economics Ltd **Report by Cushman & Wakefield accounts for around 36% of the world market” 3 The flexible workspace market CENTRE GROWTH AND WORKSTATION RATES UK CENTRE AND WORKSTATION GROWTH he sector’s explosive growth has seen the central TLondon market increase by 67% in the past 10 years. AVERAGE In the last year alone, the number of UK centres has grown NO. OF CENTRE WORKSTATION CITY WORKSTATION 11%, with rises of 16% in London and 17% in Newcastle CENTRES GROWTH RATE GROWTH (as shown in the table opposite). RATE Allied to this has been a strong increase in workstation rates, with prices rising on average by 11.4% over the past London 944 16% £613 9% 12 months across the UK. 61 2% £264 12% London is spearheading this, followed by key cities such 59 13% £252 12% as Bristol, Leeds, , Birmingham, Edinburgh, Newcastle, Belfast, Milton Keynes, Brighton, Northampton, Edinburgh 53 13% £300 7% Oxford and , all of which have shown double-digit growth since 2015 (with Liverpool showing an impressive Manchester 51 11% £271 9% 76%). Bristol 47 12% £266 -18% Research by the Business Centre Association (BCA) Glasgow 44 2% £238 -12% shows that nearly 40% of flexible workspace customers are classified as business service firms or those from the Nottingham 33 3% £218 6% creative industries. Sheffield 33 -3% £199 7% The strength of the sector has always been the diversity of Milton Keynes 26 4% £260 13% the occupier mix, ranging from financial and professional firms to the third sector. Belfast 22 0% £282 14% Aberdeen 21 5% £405 -15% Newcastle 21 17% £223 -21% Growth in Liverpool 20 11% £247 76% workstation rate Brighton 17 6% £432 16% in Liverpool Northampton 16 23% £251 11% Cardiff 13 0% £256 -1% 76% Oxford 12 0% £295 11%

Table information supplied by The Instant Group as at 2016

4 Types of flexible workspace

The Boutique Workplace Company Golden Square, W1

Types of flexible workspace

SERVICED OFFICE VIRTUAL OFFICES CO-WORKING MANAGED SPACE WHAT’S IN A NAME? This is the original, traditional The customer is provided (INCLUDING CLUB offering. Occupiers take a with a telephone number MEMBERSHIPS) This offers occupiers fitted In reality, the lines are blurred out workspace complete between co-working and private office or fixed desk and business address in This is a more recent with furniture, fittings, IT serviced offices because with telephone and Wi-Fi order to give the impression variation and tends to be and facilities management. many operators offer an connection plus access to that they have a presence run on a membership basis. Occupiers get the best of element of both in the same facilities such as meeting in a particular area or city. Members pay a monthly fee both worlds: tailor made building. rooms and breakout areas. Services provided often for desk space (open plan Occupiers pay a fixed sum include access to meeting space plus the flexibility of or private space), meeting a serviced office but without The term co-working is per room or desk with rooms, post forwarding rooms, breakout areas, and additional services generally and message taking. This paying the extra costs of most usually applied to Wi-Fi, and have opportunities a building receptionist or space that offers a modern, charged separately. Contract suits start-ups and overseas to network with fellow terms tend to be from three businesses that require a add-on facilities. Managed shared working environment, co-workers. Co-working workspace can suit occupiers including collaboration to 12 months. Occupiers local presence. was initially popular with were initially entrepreneurs who have already been in between occupiers and freelancers and start-ups serviced offices or are looking networking opportunities and SMEs looking for an and is now also used by office away from home and for a flexible all inclusive between workers from corporates of all sizes. In alternative to traditional different organisations. now include larger corporates addition, companies such and established companies space. Size requirements for There are though some pure as Barclays, Vodafone and managed space vary but it co-working operators who that require flexibility and Deloitte have created their overflow or project space. tends to suit requirements of only offer open plan flexible own co-working space for 2,000 sq ft upwards. co-working space. staff and clients.

