Recent years have seen an entrepreneurial revolution.
You need only look at the growth of the Silicon Roundabout to see the booming number of start-ups. As you’d expect, most also require commercial space to grow, and sometimes their requirement is unconventional in terms of format or lease length.
For landlords and the wider property sector, start-ups represent an opportunity and a responsibility, as without suitable accommodation and suitable terms these companies may struggle to survive infancy. There is limited stock available for companies moving between incubators to fixed lease. Although serviced offices and companies such as WeWork have begun to provide creative solutions, the industry needs to create more stable alternatives to support companies in the scale-up phase of their lifecycle.
Start-ups are an integral part of the UK economy; in London alone secured funding could exceed £1bn this year according to London & Partners. However, a number of these companies are falling victim to the ‘scale-up gap’ - in other words, the challenges experienced by rapidly growing companies when they try to expand.
An RBS analysis suggests an additional 238,000 jobs and £38bn turnover is achievable within three years of reversing this ‘gap’.
Currently there is not enough being done to help nurture high-growth companies, leaving entrepreneurs unable to realise their growth ambitions. One of the key barriers to growth is undoubtedly real estate.
I see this challenge from both sides of the fence. Traditionally, landlords don’t favour working with start-ups as it is difficult to guarantee long-term returns and secure long leases. Equally these companies often cannot present strong covenants. Informal sublets are not a viable solution, as they are often a breach of most leasing contracts. This has seen a rise in incubator and accelerator programmes to support start-up companies. However, there is still a distinct lack of focus on scale-up companies that have moved past the incubator phase and find the scarcity of suitable office space an obstacle to their growth.
Growing companies often cannot accurately forecast the speed of expansion or space requirements beyond six months; therefore, they generally need flexible, low-rent space in affordable, well-connected locations close to their peers. Lack of suitable space has led to scale-up companies moving out of the capital or failing, with locations such as Old Street no longer viable for small-scale companies.
The RICS says commercial rents in London should rise by 6% on average over the next 12 months; another factor that will challenge these companies. In addition, Knight Frank’s Central London Quarterly Report states that the capital’s office vacancy rate has hit a 14-year low and should achieve an historic low in the next two years.
As office stock becomes increasingly expensive and limited, this creates a huge block to companies looking to scale up. There isn’t a fix-all solution, but it is time for us to look at this honestly. Without flexibility to meet the needs of growth companies, the economy risks taking a direct hit. The UK may find its entrepreneurs heading elsewhere, perhaps to the US, where conditions are generally more favourable.
Collectively, we need to address lease flexibility and accommodation. Perhaps we need an independent think tank to create guidelines that landlords can benchmark scale-up companies against, or alternatively a financial model built to determine the most accurate outcome of a company’s scalability and lifecycle to provide long-term solutions. The answer at this stage is not clear. However, there is one thing I am sure of: the property industry needs to work together with the scale-up community to determine how best to support these firms as they transition from incubators to fixed leases.
The sector can’t be expected to back every horse, but equally no one wants to miss out on the next Google or Facebook. This is a problem that affects every industry - but it us who hold the key to solving this problem.
James Morris-Manuel is co-founder and chief operating officer at Virtual Walkthrough