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.
If you are looking for flexible serviced office space click on the following link or call Gryphon Property Partners on 0203 440 9800. Serviced Office Space