5 Drivers of the flexible workspace market

Office Space in Town Waterloo, SE1

Drivers of the flexible workspace market he industry sprang up as a result of operators challenging the traditional lease model offered to tenants. Tenants took to this new flexible model Tas it did not tie them into long-term conventional leases and the financial commitments these involved. The original serviced offices were, and continue to be, attractive to occupiers for several reasons, including:

FINANCIAL RISKS LOW SET UP COSTS PLUG AND PLAY PAY-AS-YOU GO Occupiers are not required to make This makes serviced offices The legal process for taking space in Occupiers pay a fixed amount per a long-term financial commitment particularly attractive to start-ups. a serviced office is infinitely easier desk or room, with extras such as by entering into a lease for a fixed There is no requirement to spend and quicker than entering into a lease. meeting room hire, furniture and number of years. As a result, large amounts on rent deposits, legal Occupiers can move in within days or printing services paid for separately. occupiers can grow or contract as expenses, or fit out and infrastructure even hours. their business needs change. costs such as telephone systems, printers, etc. “The industry sprang up as a result of operators challenging the traditional lease model offered to tenants” 6 Drivers of the flexible workspace market here are now new, more powerful drivers that makes flexible working UK’S LARGEST OPERATORS (BY SQ FT) Teven more attractive: LONDON/ DIGITAL REVOLUTION NO. OF SQ FT REGIONAL OPERATOR This has transformed the way people work. Millennials are now the largest CENTRES (’000s) CENTRE section of the workforce and Deloitte estimates that by 2025 they will make RATIO (%) up 75% of the global workforce. They demand to work in a different a way. They see their workplace as a destination, and more than a place to work. It Basepoint Business Centres 31 1,000 5/95 needs to be an enticing mixed-use environment, offering space to relax and BE Offices 17 850 70/30 collaborate, as well as work. Employers realise that a key to attracting and keeping staff is to give them the ‘club’ like atmosphere they expect. Bizspace 95 5,800 5/95 13 170 0/100 NEW BUSINESS PRACTICES Businesses recognise that the flexibility offered by new technology means Beaumont Business Centres 6 180 100/0 they can look at property resources in a different way. With employees Citibase 36 630 20/80 spending more time working on the road or at home, there is no need for a fixed desk policy. Companies across a range of sectors, including professional Clarendon/Reflex 31 175 70/30 services firms, are abandoning the traditional office model in favour of space ECC 6 140 10/90 that offers more flexibility and a collaborative environment. Flexspace 58 2,530 2/98

SMALL BUSINESS EXPLOSION Halkin 4 200 75/25 One of the by-products of the technological revolution is the doors it i2 Office/Landmark Plc 36 995 70/30 has opened for start-ups. The internet offers a level playing field for entrepreneurs and has cut down barriers to entry in many sectors. As a Lenta Business Centres 12 200 80/20 result, the UK has become a country of SMEs. At the start of last year, there London Executive Offices (LEO) 32 560 100/0 were 5.5m private sector businesses in the UK, an increase of 2m since 2000. A record 342,927 new companies were set up between January and June Office Space in Town 11 250 70/30 2016 compared with 608,110 for the whole of 2015, itself a record year. Orega 16 475 40/60 Flexible workspace is ideal for small businesses. It offers room to grow as employees join and a supportive environment in which to work. Prospect Business Centres 7 130 70/30 Pure Offices 17 440 0/100 GROWTH IN THE TECH ECONOMY AND SERVICE SECTORS Regus 286 4,500 30/70 It is estimated that by the end of 2017, there will be 9.7m office-based jobs, an increase of 1m on 2016 figures. Many of these will be employed in finance, Rombourne Serviced Offices 9 175 0/100 professional services, IT and communications, all sectors that use flexible The Boutique Workplace Company 29 200 100/0 workspace heavily. (TOG) 35 1,200 95/5 NEW TAX LAWS The Space 7 95 100/0 A new international standard on lease accounting coming into force in January 2019 will drive up the demand for shorter leases. Under the new UBC 10 150 20/80 rules, companies will need to show long or new leases on their balance sheets, WeWork 18 1,200 100/0 making short-term flexible leases more attractive. 80 4,500 100/0

7 Operator income streams

Spaces Oxford Street W1

Operator income streams

perators generate income in different ways, depending on the type of The provision of additional services is not new for serviced operators but Oflexible workspace they offer. in these new types of spaces it goes beyond charging for furniture, printing or meeting room hire. FIRST GENERATION SERVICED OFFICE Many of the newer operators also sells products such as invoice processing, Under this model, the operator charges a fixed inclusive sum for use of the health care, insurance, IT support, education and training. What they are space covering license fee, rates and service charge, with additional services offering is complete business support to their occupiers. The idea is to tie charged separately e.g. meetings rooms, telecoms and IT, concierge services. occupiers into their eco-system making them more likely to stay for the long- term. By its very nature, the flexible nature of the business model makes it is easy for occupiers to come and go but becoming an indispensable part of their NEXT GENERATION – CO-WORKING (INCLUDING PRO- customers’ business operation helps overcome this. WORKING AND CLUB MEMBERSHIP) In part, this is a monthly income model with some features that are similar to VIRTUAL traditional serviced offices. Many operators are perceived as only providing The operator charges a monthly fee for the benefit of a virtual office. The co-working space but in fact offer private offices as well as hot-desking and number of virtual office “occupiers” is almost unlimited and therefore the dedicated desks. product can be sold almost infinitely. Co-working itself is evolving and now includes ‘pro-working’, the term given to describe workspace that is geared more towards professionals and corporates. Pro-working space offers an environment that is more in keeping with what professionals and large corporates require. “The idea is to tie occupiers into their eco-system making them more likely to stay” 8 Opportunities for landlords 5

