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Grosvenor, the Duke of Westminster’s property company, is taking a big bet on flexible workspaces to meet West End office tenants’ post-Covid requirements and generate higher returns.
The group, which owns large parts of London’s Mayfair and Belgravia, is planning to more than double its flexible office footprint to 300,000 sq ft, equivalent to about a fifth of its UK office portfolio.
Chief executive Mark Preston said “the thing that surprised us [is] just how widely attractive this product now is for businesses that you might be inclined to think would take a longer term commitment”.
He said Grosvenor had tried to push into flexible workspaces — which come with shorter contracts as well as furnishings and added services — several times over the past two decades. But he said it “hasn’t really taken off” until now, which he credited to “post-pandemic hybrid working patterns”.
Grosvenor joins listed landlords such as British Land and Land Securities, and London office specialists including Great Portland Estates and Derwent, who have all boosted their flexible workspace offerings to appeal to tenants who are embracing more hybrid working.
According to Savills, flexible office space now accounts for 15 per cent of the UK’s office market, with London’s Mayfair and Victoria undersupplied.
Preston said some of Grosvenor’s “large corporate-type occupiers” were swapping their conventional offices for flexible space.
He said hedge funds, a mainstay of the Mayfair office market, were largely sticking with traditional leases, but that corporate tenants in sectors such as tech, communications and marketing were more likely to switch.
Traditionally, office landlords have let out empty floors on leases of 10 years or more, with tenants typically paying for interior fittings.
Landlords offering flexible space generally pay upfront for furnishing, and sign up tenants on shorter contracts while providing services such as WiFi and reception. Preston said landlords were “getting better at providing services, not just providing bricks and mortar and collecting the rent”.
The new model increases landlords’ upfront costs and gives them less certainty over how long tenants will stay. But it also means they can charge higher rents, at a time when many need more income to cover higher debt costs.
The announcement comes as Grosvenor announced annual results that showed its urban property holdings dropped in value by £400mn to £8.6bn. The valuation losses were milder than those suffered by many investors as rising interest rates hit property prices.
London’s West End, which makes up the majority of that portfolio, held up relatively well and continued to attract both tenants and investors.
Privately owned by the aristocratic Grosvenor family, whose London property interests stretch back over 300 years, the group includes vast agricultural estates and a large overseas portfolio ranging from logistics in Poland to student housing in Brazil.
Pre-tax profit from its property business, adjusted to exclude changes in valuations, dropped from £52.7mn in 2022 to £41.5mn last year — despite higher profits in the UK. Preston said losses in Grosvenor’s international business, particularly on residential developments in San Francisco, had hit the bottom line.
Although Grosvenor has lower debt than many landlords, with a 27 per cent net debt to equity ratio, its annual net finance costs have risen by £20mn compared with 2021 levels. It recently launched a UK lending strategy, and has increased its overseas investments, as part of efforts to generate a higher yield from its investments.
Grosvenor said its UK property business had cut its carbon footprint by 32 per cent over three years and completed environmental retrofit works on 1mn sq ft in London. Preston said green credentials were key to attracting tenants to its new developments and flexible office space.
