The future is flexible. Four years after its first foray into the provision of flex office space, London-listed developer GPE is scaling up a 600,000 sq ft portfolio that it says will help it lift rents and values for the business.
The FTSE 250 group is coming off the back of record leasing numbers in its latest financial results, securing £38.5m in new annual rent over the year to 31 March. Some £8.8m of that was for the company’s growing flex space offering, priced at 11.7% over the March 2021 estimated rental value with an average lease term of just over three years.
The flex portion of GPE’s portfolio has grown from 87,000 sq ft in 2018 to 250,000 sq ft across 17 buildings today. Now chief executive Toby Courtauld wants that figure to rise to more than 600,000 sq ft, or more than a quarter of its office portfolio, by 2027. And that’s just through converting existing assets – the company will also look to acquire sites specifically to run as flex.
The value is clear. GPE has been tracking how much excess return it can make from a flex office when compared to a traditional, “ready to fit” asset. On that front, it has smashed its own targets over the past 12 months.
“If you just take the fully managed [flex space], being the most intensive piece of the operations, our target on a net effective rent, adjusting for incentive packages and so on, is to be 50% higher than a traditional basis,” Courtauld tells EG. “We are actually delivering 75% ahead… There is real economic momentum, which tells you that our customers love it, and they are coming to us in great numbers.”
Valuation gains
But there are also big valuation gains to be made, adds chief financial and operating officer Nick Sanderson. Office buildings in which more than 40% of the space is flex saw values rise by 8.6% over the year, Sanderson said, “marginally ahead of our broader office portfolio”, where growth stood at 8%. At the 16,300 sq ft 16 Dufour’s Place, W1 – GPE’s first fully managed flex offering – ERV growth drove a double-digit valuation rise, the CFO added. That building is now fully let with an average all-in rent of £197 per sq ft.
“We are seeing customers willing to pay what to real estate people feel like quite high prices,” Sanderson said. “But for them, they are not looking at the headline price. They are looking at the all-in price. We have done some deals in there in the high hundreds, but we have done a deal at £215. And that is giving us the confidence to not only drive the organic growth of flex within the portfolio, but we [also] made a couple of acquisitions over the course of the last two months.”
Those acquisitions of 7/15 Gresse Street, W1, and 6/10 St Andrew Street, EC4, typify what the company will now look for in terms of bolt-on buys for its flex business.
“For the first time in a while we have been saying we expect there to be more acquisitions,” Sanderson says. “There is a seam of assets out in the market in this 30,000 sq ft to 60,000 sq ft [space] – they are not distressed but they are assets that need capital putting into them. Their sustainability credentials aren’t great and economically they might not make sense on a traditional basis. But if you have the capability and experience to fit them out and provide them on a fully managed basis, we think the economics are really exciting.”
Tapping new talent
The company is tapping new talent to help it build out the flex business, acknowledgement of the different approach that making a success of this kind of offering calls for.
“We brought in flex leasing skills because it’s a different leasing community and a different approach to it,” Courtauld says. “We have hired in procurement and fit-out talent, and we have also hired design talent. So we have begun to supplement where we knew we would need.
“We have an open mind as to where next, because I am sure we will find that there are other skills that we will need to supplement over time. So, for example, the management information piece gets more intensive and some of our procurement needs will change, I’m sure.”
While GPE’s HQ office offering will target the corporate behemoths – think KKR and Glencore at Hanover Square, W1 – the flex business is appealing to smaller tenants, although Courtauld is quick to note that occupiers will have their own front doors and that “it still, to the untrained eye, looks like a normal piece of space”.
Fully managed space has now tended to become the default for occupiers looking for less than 5,000 sq ft, the chief executive added, but that requirement cut-off could even double.
“I think over time that default state will also get bigger,” he added. “So for sub-10,000 sq ft [requirements] in time, fully fitted and managed spaces will be the way it goes. And we stole an early march into this arena.”
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