London

Spaces –House, London Work.Life London Fields E8

Opportunities for landlords There are a number of ways in which operators can work with landlords, building owners and corporate tenants. The most usual models are set out below: TRADITIONAL LEASE highly profitable, the amount the landlord receives the property owner. One advantage of this is that will be capped. the centre forms part of the operator’s network An operator enters into a lease, usually for a term and benefits from the operator’s brand and of 10 to 15 years, although some operators prefer Another option is a turnover lease, whereby marketing. The operator is responsible for operating to take a longer lease especially if it is outside the rent is calculated as a percentage of licence fee the centre, generating revenue and reporting to the Landlord & Tenant Act 1954. This is to protect the income generated by the operator. This is a more property owner. value of the business and amortise fit out costs over straightforward way of determining the rent than a longer period. under a profit share lease. Often, the lease includes The costs of fit out is generally met by the owner PROFIT SHARE AND TURNOVER LEASES a base rent. whilst some operational service costs can be met by either or both parties. There is a ‘management The difference between and traditional lease and If a centre is successful a profit share or turnover fee’ charged by the operator, usually 10%-15% of a profit share or turnover lease is the mechanism lease can provide a landlord with income over and turnover. This covers the operator’s head office for paying rent. Under a profit share lease, the above ERV. overhead, with a profit share divided between the landlord only receives rent once the centre parties once the centre hits certain targets. becomes profitable (although a low base rent is not MANAGEMENT AGREEMENT uncommon). The percentage profit share will differ A management agreement is a contract between A property owner is likely to enter into a from building to building, but the greater share is the party who has the interest in the property (i.e. management agreement for any number of usually in favour of the landlord. the freeholder or a leaseholder) and an operator. reasons. These can include a site being due for In some cases, there is a ‘cap and collar’ on what redevelopment and short term income being the landlord can receive from the operator, i.e. a It does not create any property interest but is required or they see the benefit in having minimum and maximum amount. This can reduce an agreement between the parties to provide flexible workspace in their building and want to the landlord’s exposure to receiving no rent if the services. The operator will agree to provide flexible take advantage of an operator’s expertise and centre is not profitable but likewise, if the centre is workspace and other related services on behalf of experience. 9 Opportunities for landlords

SOME OF LONDON’S OPERATOR SQ FT TROPHY BUILDINGS , SE1 The Office Group 33,600 The Leadenhall Building, EC3 Servcorp 11,800 The Gherkin, EC3 Regus 27,100 Salesforce Tower, EC2 Landmark plc 37,000 1 Canada Square, E14 Regus 42,800 Tower 42, EC2 Regus 26,000 Lloyds Building , EC3 Regus 17,000 Broadgate Tower, EC2 Regus 26,000 Octagon Point, EC2 LEO 40,000 Berkeley Square House, W1 Regus 60,000 TROPHY BUILDINGS 125 Old Broad Street, EC2 Landmark plc 31,500 he extent to which landlords are now embracing Sea Containers House, SE1 WeWork 37,500 Tflexible workspace can be seen by looking at the Michelin House, SW3 LEO 26,000 tenants in some of London’s landmark buildings. 199 Bishopsgate, EC2 WeWork 63,200 It is evidence that the dynamic growth of the 1 Cornhill, EC3 LEO 40,000 sector has caused landlords to rethink their letting strategies. Buildings that were once the exclusive Devonshire House, W1 Servcorp 30,300 home of large corporates, now actively seek out White Collar Factory, EC1 The Office Group 41,300 top flexible workspace operators as part of their lettings mix. 2 Kingdom Street, W2 Regus 26,200 40 Bank Street, E14 i2 Office 19,500 40 Bank Street, E14 Servcorp 4,800 Dashwood House, EC2 Servcorp 9,000 Euston Tower, NW1 Office Space in Town 17,700 Aldgate Tower, E1 WeWork 61,200

