Same problem, new solutions

Chris Allington argues that the growth area for the property market lies in providing flexible office solutions for growing companies, which can also deliver good returns for investors

If the recession has taught us one this it is that we need to step back from the role of property as an investment.

Instead we need to see that, from an occupier’s perspective, property is simply part of a business’s supply chain of products and services. Most occupiers view their property at a total occupancy cost level. For every carpet tile occupied there are associated costs - rent, rates, fit-out costs, facilities management and so on.

Much of my early career was spent in manufacturing, engineering and international purchasing. I therefore intuitively understand the needs of the occupier, which can be summarised as the following: Poorly utilised property represents unnecessary cost.

Property and its associated services need to be a variable cost. Sharing common services (cafeteria, receptions, meeting rooms) improves the utilisation of property.

Getting involved with facilities management service provision is an unnecessary distraction from the core business. Clearly these occupier requirements are incompatible with the traditional property investor’s ‘let and forget’ stance and this, in my view, is why the UK office market has undergone significant structural change over the last ten years.
Flexible office solutions, combined with shorter lease terms, have grown exponentially whilst traditional full repairing leases have steadily declined as more businesses become aware of the advantages of flexible office solutions.

IPD trends indicate that in the office lease sub-sector average lengths have been on a decreasing trend since 1993. The 2009 Occupier Satisfaction Survey showed a period of just six years to the first break opportunity. It is clear that the demand for flexible office space, such as that provided by Oxford Innovation, is growing. I forecast that this trend will continue in the future and is likely to accelerate.

As the UK economy emerges from recession there will be ever more focus on entrepreneurs and knowledge-based businesses. The ‘Digital Age’ trends such as, remote working and social networking and the work/life balance objectives of the next generation of knowledge based workers are also important factors. We therefore have to ask ourselves whether the property solutions forecast by current trends are likely to be fit for purpose.

I don’t think they will be.

Start-up companies need fully-serviced property solutions with specific features. To support growing companies, innovation or enterprise centres have to be a branded destination, like a hotel. The operation of the building is more important than the physical building itself. Features of the operation include places to meet, a community, a point of digital presence, places where the public and private sectors come together, connections to money, ideas, skills, research.

Once a company is beyond the start-up phase, they are currently faced with two primary choices when selecting a strategic property solution for the future. Either they make a long term commitment to premises or they choose serviced offices on very flexible (such as three month notice) terms. For many companies both choices have huge disadvantages. Serviced offices only provide solutions for standard office accommodation. This means no provision for laboratories, warehousing or manufacturing, and the flexibility offered commands a premium price. Freehold or leasehold premises require a commitment to capital costs and a timescale that is beyond any level of accurate business forecasting.

The property industry’s next challenge is therefore to provide ‘move-on’ business accommodation with all the benefits of co-location and community that have been pioneered by innovation centres.
 
The key question facing the traditional investment-backed property industry is whether the growing demand for flexible managed, fully serviced, business space is compatible with property investment return objectives. Oxford Innovation believe it is extremely compatible, as our property investment partners will attest.