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Roundtable: The transformation of the commercial property market

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Here’s what participants in our PropTech roundtable had to say about how the UK property market is changing rapidly as agile tech companies demand more flexibility and greater diversity in working environments.

As a young tech firm, looking for an office and deciding which type of space is right for you can be very daunting. Whether you’re after a shared co-working space, a fully-serviced office, or something in-between, the possibilities are endless.

Although the property market is being disrupted at a quickening pace, some traditional landlords still risk being left behind as they fail to adapt to the demands of agile tech startups and scaleups. Tech City News gathered a group of experts for a roundtable discussion on this very topic.

UK PropTech and venture capital: A love affair?

Traditional landlords

In most traditional commercial rental agreements, tenants are required to sign a lease that ties them into a lengthy contract of up to five or 10 years. Although this type of agreement can suit established firms that don’t plan on short-term rapid growth, they’re not ideal for the likes of tech startups seeking to create the next Big Thing.

Committing to a lease for such a long period of time is not only risky for a young company with often questionable finances, but this lack of flexibility can also hinder growth and have a noticeable impact on long-term viability and profitability.

“Traditional landlords on the whole haven’t opened their minds to flexibility. They’re very keen to stick to what they know and what works for them from a yield perspective – keeping tenants tied in and having strong covenants,” said James Barnett, co-founder of serviced office space provider WorkPad.

Charlie Green, co-founder of The Office Group, which owns and operates 16 co-working spaces in London, one in Leeds and one in Bristol, agreed.

“The problem is, the existing structure has worked for so long. There is a reticence to change,” he said.

Regardless of how anti-change landlords are, change is happening. The UK’s prominence in the global tech scene is garnering momentum and the nation’s digital workforce is posing a series of challenges for some of the country’s commercial property owners. Technology entrepreneurs are demanding greater contractual flexibility and are no longer willing to settle for bleak office blocks, instead calling out for aesthetically exciting spaces in which to work.

“Landlords are having to look at how they manage their property and they’ve realised that they need to make changes in response to what is being dictated by tenants,” said Green.

Startups operate in a very unpredictable environment. If they’re lucky, they may go from a staff count of single digits to double digits in a matter of months. On the other hand, things may not work out and they could go bust, leaving behind little more than an unfulfilled dream and what seemed like an excellent idea at the time. It’s for this reason flexibility is paramount.

Disruption

By definition, co-working enables individual companies to operate within a shared working environment, allowing them to function autonomously whilst also forming part of a community.

It’s a model driven by choice. Tenants can either chose to pay per desk – a favourable option for small companies – or decide to rent a private office next to the co-working space element. This way, they’re able to decide on a space based on the changing needs of their business.

Alongside flexibility, co-working space providers have also come into reasonable success because they’ve realised the need to conjure spaces that are much more appealing to young companies.

Traditional offices, which often lack charm and typically consist of simple furnishings, are now competing with chic and sophisticated co-working spaces. Green suggested his buildings have such a great appeal they can help their tenants close business deals and attract talent.

Price

According to research by Knight Frank, demand for work space in London’s Shoreditch has seen startup office costs soar, with a 600sq ft office setting a company back $66,706 per year, on average.

Philip Salter, director of The Entrepreneurs Network – a think tank for growing businesses and entrepreneurs – said there is a shortage of office space in cities such as London.

“The cost of renting is significant and is largely dependant on the current state of supply and demand. Price is also influenced by bad planning policies,” he explained.

An example of this is a restriction that imposes a ‘tax’ on office developments. This ‘tax’ is 400-800% of development costs in London, and around 250% in Birmingham, which is huge in comparison with New York (0-50%), Amsterdam (200%) and central Paris (300%), Salter added.

Such policies deter developers from building in the UK, compounding the issue of low supply and high demand.

Green went on to say it’s not all bad news, though. While prices may be increasing, value for money has also risen, thanks to the added extras contained within modern work spaces.