10 Valuation Valuation

he Royal Institution of Chartered Surveyors’ In practice, both freehold and leasehold flexible applying the traditional method using an ERV and T(RICS) Red Book contains no guide for valuers workspace has been sold using a variety of market yields, and a view on the vacant possession when valuing flexible workspace. As a result, there valuation methods including the following. value. has been much debate about the basis on which flexible workspace businesses should be valued. MULTIPLE OF EBITDA Interestingly, as result of the premium income This method applies on the sale of an operating being received from well run flexible workspace, The main challenge for a valuer is to decide what business. It values the business as a multiple of these methods of valuation can provide similar proportion of a flexible workspace business earnings before interest, tax, depreciation and sums to traditional investment valuations. attaches to the property and what to the business. amortisation (EBITDA). The multiplier applied will depend on a range of circumstances including DUAL SALE METHOD A report by Capital Economics Ltd in 2016 makes location and proximity to lease events such as rent A dual sale method has been used in the market the point that income such as IT, meeting rooms, reviews and break clauses. It also depends on the on the sale of freehold flexible workspace as a catering, etc. is closely related to the property size of the central overhead of the business as this going concern. The first step is to separate the income and although it is mainly variable, much of is generally cut or squeezed by the purchaser and freehold property from the business. This involves it is contracted. can release value in the sale. hiving the business off into an SPV company and granting it a new FR&I lease. The revised EBITDA The report argues that this variable income stream of the business takes into consideration the new is largely predictable and should attract a lower INVESTMENT VALUATIONS/SALES rent. Once the new lease in place, the freehold yield in valuation. It also states that occupier In line with the comments above on the value of investment is sold off separately. tenures are lengthening, especially in London, with both contracted and variable income, when valuing some occupiers remaining for up to five years. freehold centres as going concerns it is common practice to pool the gross income. Capital Economics Ltd suggests that flexible workspace should be valued as a separate asset The EBITDA is calculated in order to establish “There has been much class using a discounted cash flow (DCF) basis. the free cash and then an investment yield is This uses future free cash flow projections and applied. This yield will be discounted compared discounts to arrive at a present value estimate. to a traditional investment valuation due to debate about the basis the work required to run the workspace and The weakness of this is that it may only be relevant generate the income. The yield is, of course, also on which flexible office if selling to another operator and may not apply determined by the quality of the property and the if selling to an investor. Until flexible workspace basic fundamentals of property valuation such as businesses should be becomes an asset class in its own right, with location and size. detailed supporting evidence of its ‘value’, larger investment into the sector may be held back. The resulting valuation is then cross referenced by valued”

11 Valuation

Net.Works Highbury N5

Valuation continued FLEXIBLE WORKSPACE AND THE INVESTMENT MARKET Moor Place, 1 Fore Street, London EC2 uildings let to flexible workspace operators have now been sold A Hong Kong investor bought the European HQ of WeWork for £271m, a net Bas straightforward investments, thereby providing evidence of initial yield of 4.85%. Around 75% of the building is let to WeWork. investment yield. Octagon Point, 5 Cheapside, London EC2 As a result of operators receiving additional ‘sticky’ income streams, and Alan Sugar’s Amsprop sold this building to a Dubai-based firm run by Easa Saleh therefore going some way to overcome a perceived weakness of flexible Al Gurg for £80m. The entire office element of the building is let to London workspace operation, institutions have overcome their reluctance to invest in Executive Offices at a rent of £83psf overall – an initial yield of 4.34%. buildings with flexible workspace operators. Fox Court, London WC1 Flexible workspace has been providing the backbone to some low yield deals Another building with WeWork as a tenant, this was sold to a private Middle in recent months. Examples include: Eastern investor for £101.5m, representing a net initial yield of 5.1%.

33 Queen Street, London EC4 Lime Kiln Business Centre, Royal Wootton Bassett, SN4 This deal was the first time WeWork’s covenant had been traded in London. The freehold investment of this business centre, which is let to Regus, was sold WeWork occupies floors one to five on a 20-year lease at £60psf overall. The to an overseas investor for an initial yield of around 8%. building was sold to German investor Corpus Sireo for £40m, representing a yield of 5%. 12 The future of flexible workspace 7

