Serviced offices success story David Alberto is taking shareholder Kenmore’s collapse in his stride as he opens up about his UK and international expansion plans for Avanta. By Noella Pio Kivlehan
After a hurried “hello”, David Alberto’s second word on entering Avanta’s Hammersmith head office is “Kenmore”.
Last week the Kenmore Property Group collapsed, leaving Lloyds Banking Group chasing debts and investments of more than £700m. Serviced offices operator Avanta is one of Kenmore’s private equity investments, following a deal done in March 2007 when Kenmore Private Equity, part of Kenmore Property Group, funded the management buyout of Avanta.
Part of the deal was that KPE provide additional equity that, with bank debt, enabled Avanta to embark on a £100m expansion programme through buying freeholds, taking on leaseholds and developing its corporate outsourcing model.
“[The collapse] doesn’t make any difference at all to us,” Alberto, Avanta’s managing director, says immediately, in rapid-fire speak. “It makes no difference to our day-to-day trading and I don’t want our staff to think otherwise. Everything we own is within Avanta’s ownership. Clearly, Avanta is looking at all the various options and I am looking to buy back shares that it owned – I would be mad not to look at buying back my company.”
Expansion plans
But Alberto – a stalwart of the serviced office sector, having worked for Regus and MWB Business Exchange (see panel, p82) – is reluctant to comment further on the situation. Instead, he is keen to discuss market conditions and Avanta’s plans for the expanding in the UK and internationally.
Whatever happens post-Kenmore, Avanta is doing very well – it manages 700,000 sq ft of office space and when the company released its trading figures in March it boasted it had been “our best year ever, with like-for-like sales up 27.5% and significant levels of profitability”.
“We have had our best August in 17 years for occupancy and revenue,” Alberto says, adding that more companies are coming to Avanta needing to lease space because they lack the capital to buy premises.
“Clients are downsizing,” he says. “It’s hard for people at the moment, and it is hard for people to write a three- to five-year business plan, but when the economy picks up our rents per work station will also pick up.”
But Alberto does not yet see any signs of a recovery. “I can’t see that happening at the moment,” he says. “I am a pessimist, and I believe it will be another year at least. Most people feel we are at the bottom of the market, but nobody is seeing any real signs of a sustained recovery. We will bump along the bottom for a while.”
He does, though, believe that the economy will start to slowly pick up from the third quarter next year. “But,” he adds, “it will be a long time before the banking sector recovers. I just can’t see what will start making the banks lend freely over the next 12 months.”
Alberto believes: “The only market that falls outside the economic crisis is London. There is enough diversity and internationalism in the capital.”
And it is in London – where Avanta has 15 centres out of its UK total of 20, including Reading, Manchester and Edinburgh – that the company intends to focus its expansion plans, with the recession lending a helping hand. “This is a good time for us to expand in London [because property is good value],” Alberto explains. “We want to go from 7,000 work stations to adding a further 4,000 to 5,000 work stations over the next two years.”
Avanta, whose occupiers comprise 70% SMEs and 30% FTSE top-100 companies, already has eight buildings in the capital’s W1 postcode. It wants an additional five in central London. Alberto says: “Occupiers are price-sensitive at the moment, which has meant rents are down 20% on two years ago, and there is no sign of that improving. So we are acquiring new buildings with today’s pricing in mind.”
While the company is tasting success in the UK, internationally it has had mixed fortunes. In July, it successfully set up a partnership with Regent Business Centers in the US – which operates mainly in New York and Los Angeles. But it has had its fingers burnt in India.
Just a year ago, Alberto was talking about the company’s expansion into India and China, having taken leases on three buildings, one in Dehli and two in Mumbai that were to form part of a five-year Indian growth plan. He is now set to close the two Mumbai buildings.
“We did India because we needed an expansion plan that made sense, as we were going to float Avanta,” he says. “London was too expensive… I still look at the rate we charge clients and, by the summer of 2007, London had priced itself out of the market. So we looked at Mumbai and Delhi, which do have [opportunities for] growth.”
But, he says, Mumbai was a bad decision because of the two buildings Avanta leased. “The rents were too high, even though we filled the buildings – one was 100% full,” he says. “But the rental income per work station dropped 70% in the nine months between signing the leases and opening the buildings. That drop meant we were unlikely to make a profit in the foreseeable future.
Funding dilemma
“We did try to renegotiate the leases, but the landlords of the buildings didn’t want that,” he adds. So Avanta offered to operate the buildings until the landlords found someone else to take over. “The problem I was facing was that we had capital to spend, but do I carry on funding losses in Mumbai? Or do I pull out and spend the money in London, where the profits were so much better?
“What it has taught me is to be a lot more careful before signing a lease. We should have set up a partnership and done turnover leases – although we could still have lost money, just not as much. Also, there was the problem with Mumbai’s infrastructure [which is very immature].
“But the reality is that rents came down and I didn’t make a profit … for nearly two years.”
Having learned from the Mumbai mistakes, Alberto is on the road to international expansion again – albeit in partnership with others. “I am hoping to tie up a strategic relationship with an Asian operator to partner in Hong Kong, China and Vietnam,” he says. “This will be a sales and marketing venture. We get a lot of international business in London, so it made sense to do a marketing alliance to add to the existing alliance with Regent in the US.
“We also have a potential partnership in Middle East, which should be finalised early in 2010, but we are not going to lease or own buildings.”
Alberto offers a final piece of practical advice: “If you are going to set up in a new market, make sure you set up with a partner who understands the local market. To take long-term liabilities in markets, you really need a partner.”
CV: David Alberto, a potted history
Alberto joined Regus in 1992, when it had eight centres, and left at the end of 1996 when it had more than 100 centres in 26 countries.
He was involved in finding buildings, fitting out and operating them, and ran the UK sales team. He then established his own business centre company, merging it with MWB’s fledgling business centre operation in 1998 and taking over as CEO.
Between 1998 and 2002, Alberto grew MWB Business Exchange to 50 centres across the UK and Europe. He left MWB in December 2002 and started Avanta in February 2004. Avanta now manages 20 business centres across the UK and India.
