Given the runaway growth of flexible offices in recent years, it could seem surprising that serviced office stalwart IWG (formerly Regus) last week had to issue a profit warning.
While US giant WeWork was recently credited with a £20bn valuation and is moving radically to soak up vacant office space, most notably – for the UK – in London, 30-year-old IWG’s share price has tumbled.
Stock fell by more than 34% on Friday when the group said its operating profit for 2017 would be “materially” below market expectations.
What’s the problem?
Speaking to EG today, the company gives a simple explanation for the dip. Like the Office Group, WeWork and others, it is in expansion mode, having opened more than 300 centres in the past 12 months.
In practice, though, this means higher up-front costs for the opening of new centres. The company insists there is no wider systematic problem in demand for its services, although Brexit has had a negative impact, particularly on the London market.
Nonetheless, IWG has admitted that sales at more “mature” sites have dropped off. It says these revenues in the six months to 30 September declined by 1.9% – a fall that chief executive Mark Dixon puts down to refurbishment and other costs associated with operating older centres.
These older centres were conceived 30 years ago at a time when “serviced offices” meant providing discreet, more serious and temporary office space for global businesses with a travelling workforce.
It is a far cry from the more recent co-working phenomenon in which a more atomised workforce joins a new community of potential collaborators, many of them working on a freelance basis.
IWG is aware that its traditional model needed updating and those older centres, mostly still branded as “Regus”, are nowadays only one part of the portfolio.
It launched several new brands into the marketplace: Spaces, which mimics the fashionable co-working environment; Open Office, a budget offering for back-office functions; and No. 18, a luxury environment to rival London Executive Offices.
Against that backdrop, while older centres have suffered, the company’s profits grew at 4.4% last year, and Dixon claims this was buoyed by rivals such as WeWork.
He says: “People look at the publicity around WeWork, and it’s been brilliant for us as it has increased people’s awareness of the sector; we have been on our own doing publicity for so long.
“With the profit warning, we were just adjusting expectations for this year. The growth we had expected has not materialised. Loads of companies issue profit warnings.”
Is there a flexible offices bubble?
Dixon distances last week’s bad news from events in 2003 when, at the time of the dot-com bubble, Regus’s US arm filed for bankruptcy. He highlights that IWG is now more diversified geographically, having historically been more concentrated on western economies and that the tenant mix is now less focused on tech businesses.
“The current time is nothing like that whatsoever,” he says, underlining the fact that profits were still £160m-£170m in spite of them coming in below expectations.
Nevertheless, the dizzying growth of similar companies has given rise to concerns that the flexible office sector’s boom may not be sustainable.
In London in the first half of 2017, the serviced offices sector accounted for more than 15% of take-up – double the average figure recorded in 2014-16.
Simultaneously, IWG has become bearish about London flexible offices and has stopped opening new centres there. Instead it is investing in more regional locations such as Newcastle and Brighton.
The Office Group’s co-founder Charlie Green, focused on London, says that enquiries were up 3% month-on-month. But anecdotally, agents fret that it is difficult to measure the success of these centres in terms of actual demand.
Exposure for IWG’s competitors is largely concentrated in key cities. Unlike newer kids on the block, IWG has a mammoth portfolio, with 3,200 centres globally and around 300 openings in the year to June 2017. By comparison, WeWork has around 150 centres.
This diversification of risk could also be a strength when it comes to rolling out alternative brands such as Spaces, which Green describes as “incredibly smart”, adding that it “spread its risk better than anyone else”.
However, the company is having to work hard to stay relevant while less established rivals march onwards.
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