A seven-year-old US startup is set to become the biggest private tenant in London just as the UK’s economic outlook worsens.
Three years after entering the British capital, WeWork Cos. has signed leases that will make it the city’s No 1 private-sector user of office space, according to data compiled by CoStar Group Inc. for Bloomberg. The rapid growth makes WeWork, valued at $20 billion, increasingly important to the health of the city’s property market as well as more vulnerable to any future decline in rents.
“A downturn of some description has to happen at some point, and when it does the serviced office business will suffer very quickly,” said Michael Marx, the veteran developer who ran Development Securities Plc for 21 years through 2015.
“In the present uncertain market many people are hoping that the WeWork model works—but we have no idea whether it does
on a sustainable basis or for how long. It appears to be a well-
capitalised business, but if the cycle turns down, then the model looks vulnerable.”
WeWork’s success in London depends on demand for flexible office space growing fast enough to keep rental income above the historically high rates the company pays to lease its properties. While the company has acknowledged that Brexit poses economic risks, it also said that uncertainty surrounding the move will support its business as companies remain wary of long-term commitments.
WeWork, through a spokeswoman, declined to be interviewed for this story. The firm currently operates 17 London locations, with two more opening soon and a further 10 announced. It has also begun buying some buildings and is in talks to purchase a 12-building campus close to Liverpool Street station from Blackstone Group LP for about $807 million. Peter Grauer, chairman of Bloomberg LP, is a non-executive director at Blackstone.
WeWork’s most basic membership plan, which allows access to the company’s offices two days a month and use of the firm’s app, starts at $45 a month, according to its website. The company ran a promotion this summer offering tenants half of their lease for free in an attempt to fill that space. In some cases, it has also paid brokers fees of as much as 20 percent for bringing in tenants, double the industry norm, people with knowledge of the matter said.
“In typical English fashion, we frown on the new boys,” said Jonathan Goldstein, chief executive officer of Cain International, a developer and lender that is involved with two large London projects leased to WeWork.
WeWork’s rapid growth in London means that at a minimum it has committed to paying about 815 million pounds of rent in the future. Of that, 231 million pounds must be paid over the next five years, according to its British unit’s accounts filed in late October. Membership income for WeWork UK Ltd. was 61 million pounds in 2016 and the division posted a loss of 11.1 million pounds.
Growing demand for flexible leases has drawn increasing competition. Blackstone bought The Office Group for about 500 million pounds earlier this year and plans to expand the business while British Land Co., the UK’s second-largest real estate investment trust, has started Storey, a new flexible workspace brand. There were almost 1,140 serviced office and co-working facilities in London in April 2017, up from around 490 in 2012, according to data collated by broker Instant Offices.
In recent years, big companies as well as startups have chosen
to use co-working spaces for some employees.
WeWork has secured deals with firms including International
Business Machines Corp. and Amazon.com Inc. in its US business and is seeking similar deals with blue-chip tenants in London.
Hammond makes a pitch for finance
As the UK races the clock to save Brexit talks, Chancellor of the
Exchequer Philip Hammond tried to reassure the world of finance about his government’s aim to preserve London as a world-leading financial centre.
“Of course, our negotiations with the EU are in a critical phase and getting the right deal and an implementation period to allow us to adjust to it will be vitally important in the short-term,” Hammond said in London.
Hammond, who voted against the UK leaving the European Union, has long been an advocate for an extended grace period that will allow businesses and financial services to adapt to the reality of Brexit. Some banks plan to leave London for Frankfurt and Dublin while others await to see what kind of transitional arrangements the government will forge.
But their confidence in the ability of PM Theresa May to deliver on a two-year transition phase—to allow them to flesh out contingency plans while Brexit talks continue—took a knock when a much-anticipated deal to move talks on the transition and trade were derailed by her Northern Irish ally over the delicate issue of what to do about the border with Ireland.