It’s a problem for the entire property industry that London is becoming too expensive for start-ups.
The risk is mounting that high-growth tech and creative businesses will start to run to other cities in search of the value that is becoming increasingly difficult to find in our capital. At Kontor, even though we do find amazing spaces for occupiers in London, we’re continually approached by clients seeking better-value opportunities in other areas of the UK and internationally, where it’s cheaper both in terms of living costs and office space.
Not only are our fledgling businesses leaving our capital, but we will also struggle to attract overseas start-ups into our fold due to rising costs. The UK, in particular London, is the tech and creative leader within Europe, but although the TMT sector accounted for the highest take-up in central London in 2015, there’s a huge disparity between what new start-ups want and what London is providing. The question is whether the property industry is shooting itself in the foot by trying to achieve premium rents now that could cut off the potential for economic growth later down the line.
To find a solution, landlords and investors need to start thinking creatively about how they can match their offerings to the needs of occupiers. Finding a way for SMEs to flourish doesn’t necessarily have to be to the detriment of returns on investment - it could even mean higher returns if the current model is reworked.
Take shared offices, for example. The desperate need for affordable and flexible space has resulted in an explosion of these platforms, not just in London but across the world’s major cities - and there is still more demand. From my experience dealing with such operators and occupier clients, I could easily see London’s office market soon comprising 25% flexible, co-working space. It is not only SMEs taking this space and changing the make-up of our economy. Large international brands also see the advantage of such space, exposing them to new ideas, while helping them to attract the best talent.
While the model of letting space to such operators doesn’t appeal to every investor or landlord, these platforms do actually diversify risk by their very nature, and provide the potential to generate rental income over and above a traditional lease, whether through creative partnerships with such operators or through landlords themselves starting up operating platforms.
Another way to nurture the next cycle of businesses could be for landlords and investors to set aside a percentage of a new development for affordable workspace. Developers in Hackney are already adopting this strategy as part of section 106 requirements. The traditional view is to minimise this allocation as much as possible to lessen investment impact, but if more space were given over to affordable workspace and it was properly managed, perhaps by an external operator, could the impact on the traditional investment value be countered?
By generating rental income above that of a traditional lease due to higher densities, and incubating businesses that can grow to be larger tenants, the building will have a buzz that could attract bigger brands with even stronger covenants that will pay a premium for remaining space to be associated with such a hive of activity.
At Kontor, we have conversations over and over again with occupiers who complain of the outdated model for renting office space in London, which is to the detriment of everyone, not just the tenant. The landlord who embraces a new way of letting space and ways to ease this burden will become a landlord for the next generation. This is a huge opportunity for any landlord brave enough to take it.
James Townsend is co-founder of Kontor