By Will Kinnear 11 January 2019

I expect a feature of 2019 to be the increasing involvement of property owners in the flexible workplace market. Landsec and Legal & General are the latest property owners to launch flexi offerings, following British Land and The Crown Estate into this growing sector.

 

Will Kinear

These property owners recognise that flexible workplaces are one of the best ways to attract tenants to their buildings and incubate them for future growth. The idea is that as these flexible tenants grow, they will take more space within the property owner’s portfolio.

Most property owners realise they need to embrace the flexible workplace sector and many are launching their own operations. Those that take this approach take on all of the risk of doing so in a dynamic and sophisticated market. But they will benefit from retaining all profits, having complete control over the space and (they hope) tenants’ loyalty.

Not all landlords have the resources or will to do this, but that doesn’t mean the flexible sector has to pass them by. There are several ways for them to get involved.

Traditional leases

The first is the oldest and simplest to understand: a traditional lease to an operator. With flexible workspace now an integral part of the market, many property owners are happy to include this type of deal in their portfolio. Others have invested in an existing operator; for example, last year Blackstone bought a big stake in The Office Group, valuing the operation at £500m. Brockton and The Carlyle Group also took this route of “buying in” knowledge and a sound business.

There is also a growing trend for property owners and operators to form joint venture/management agreements, which can be best described as the property owner outsourcing the sales/marketing and ultimate revenue generation of their space to a flexible workplace operator.

These agreements are quickly becoming a favoured route for commercial landlords as they can provide returns above estimated rental value and carry a lower risk than directly investing in a flexible workplace operator or running their own operation.

Workplace

Such agreements are not property deals, but service agreements between two parties. If this is not understood from the outset, there can be issues with valuation, lending criteria and legal points on the agreement (especially if lawyers fail to grasp the deal’s ‘non-property’ nature).

With a vast array of flexible workplace products in the market, when landlords partner with an operator they must find the right partner for each asset. In the past, the choice of operators was limited and those that approached landlords were often chosen out of necessity. But times, operators and flexible products have changed. An understanding of both the asset and options available will ensure the best returns are made.

JV agreements

Landlords considering a joint venture management agreement must be clear about their partner’s income expectations, as well as their own. There are operational and property costs to consider as well as the rewards. The details of the profit-sharing agreement will depend on many factors, including each party’s share of costs and risks. The ‘waterfall of returns’ should be set out in detail in the agreement.

‘Space as a service’ has always been at the forefront of the flexible workplace sector and landlords must understand how this is disrupting the market. They should see their product as more than just the provision of property. Owners who refuse to embrace this growing market risk missing out. Capital Economics forecasts the UK market could be worth at least £62bn by 2025.

The successful owners will be those who think carefully about who they are going to work with and why.

Will Kinnear, director at GKRE