No longer simply incubators for new ventures, serviced offices are now an option for even very large companies. Michael Herson reports on a rapidly evolving market

Ten years after its birth in the UK, the serviced office market is beginning to mature. The two leading players - Regus and MWB - have become established brand names with plc status.

Landlords are now keener to acquire buildings for conversion to serviced offices, and big companies that were once fixated by the concept of head offices are more flexible in their approach to working arrangements.

The industry also has a credible trade body to represent its interests - the Business Centres Association, which has 160 members representing 600 locations.

The market may be maturing, but it has by no means reached its full potential. Most industry experts estimate that 1% of available office space in the UK is used for serviced offices, compared with 2.5% in the US.

The four leading UK players - Regus, MWB Business Exchange, HQ Global Workplaces and Abbey - have 146 centres between them in the UK (see table, p135).

Opinion differs on whether the UK or Europe has more potential for expansion. MWB is expanding equally here and on the Continent, where it has only one centre.

On the other hand, HQ believes that critical mass has been achieved in the UK and prefers to focus more on Europe. HQ managing director Ron Adam says: "It's easier to partner with the developers in Europe."

Regus, which started the serviced office market in the UK, anticipates much more growth here. This is because large companies, which are the main market drivers, were "late buying into the idea", according to UK managing director Sean Morgan.

He firmly believes that working arrangements will become more flexible as a response to environmental issues and because businesses need local contact with clients and suppliers.

Another driving factor is that serviced offices are no longer seen as just the first step for start-ups. The average period of tenancy is increasing - all the key players report that it has now reached 12 months and rising.

This allows providers to grow with their customers - for example, a corporate client may want a whole open-plan floor with partitioning, instead of the traditional client's two-to-four person serviced office.

There is a trend among serviced office providers to build facilities as large as 9,290m2 (100,000 sq ft) to serve the needs of large corporate clients.

MWB is developing a specific product for bigger clients, called Flexilease. Aimed at companies with more than 50 employees, it provides a pool of space with a menu of options, within a large building.

Philip Newborough, joint managing director of MWB Business Exchange, believes that flexible office providers will move upstream and traditional landlords downstream to converge in the middle. He says that "80% of current requirements are in the range of 2,000-20,000 sq ft".

Newborough's vision is based on a report that MWB commissioned from the University of Reading. The changing face of space indicates that future requirements from corporate clients will be more aligned to three-to-five year leases, rather than the traditional 15-year leases favoured by pension funds and institutions.MWB says that already half its sales are to large companies.

All the leading service office providers focus firmly on the IT, telecoms, technology and media sectors. A secondary source of tenants is business service firms such as lawyers, accountants and recruitment agencies.

The major players are installing communications rooms and high-speed internet access. This is seen as an additional revenue-earning opportunity - buying bandwidth in bulk and selling it on to customers.

The shift towards corporate clients has strengthened the relationship between serviced office providers and property agents. David Jenkins, associate partner of Vail Williams, has specific responsibility at the firm for business space. He comments: "We now view them as clients rather than just another way of earning income."


Short-term solutions useful

Howard Elliot of Baker Davidson Thomas says of serviced office provision: "It fulfils a market need in the tightening supply that we've seen - especially in the M3 corridor." He explains that short-term solutions often need to be found while a wider property search is undertaken.

Simon Freyer of Freyer Gilbert comments: "I actually see them as a benefit, because you can camp companies in serviced offices for a month or a year - and get a fee."

Paul Smith of Weatherall Green Smith is equally bullish. "We're not dealing with a one-man office anymore - there's demand from corporates where we can make six-figure commissions," he says.

The strategy of temporarily housing corporate clients in serviced offices benefits the operators, as Geoffrey Howison of Abbey explains: "It gives us a gateway to a large, dynamic customer base and we are committed to developing these relationships for the long term."

MWB has only one facility on a business park, which is in Oxford, but is planning four more. HQ has five business park sites - accounting for 20% of its portfolio - but it is Regus that has led the way, with 30 business park locations that make up 38% of its total portfolio. This makes it possibly the largest occupier in business parks nationwide.

Ian Southern, chairman of the Business Centres Association, is confident about the sector's future. "There's huge growth to come in the market," he says. "I think we're only at the beginning in terms of convincing corporates they should deploy teams.

"As the traffic network becomes more and more frustrating, it's easier to have people where they should be, with the infrastructure to link those offices together."

Services a significant niche

Judging by the rise in Regus's share price since flotation, the City appears to approve of its approach.

Southern comments: "Regus was quite right to seek a flotation under the services heading, and not the property heading. Anybody who takes this industry seriously knows you've got to give it the same attention as a hotelier would give his hotel."

Sean Morgan at Regus, whose background is in the hotel industry, says tellingly: "I'm not a property guy - this is a service industry." As HQ's Adam points out: "The business services sector generates more value than the property sector." He adds that his company's covenant is now on a par with that of its customers.

From an investment perspective, MWB has £600m of institutional money under management in three funds. The fund acquires property freeholds and approaches the corporate occupiers to take over their current space.

HQ is in partnership with Merrill Lynch and has created an investment fund - split 80% Merrill Lynch and 20% HQ - for nine of its buildings, operated by Merrill Lynch investment managers.

MWB's Newborough believes that the serviced office market offers institutions such as pension funds a more exciting opportunity than their traditional property investment.

Company

Number of UK centres

Regus

80

MWB

31

HQ

25

Abbey

10

Source: The Strategy Works

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