By Douglas Green 18 January 2019
The UK’s flexible workspace market has never been more vibrant, writes Douglas Green, director at GKRE. Annual growth is at double-digit levels and is projected to remain so for at least the next five years.
A host of new operators have entered the market along with a variety of new players – from private equity houses to traditional institutions – as well as overseas operators and investors. This has already caused an uptick in M&A deals, as some operators have merged to acquire scale to help drive growth, while a number of new financial institutions have entered the market by acquiring existing operators.
Over 2019 we expect deal flow to accelerate and rebalance, with inter-operator transactions being matched and potentially exceeded (certainly in terms of value, if not volume) by external players entering the sector and acquiring existing operators.
Consolidation will be a key driver
While the flexible office market has expanded strongly over the past few years, a key characteristic of this growth has been a fragmentation of the market. The UK market share held by the top 10 operators by size is actually decreasing, as many smaller players enter the market. Last year the three largest providers of flexible workspace in London made up only 17% of the total market. Operators such as Regus, Bizspace, WeWork and The Office Group may still be dominant, but strong demand for flexible workspace options has seen the number of small-scale and localised providers expand significantly, both in London and regionally.
Growth has been strong in the regional hubs of Manchester, Birmingham and Leeds and in smaller regional hubs such as Cardiff, Liverpool and Newcastle. Across the UK, the number of flexible office centres tracked by the Instant Group has risen to 5,320 over the past 12 months, which represents growth of 10%.
Inter-operator deals have dominated
Against such a backdrop, it is understandable that inter-operator M&A deals have surged, with management teams seeking to build scale and drive growth. Notable deals have included Regus’s acquisition of Basepoint Business Centres in a transaction valued at £100m, and i2 Offices’ acquisition of Landmark. Meanwhile, Leeds-based property asset management business Moorgarth increased the value and scale of its flexible portfolio by acquiring London serviced office provider Ventia and merging it with the Boutique Workplace Company. A further key deal for the sector was BE Group’s acquisition of private and co-working offices provider Headspace Group.
Continuing Brexit uncertainty and intensifying trends for more flexible working should ensure that the sector’s growth continues and that new operators will emerge. At the same time, existing providers will intensify their efforts to acquire, merge and scale their businesses to stay ahead of the market and the challenge of new competitors.
External players will acquire existing operators
A more recent trend, which we expect to accelerate this year, is the rise of external players (property funds, alternative and institutional investors as well as family offices) acquiring operators.
In 2018 we saw FTSE 250-listed RDI REIT buy a controlling stake in a property portfolio owned by Office Space in Town (OSiT). There is also an increasingly cross-border element to this deal flow. For instance, in 2017 US private equity fund Blackstone bought the Office Group, valuing it at more than £500m, and another US private equity house, Carlyle, made a £150m move to complete three acquisitions and launch its own flexible offer, Uncommon.
Most recently, in October, Asian family office Celvam Management acquired London Executive Offices for £475m.
If moves by the RICS to create a market-agreed valuation formula for flexible offices succeeds in 2019, this could help boost confidence among institutional investors, as well as operators, and further drive deal flow.
Complex backdrop to M&A
As a result of the increase in the number of operators – with a greater array of offers, and the interest of external players in entering the market – M&A activity has never been more varied. This creates compelling opportunities for businesses seeking to make acquisitions, but also brings risks as it creates a more complex market. Increasingly we are being approached by a variety of buyers seeking advice mergers and acquisitions. In recent years GKRE has provided key M&A advice to businesses and operators and has acquired more than 600,000 sq ft across the UK for national and regional flexible workspace operators.
As demand for flexible workspaces grows at a rapid pace – driven by businesses competing to attract a workforce increasingly motivated by experience and lifestyle, and by regulatory changes that are making long-term leasehold liabilities less desirable – we are likely to see a constant flow of new entrants keen to capitalise on this trend. An influx of property developers and new operators, large investment funds, private equity groups, and overseas capital will invariably lead to a more vibrant, more complex M&A environment during 2019 – and well beyond.
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