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New financial regulation could spell the end of the long-term office lease

long-term lease

Could a new directive by the International Accounting Standards Board (IASB) be the final nail in the coffin for traditional leases?

The serviced office sector has been booming for many years now; more recently, a new wave of providers has created competition within the market. Coworking centres are competing with the more traditional serviced office operators and as a result, long-term leases have become less and less popular as business owners choose to go down the more flexible route.

A new directive: the lowdown

The International Accounting Standards Board is about to implement a new rule which could have a huge impact on the way business rent workspace, making the serviced route even more desirable.

From 2019, leases will be listed on company balance sheets as both assets and liabilities, making them more like mortgages. Businesses will have to report the amortisation of the asset and interest on the lease liability, as opposed to recording the current rent as an operational expense.

Bill Hughes, Head of Real Assets at Legal & General Investment Management, explains that although he isn’t against short-term leases, he wants to see valuers rethink the value of their properties.

“As a matter of urgency it is important for owners of real estate to respond to what occupiers really need. Its importance is heightened by the UK’s move towards Brexit. It’s a good time to challenge convention about long leases.”

In light of the announcement, serviced offices are looking to benefit from corporate renters preparing themselves for the implementation of the new accounting standard and will become an even more viable and desirable option for those looking to minimise risk in an uncertain economic climate.

Attractive to all

Demand for flexible workspace is growing at an average rate of 10-15% per annum, according to a recent report by Cushman & Wakefield. A huge 10m sq ft of serviced office space is currently rented out to businesses in London alone, and they are no longer the sole domain of the freelancer or SME either: corporates are getting in on the action too.

One such example is tech giant IBM’s deal with WeWork to occupy their entire 88 University Place location in New York, a space that was initially marketed towards smaller creative businesses. Flexible terms and the ability to acquire more or fewer desks at short notice means many large organisations are renting out coworking or serviced space for individual projects or teams.

It’s not just flexible terms that attract blue chips to the serviced and coworking option. ‘Built-in’ employee perks and access to a large network of talent help to boost staff retention and allow companies to hire new people easily and cost-effectively. Read more about the benefits of coworking from occupiers themselves in this article.

Supply and demand 

Serviced office space providers are expanding at rapid rates, as demand continues to grow. The Office Group plan to expand their portfolio to 1.2m to 2m sq ft this year and WeWork are focused on their global expansion plan – they more than doubled their membership base last year and are due to launch in India soon.

A representative at WeWork says, “In February 2017 alone, we had 12 openings and added over 9. 300 members in eight cities across three countries,” adding “We are focused on our global expansion this year in order to provide more locations in more places for our international membership.”

Olly Olsen, co-CEO at The Office Group explains that flexibility is at the core of their growth plan: “As well as new building acquisitions, we are excited about developing our secure pipeline of new flexible offices. Our workspace in Derwent’s White Collar Factory in Tech City is due to open in the summer and work starts soon on Tintagel House, which is on the riverfront in Vauxhall near MI6.”

long-term lease

The market is making way for new coworking options every month, like LABS in Holborn (above), and Techspace in Aldgate (below), both available to view today.

long-term leases

New spaces for big ideas.

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