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 5.0 What is a serviced office?
The concept of a serviced office was created in the US in the 1960s. In the UK, the
concept has really only been in existence for the last twenty years. Unlike the traditional
office procurement method, serviced offices offer a total working environment for the
occupier which can be taken up and exited from relatively quickly. It is for this reason
that it should be seen as a service rather than a traditional landlord and tenant
relationship.
| Firms are generally unaware of the exit liabilities which may have massive financial implications. |
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In simple terms, the occupier gets a fully working office environment with
the provision of services required to carry on a business. There is no delay in waiting for
an office to be tailored to an occupiers’ requirement, as in the main they are ready to use.
Herein lies one of the principal distinctions between serviced offices and the traditional
office lease.
6.0 What makes a serviced office unique?
It is very important to understand what makes the use of a serviced office more
beneficial than a conventional lease. When a firm takes up occupation, the business is no
longer constrained with the ongoing disruption of dealing with the day-to-day worries of
managing an office with all the concomitant costs. The operator of the serviced office is
responsible for all the management leaving the occupier to concentrate on its core
business. Additionally, the occupier is not affected by the traditionally high transactional
costs involved in acquiring a property or a traditional lease: this minimises any initial
capital outlay. Ultimately, this creates liquidity in the office space market which enables
firms to move more freely within and around locations.
| A good covenant is
not a perquisite to
gaining office
space…Nor is there
a need to commit for
lengthy periods |
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Traditionally, occupiers are required to prove good creditworthiness or “covenant” for a
lease. Some occupiers are unable to get a lease in particular locations because of the
perceived risk to the landlord’s rental income. With a serviced office, an occupier does
not face such a requirement because of the typically short-term commitment. A shorter
term commitment also enables the occupier to remove its exit liability, which is often
overlooked by financial managers. The monthly fixed pricing of the serviced office also
allows firms to account exactly for what they are using month by month and year by
year.
7.0 Why have serviced offices been established?
The demand for serviced offices has come from occupiers looking for greater flexibility.
Traditionally, landlords have searched for ways to maximise their returns on property
investment by securing the longest possible lease term on a building in order to capture
continuous long term rental income. However, research by the University of Reading
(Gibson & Lizieri, 2000) shows that institutional leases are no longer as popular as they
were. In the last recession for example, many landlords experienced rental income gaps
and decided to offer potential tenants short-term agreements to ameliorate the situation.
The serviced office concept in the UK and the US thus benefited as a cost effective
comparison to the traditional lease commitment.
Occupiers are demanding greater flexibility from their property needs for several reasons:
- shorter business planning horizons;
- greater awareness of property total occupancy costs;
- globalisation;
- changes in technology and the subsequent affects on property and working
practices; and
- changes in UK accounting standards.
More... (open / download the report )
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