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Published 10 October 2018

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By: Financial Times

An opulent portfolio of London serviced offices is on sale with a £700m price tag as its private equity owners seek to cash in on rising demand for imposing yet flexible office space in the wake of the UK’s vote to leave the EU.

Queensgate Investments has appointed bankers to market London Executive Offices, a company running 33 office buildings in the City of London, Mayfair and Belgravia, after approaches from potential buyers, it said. The company said it had experienced a “spike in demand” from office tenants seeking short-term space since the Brexit vote. “We’ve had foreigners coming in because of sterling weakness, and we’ve seen a change in attitude towards occupancy requirements — people are seeking flexibility and shorter lease terms,” said Jason Kow, chief executive of Queensgate. He added that the grandeur of the group’s properties enabled companies to “look like a proper business from day one”.

LEO owns properties including the landmark late Victorian building at 1 Cornhill, close to the Bank of England, an 18th-century building on St James’s Square in Westminster and the former London Patent Office near Chancery Lane.
Its serviced offices are designed to appeal to companies in search of exclusivity and period architecture combined with short, flexible leases — quite a contrast to co-working companies such as WeWork which have grown rapidly by targeting hipster start-ups who favour exposed brickwork and free beer.

Queensgate, which is backed by a series of private family offices, bought LEO — then called Executive Offices Group — from Morgan Stanley for about £260m in 2013, and says it has since added new properties, refurbished buildings and streamlined its operations.
“We have a lot of inbound interest and a very robust price in mind,” Mr Kow added. Those looking at the company include sovereign wealth funds, pension funds, insurance companies and other serviced office providers, attracted by its potential for income generation, he said. Mr Kow said LEO makes £80m in annual revenue and has “relatively humble” amounts of debt attached. Bankers at Lazard have been appointed to market the group.

Although there are fears that London office rents could fall if banks move staff away from London to Frankfurt or New York, for now, serviced office operators are able to command premium rents for the flexibility they offer.

An agency marketing LEO’s building at 25 Southampton Row said desks there start at £875 per person per month.
Deloitte Real Estate reported last year that the serviced office market in London had grown by 67 per cent in a decade to comprise 5m square feet.

The industry has been reinvigorated by the latest technology boom and the rise of co-working services that offer not only office space but shared services and social events. However, Mr Kow said he believed LEO faced little direct competition in the high-end market.
Several serviced office providers collapsed when the dotcom boom ended in the early 2000s, partly because of the disjunction between the long leases they took on buildings and the short leases handed to occupiers. Owning properties is one way to avoid that problem, although LEO does also lease some of its sites.

With a market capitalisation of £2.5bn, Regus is the largest listed player running serviced offices, but WeWork was valued in March at $16bn (£12.9bn at current exchange rates).

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