Concrete AnalysisHong Kong’s hunger for shorter leases and flexible working spreads to London

London has been the destination of choice for Hong Kong investors, particularly over the last two years. The known attractions of its market place have been bolstered further by potential currency gains from buying at a weak point in the sterling cycle caused, not least, by the Brexit vote and current uncertainty around any agreement on exit. The beginning of this year, however, has seen a slowdown in the pace of Hong Kong investment into the UK capital city. Whether this is a pause for breath and the result of more competition from returning Korean investors and sovereign funds is yet to be seen. A major subplot, not just to London but the real estate stories of other international markets, has been the ever shorter leases and now the flexible leasing / serviced office phenomenon. It is important to note that even with the backdrop of uncertainty and these flexible leases, London still attracts purchasers from all over the globe. Readers of this newspaper will be aware it is a boom time for flexible workspace in Hong Kong right now. The market has doubled in size over the last two years as global and domestic operators compete to satisfy seemingly insatiable demand from a wide variety of end users, for what many consider to be a more cost effective and convenient way of taking space. London is recognised as the global capital of flexible working. Take up of space is at record levels with research by Cushman & Wakefield revealing 2.5 million square feet of Central London lettings in 2017 going on flexible operations, accounting for more than 21 per cent of all commercial office leases in the capital. Yet it is difficult to see it staying at this level, let alone rising. Commentators have surmised that this take-up distorts occupational figures, but statistics cannot discount larger, more pronounced market trends and my view is that we are at the zenith of this take up in London. Flexible offices have created take-up from users who traditionally would not have had the formality of working in a London office, rather working from home, libraries, internet cafes and the like. The shorter, flexible, co-working arrangements have added maybe one million square feet of “new take-up”. This evolution towards flexible working has been a progression. At the start of the overseas investment phenomenon in the late 1980s, London was attractive for a number of reasons, not least the long 25 year leases. Over the last 30 years the investor has adapted more to the tenant needs and realised that more flexibility in lease terms and provision of facilities is acceptable and in the long run may lead to full leasing at higher sustainable rates. International investors have become more accustomed to flexible leases throughout Europe, having come to terms with the established shorter lease regime in some competing major capitals, such as Paris. The overseas investor into London must take on the trend of shorter leases, and indeed often will need to let some of their portfolio to flexible office providers. A ‘local’ workspace operator in London takes many shapes and sizes with data by the Instant Group revealing a surprisingly high 83 per cent of the London market being made up of small independent operators. International investors have become more accustomed to flexible leases throughout Europe, having come to terms with the established shorter lease regime in some competing European capitals, such as Paris There will undoubtedly be consolidation in this sector, so there is also a need to beware of these smaller operators and also have a mind to ‘re-letability’ if the tenant vacates or collapses. An overseas investor looking for or dealing with a serviced office occupier in London may need a large, established, international yet local operation, to be the front for the wholesaler of these flexible offices spaces. My firm Evans Randall Investors occupied a co-working office premises for six months in London whilst we were between permanent offices. For me, the experience was too transient, temporary, busy and small, but it was still a step in the office journey and clearly much of the market likes it. This flexible workspace phenomenon will be part of the long term occupation scene. Investors must be very aware of this permanent change to the market, but as with all factors, risks of flexible offices must be analysed most carefully. John Slade is executive chairman of a private equity real estate investor Evans Randall Investors