Clarendon Business Centres Upper Berkeley St, W1 The future of flexible workspace There are four key the AN INCREASE IN OCCUPIER DEMAND FLEXIBLE OFFICES WILL BE RECOGNISED AS workspace market can expect to The freelance economy has grown by 25% since 2009 and is A SEPARATE ASSET CLASS see during the coming year: now worth more that £109bn a year according to IPSE, the This has already started to happen. An article in EG London body that supports independent freelancers, professionals outlined how lenders and developers are now adapting to • AN INCREASE IN OCCUPIER and contractors. The Office of National Statistics states than the “short-lease” environment. The article refers to Trilogy DEMAND one in seven people in the UK is self-employed. founder Robert Wolstenholme “keeping an eye on hotel- style valuation techniques”, which value revenue and the • FLEXIBLE OFFICES WILL BE There has been a fundamental change in the UK economy operating income as RECOGNISED AS A SEPARATE over the past few years. Research by Self-Employment much as the capital ASSET CLASS Review has identified that 60% of the rise in self- value of the asset. employment in the past five years has come from skilled • PROPERTY COMPANIES managerial and professional people. It is this demographic “We are definitely DEVELOPING THEIR OWN that will continue to drive demand for flexible workspace in heading that way,” FLEXIBLE WORKSPACE the months and years ahead. Only time will tell whether this he said. “More • MANAGED SPACE will continue post Brexit. investors are talking £109bn about total returns, Added to this is the fact that the following fast-growing thinking about the sectors are embracing flexible offices and will lead the way yield on cost they Annual value of the in demanding flexible workspace: can create. It means freelance economy thinking about long- Professional, scientific and technical services • term income.” • Finance and insurance • Information and communication • Business support 13 The future of flexible workspace

The Office Group Liverpool St, EC2

The future of flexible workspacecontinued PROPERTY COMPANIES DEVELOPING THEIR OWN MANAGED SPACE FLEXIBLE WORKSPACE Tenants from all sectors, from professional services companies to charities, One of the challenges that landlords have always had is attracting and retaining are demanding flexible workspace. They want bespoke modern office space tenants. This issue has become more acute in recent years as lease lengths without being tied in to long-term commitments. The next evolution of the have shortened, going from a standard 25 years to around five years or less at flexible workspace market is likely to be towards tenants taking managed space. present. Many landlords have embraced the short lease culture by taking flexible Space will be packaged for tenants and include fit-out, an inclusive license fee, IT, workspace operators as tenants – as can be seen in the trophy buildings section. furniture, and additional services. The attraction to tenants is that property will The problem with this from a landlord’s point of view is that the occupiers of the become a service, allowing tenants to simplify the way they take office space. flexible workspace become ‘tenants’ of the operator and not the landlord. They Tenants will also be able to benefit from choosing their own address rather than have no control over the businesses that occupy their buildings. is having to go to an operator’s premises. This type of space could be especially seeking to overcome this by launching its own dedicated flexible workspace in popular with professional services firms, creatives and service industries. London this year. We expect other landlords to follow suit and create their own flexible workspace operations under their own brand.

14 Top row (L to R): The Collective, Old Oak NW10; Clarendon Business Centres, Upper Berkeley St W1; Us & Co, Harp Lane EC3; Halkin, Brook St W1 Second row: The Space, High Holborn, WC1; LEO, Southampton Buildings, WC2; i2 Office, Victoria, SW1; Third row: Work.Life, London Fields, E8; Net. Works, Highbury N5; The Office Group, Liverpool St EC2 Bottom row: Spaces, Oxford Street W1; Prospect Business Centres, Old Bailey EC4; Office 15 Space in Town, Waterloo London SE1; The Boutique Workplace Company, Golden Square W1; BE Offices Threadneedle St EC2 About GKRE About GKRE GREEN KINNEAR

GKRE is the UK’s leading specialist flexible workspace agency. Founded in 2013, the directors bring to GKRE more than 25 years’ experience in the flexible workspace industry between them.

Our clients include operators and landlords across the UK, from major PLCs to independent companies.

We have recently been involved in the merger and acquisition of businesses worth over £30m, comprising more than 360,000 square feet in some 50 buildings. On the agency side, we have acquired in excess of 400,000 square feet across the UK for 14 different operators.

GKRE advises landlords and building owners throughout the UK on their flexible workspace options and opportunities to partner with flexible workspace providers.

Please visit gkre.co.uk for more information on how we assist property owners, tenants and flexible workspace operators, and for details of our latest transactions.

Douglas Green Will Kinnear, MRICS We have been nominated as both E: [email protected] E: [email protected] T: 020 3427 5678 T: 020 3427 5677 specialist and niche agent of the year M: 07855 825 088 M: 07811 942 752 by and

11 Golden Square, London W1F 9JB 020 3427 5679 www.gkre.co.uk

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