From DIY to JV: 6 Ways Property Landlords Want to Work with You

From DIY to JV: 6 Ways Property Landlords Want to Work with You

One of the most notable trends we’ve seen in 2018 has been the commercial property sector’s response to rocketing demand for flexible workspace.

At the BCA Conference in May this year, CBRE’s Kevin McCauley and James Pearson revealed that 77% of UK landlords are now looking at ways to introduce flexible space into their portfolios, and warned flexible space operators to expect some competition.

However, interest from commercial property landlords also represents an exciting opportunity for our sector.

Douglas Green, Director of GKRE (Green Kinnear Real Estate), a BCA Partner, said that GKRE has been “inundated” with requests from property companies for advice on how to deliver joint venture agreements for flexible workspace in locations across the UK.

“My view is that the successful property owners of the future will be the ones who no longer think only of generating income from property in the traditional way, ie. by granting leases,” Green commented.

In a new report, GKRE delves deeper into the future of the flexible workspace industry and explores some of the ways operators and commercial property landlords can work together.

The Future of Flexible Workspace

In addition to the well-known drivers behind the growth of flexible workspace - including technology, a startup culture, and changing corporate attitudes to flexible workspace - GKRE reveals some of the new drivers that will further strengthen the sector over the coming years:

  • Talent retention: Deloitte estimates that by 2025 millennials will make up 75% of the global workforce. This demographic values wellbeing and flexibility in the workplace, which is driving employers to invest in wellbeing programmes and a flexible, lifestyle-orientated workplace environment as a talent strategy.
  • Work/life integration: As work/life balance gives way to work/life integration, employees are now placing greater emphasis on the workplace experience. Operators are responding to this by providing “a complete office environment” with restaurants, bars, coffee shops, gyms and recreational break out areas.
  • The new international standard on lease accounting: Under the new rules, which come into effect in January 2019, companies will need to show long or new leases on their balance sheets. According to GKRE, this will have the effect of depressing a company’s profits and will make short-term flexible leases more attractive. As a result, flexible workspace is likely to be more desirable as companies seek to avoid long-term leasehold liabilities.

As these new drivers continue to influence demand for flexible space in the years to come, it is highly likely that commercial property landlords will take greater interest in the sector and seek to identify ways in which they can incorporate flexibility into their own portfolios.

So what can we expect from property landlords in the near future?

According to GKRE, there are six main opportunities available ranging from DIY options through to joint ventures. In brief, these are:

  • Traditional lease - the vanilla option: The property owner grants a traditional FRI lease to an operator on market terms.
  • Profit share or turnover lease: Similar to a traditional lease, except rent is determined either by establishing what constitutes profits or as a percentage of turnover. Commonly, the rent is fixed to an agreed percentage of license fee income.
  • The DIY option: Currently demonstrated by The Crown Estate, Grosvenor Estate and British Land, this allows property owners to run their own show. They also have the opportunity to incubate occupiers on their growth journey from shared space members to fully fledged tenants.
  • Management agreement - recommended by GKRE: A management/joint venture agreement is a contract between a property owner and an operator, usually operated through a JV company.
  • Space-as-a-service or managed space: Described as the next evolution of the market, space is packaged for tenants and can include fit-out, design, IT, furniture, rent and rates for an inclusive licence fee.
  • Franchising - a new opportunity? GKRE’s sixth option is relatively new to the UK market but several operators in the US are now established in this field, including Office Evolution and Serendipity Labs.

“The impact on property owners is going to be profound,” commented Will Kinnear, Director of GKRE. “Office leases are getting shorter year by year and the demand for tenant flexibility is eroding the long-term security of rental income.

“Our view is that the successful property owners of the future will be the ones who no longer think only of generating income from property in the traditional way, by granting leases. Instead, they will use their property to generate income in an entirely different way, by offering space as a service, largely through joint venture/management agreements with flexible workspace operators.”

Click here to download the guide in full

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