Interview: Regus chief Richard Morris

Flexible office provision has undergone a revolution in recent years, but Regus boss Richard Morris says there is room for more growth as the market goes mainstream.

The growth of the flexible office market in recent years has been extraordinary. Just look at central London. From 2005 to 2012, average annual take-up stood at 202,000 sq ft. Then came the revolution.

In 2013, flexible office take-up in central London totalled 568,000 sq ft, a near threefold increase on the previous average. What’s more, the market was only getting started. In 2014, the total reached 1.3m sq ft - 9.1% of all take-up that year - and in the first six months of 2015 it reached 617,000 sq ft, on course to match the previous year.

By far the company best placed to take advantage of the booming demand for flexible space is Regus, the market leader. So where does the company think the demand for flexible offices is coming from? And just how does the company intend to cement its position?

This year, we plan to invest £230m in global expansion - the equivalent of 600 new locations

Regus’s latest results make for happy reading. In August, the company reported a 16.4% rise in revenues to £937m over the first half of the year and a 63% increase in operating profits to £65m. In the same period, it added 231 new locations, bringing the total to 2,481 in 106 countries.

What’s more, according to Richard Morris, Regus’s UK chief executive, we haven’t seen anything yet. “This year we plan to invest about £230m in global expansion, which would be the equivalent of 600 new locations across the world,” he says. “By the end of the calendar year we should be up to around 3,000 locations.”

Morris is a softly spoken, taciturn Geordie, but he can’t help but convey his enthusiasm when it comes to the room for growth. Indeed, it was a key motivator in taking the job around 15 months ago. At the time Morris was working for G4S, the US outsourcing firm that ran into trouble on its London 2012 security contract (“We had a little mishap with the Olympics,” he laughs), but says it was Regus’s prospects that attracted him.

“The exciting thing about Regus is the opportunity for growth,” he says. “Regus is well placed. We’ve got the backing of our investors to continue to expand and capture the huge opportunity we have building the network and continuing to grow.”

That opportunity has its roots in a number of factors, including technology and changing attitudes towards traditional office environments. But so far as Morris is concerned, the recession was also a critical factor. “No question the extent of the financial crisis had an almost indelible impact on how companies think about cost and efficiency,” he says.

More fundamentally, however, Morris believes that traditional leases no longer chime with many modern companies’ business plans. “When you really think about it, most companies don’t have a business plan for more than a few years out, so a 15-year lease is a bit of a nonsense,” he says. “The way businesses have to think and operate to survive is very different. You need to be able to flex in size, up and down, in line with economic cycles or other trends that might come their way.”

Stage set for expansion

However, Morris does not believe that flexible offices are yet seen as part of the mainstream, which is another reason why he thinks their growth prospects are so strong. The sector was once seen as purely something for start-ups and the self-employed, rather than established companies. While there have clearly been inroads on addressing the image problem (Regus counts firms such as Microsoft and Toshiba as clients), clearly there is some way to go.

“It’s something that means the full market potential is enormous,” says Morris. “Larger companies are waking up to the fact that it can be a more cost-effective way of delivering their real estate requirements. I think less and less it’s seen as a temporary, short-term thing to do. We’ve seen a lot of traction over the last few years, but we’re still not at a point where it is mainstream.”

So the stage seems set for rapid expansion. But Morris is clear that despite the boom times, he and the rest of Regus’s management team won’t let themselves get carried away or expose shareholders to unnecessary risks. This is a lesson the company learned the hard way and, as the expression goes, once bitten, twice shy.

In the heady years of the dotcom boom, Regus’s share price ascended to the stratosphere, reaching 368p in December 2000. Then came the crash, with the share price eventually bottoming out at 3.5p (the price now sits at 324p).

At least part of the reason for the hit was that in the late 1990s, Regus had taken on numerous boom-time leases, particularly on the US west coast. When the crash came, it found itself unable to fill space for which it was still paying handsomely. The contrast with what happened in 2008 is striking. For sure, Regus took a hit as a result of the global financial crisis, but confidence soon returned.

Key focus

The main reason for the difference is that Regus had in large part moved away from taking on traditional leases. Instead, the strategy was to partner with landlords on a profit-share basis, at a stroke removing a huge amount of risk from the business. “The company is very different today, not least because of the different commercial arrangements we have in place with property owners,” says Morris. “That significantly deleverages the business. In 2008, the company was very solid, very resilient.”

Our offer in itself is compelling - the model delivers very attractive returns for our landlords

Indeed, the current growth strategy is based on the same thinking. Regus will still take on conventional leases in limited circumstances, enter into joint ventures and occasionally consider outright acquisition or even a franchising model. “But predominantly our business is based on partnering with landlords and managing their buildings,” says Morris. “That is a key focus for us.”

The model, he believes, isn’t just advantageous for Regus from a risk perspective; it also works for property owners. “Our offer in itself is compelling, ” says Morris. “We invest significant amounts in marketing and the landlord derives benefit from that. We’re all aware that the economics of flexible workspace can be compelling, and more compelling than when space is leased on a conventional basis. The model delivers very attractive returns for our landlords.”

As a result, a key part of Morris’s growth strategy is to engage with commercial landlords and sell that story. In doing so, he is in talks with everyone from major portfolio holders to owners of individual properties. “We’re investing a lot of time right now engaging with the property owner community in all its different guises,” he says. “It’s quite a diverse and fragmented community, but we’re working right from big funds through to single-building landlords.”

Diversity is strength

In addition to the concentration on the partnering model, Morris believes that Regus’s global reach also provides a degree of resilience. While not unprecedented, the 2008 crash was unusual in the fact that it reached most corners of the globe. “We’re now geographically diversified and it’s not normal to have severe global economic shocks. Clearly we will have to weather storms in different parts of the world at different times, but we think that diversity gives us a lot of resilience.”

So Morris is confident in Regus’s own business model, but what about the competition from new entrants to the market? The last few years have seen several firms rapidly building their presence, particularly in London, with US company WeWork perhaps the most notable. Morris isn’t worried, however, arguing that the sector’s growth potential is such that there is more than enough business to go around.

“I don’t think new entrants are coming into the market with a mindset of ‘let’s beat the market leader’,” he says. “I think they’re attracted to the market, as with any market, because of the structural drivers of growth over a medium- to long-term period. That’s why some companies are getting the access to capital to invest significant amounts in expanding their offer in the market.”

“It’s done off the back of deciding to participate in a market that is expanding and will continue to do so over an extended period. We’re nowhere near a zero-sum game in terms of participation in the market.”

Indeed, Morris welcomes more high-profile players - the more noise made about the sector the more it will become part of the mainstream, thereby attracting still more business. “Frankly, it’s a healthy aspect of the market,” he says. “It will help to continue to raise the profile and awareness of flexible workspace among companies of all different sizes and contribute towards that ongoing process of flexible workspace becoming mainstream.”

The rate of growth seen in the sector in recent years has been phenomenal, and if Morris is right the boom times are set to continue. And with a more sustainable business model, Regus looks set to ride out any bumps in the road ahead.


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