Added value

If you work in the startup world, the likelihood is you live to work and not the other way round. Focused on growing a business, you’re likely to spend more time in the office than anywhere else.

Gi Fernando, founder of Freeformers, which seeks to help companies drive digital transformation from within, said: “Most offices nowadays are used for work, rest and play. That’s why tenants are looking for a space that will provide them with a richer experience.”

This desire for a space that caters for both work and play has lead to many co-working spaces offering perks, such as free beer on tap, games rooms and on-site exercise suites.

Barnett wasn’t convinced, though. He said not everyone is interested in all these extras, some simply want the basics and nothing more.

“I don’t know whether everyone is after a richer experience. They’re just interested in a place where they can get on with their work,” he said.

Tom Redmayne, business development manager at WiredScore, which rates commercial property depending on its internet connectivity, was on Fernando’s side, though.

“I’d happily pay more for a good quality experience. Everyone should be proud of where they work.”

Connectivity

While a ping-pong table may be high up some startups’ lists of top office attributes, there’s one thing that’s vital: decent internet. Strong connectivity was deemed to be of high importance by the roundtable participants, who agreed it would also play a pivotal role in the UK’s current and future proposition as a global tech hub.

“The current state of connectivity in the UK is mixed,” said Redmayne, adding that in some areas it’s great, but in others it is terrible. He explained one of the complications is that there’s so much centuries-old infrastructure, so it’s difficult, and costly, to make the necessary upgrades to ensure top-quality connectivity is available to all.

One thing is for certain, though, something is going to have to be done if UK cities such as London are to continue competing with the likes of New York and Singapore in attracting tech talent and businesses.

The tipping point

Priyanka Karunanithi, a VC at BGF Ventures, turned the conversation back to co-working spaces. She suggested that, while the flexible contracts mean companies are able to leave at short notice, the spaces provide limited opportunities for company expansion. They are great for small teams, she said, but not for those who are scaling quickly and want to make spaces their own.

“It’s great for teams of up to 20 people. Then you start to hear how a startup needs their own space,” explained Karunanithi.

Green disagreed, saying that The Office Group offers different spaces to accommodate companies of varying sizes and keeps the non-communal spaces deliberately basic to allow companies to customise to suit their own brands and tastes.

Insurance issues

With this new way of working also comes a new set of challenges, particularly in the realm of insurance – an industry that is also having to innovate to meet consumers’ changing demands.

The open nature of co-working spaces and the fact members are typically free to come and go without strict supervision can prove challenging for some traditional insurers.

Ben Rose, co-founder and insurance director at Digital Risks, founded his firm in a bid to provide specialised insurance to digital businesses and those wishing to set up base in a co-working space.

“We’re trying to make insurance policies more flexible and we’re pricing things on a per-desk basis for public liability and content insurance,” he explained.

Although much impetus is placed on the possible disappearance of, or damage incurred to, a company’s equipment, Rose explained insurer’s concerns go beyond tangible assets.

“There are also concerns about the security, or lack thereof, of using a shared internet connection and the privacy issues this may entail,” he added.

What’s next

Co-working is definitely en vogue right now, but with new providers of such spaces popping up all over the UK, one wonders whether they all have the business smarts necessary to survive or whether they’re just riding the wave.

As a nation, we’re facing potentially challenging times ahead, due to Brexit and the subsequent political uncertainty this will bring, so it seems legitimate to question whether some of these companies – both old and new – will make the cut.

Green said he believes the tough market will flush out some co-working space providers, but he also predicted some companies will try to innovate further by spinning out very niche takes on the co-working model.

“We’ll probably also see some M&A activity in the sector,” he added.

Whatever happens, it’s safe to say the way in which people work and what they expect of a working environment has evolved and this doesn’t seem set to change any time soon.

Traditional landlords need to at least starting thinking about offering more flexibility or they may find themselves losing market share to the new and innovative companies emerging in the property space.

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