Blackstone buy gives TOG global reach

Having been bought by Blackstone for £500m, The Office Group is set on moving into Europe and beyond. Now backed by the world’s largest property company, it has a “local partner” across almost every major city across the globe. As it accelerates its growth, TOG expects to buy predominantly freehold opportunities allowing it greater control and asset management potential given Blackstone’s deep pockets. However, it also anticipates teaming up more frequently with traditional landlords that want to gain upside exposure from the serviced office model without the risk of fully establishing and running their own business. “We wanted a partner that would seriously help us grow. That’s about funds and about property knowledge,” said TOG co-founder Charlie Green. “Blackstone has a deep understanding of the shift in the way people are working. They were looking for an operational platform that would work in their portfolio and allow them to look at property in a different way when they are buying new opportunities.” Although not the driver for the deal, Blackstone will now be able to put TOG in to appropriate locations within its portfolio in London, which includes the likes of Lacon House, on Theboalds Road, WC1, and The Adelphi on John Adam Street, WC2. Not looking to change “We will help them de-risk certain opportunities to some extent, but Blackstone has bought into us and our business and they are not looking to change that. Any new locations will have to suit TOG and if they don’t fit the usual criteria then we have no obligation to use them,” Green says. TOG has 36 locations, nine of which it owns freehold or long-leasehold, all in the UK. It has no international sites and the expertise that Blackstone can bring in helping to introduce TOG to new markets was a crucial factor in picking the private equity firm as a partner. For Blackstone, having TOG on board allows it to partly de-risk new acquisitions if they are appropriate as potential new locations. “We have a lot still to do in London and the rest of the UK, but we always said that if we go outside we needed a local partner. This makes it much more interesting because your route to market is much quicker and your understanding from a cultural and price perspective is enhanced, and that can give you a huge advantage over the competition. Designing and adjusting a product to suit each audience will also be a challenge we will address together,” says Green. It is understood that the process drew interest from private equity as well as Asian investors almost all of which were keen to buy more than the 25% of the business that was put up for sale initially by backer Lloyd Dorfman through Rothschild. Extra margins No UK REITs or traditional property companies entered into detailed negotiations over the sale of TOG. However, British Land is launching its own serviced office business and such landlords are increasingly becoming more engaged with the extra margin that serviced office operators can make above the rent TOG is paying them; serviced office companies are, in most basic terms, a wholesale to retail business. Such traditional companies setting up serviced office businesses are a threat to serviced office providers such as TOG, but Green is not convinced many will be as effective or willing to take on the risk associated with such an operation. “If we are renting out office space, are prepared to pay a market rent and make a margin then why wouldn’t a property owner just cut us out and go direct? That’s British Land’s view and I’m sure they will do well,” says Green. “But we set up this business 14 years ago and it is a struggle to build it overnight. You really have to commit resources to something like this and I think people will be nervous of that commitment. It is such an upending of an arm’s-length relationship with a tenant. It is constant contact with customers, services, building customer relationship management systems and a platform, as well as marketing. It’s a sophisticated organisation that is more akin to running a hotel chain than anything.” For that reason TOG envisages that landlords will be eager to take the business into new buildings and work with it to establish new locations where it can share upside without taking on all of the risk. “It can be more joint venture led where owners invest in building with us side by side to share in the upside, through management fees, upside shares – there are so many ways to skin it. We are agile and innovative in terms of our approach to those sorts of partnerships,” Green says. The dynamics of the office and working are changing radically with evolution in both culture and technology. With or without the collaboration of traditional landlords, with the acquisition of TOG, Blackstone is now at the forefront of the opportunity brought about by that change. Largest serviced office take-up in London 2014-2017 Tenant Acquisitions Transactions Established in London WeWork 1,399,107 18 2014 The Office Group UK 608,654 14 2012 i2 Offices 244,024 16 2011 Regus 144,237 8 1996 London Executive Offices (LEO) 109,285 6 2006 Instant Offices 103,686 5 2010 NeueHaus 64,661 1 2014 Halkin Management 62,427 1 2016 Office Space in Town 58,041 2 2013 Prospect Business Centres 54,213 3 2011 Beaumont Business Centres Limited 43,140 2 2015 The Space 39,760 2 2015 One Avenue Group 39,374 2 2013 Target Space 32,360 2 2013 ETC Venues 30,630 2 2007 Avanta Managed Services 29,107 1 2006 Servcorp 27,020 2 2009 TechHub 25,795 2 2014 Techspace LEM 25,306 1 2012 Avanta Managed Services 23,650 1.5 2017 Source: JLL Comment: If it works for WeWork… Neither Blackstone nor The Office Group would be so brash as to say it, but there is clearly a big unspoken driver behind this deal. The elephant in the room is WeWork. The serviced office provider’s latest valuation comes in at an eye-watering $18bn and whether you believe in the sustainability of the business or the valuation or not – and many don’t – that big flashing jackpot sign will have been a major factor in Blackstone entering the market. WeWork has positioned itself as a desirable brand in a way that Regus, the only truly global serviced office provider, has struggled to do. Of course Europe will come first, but in buying TOG, Blackstone has the opportunity to establish it eventually as a recognisable company in all four corners of the world where it already has a real estate portfolio. The argument goes that the TOG brand is less quirky than that of WeWork and as a result more adaptable and appealing to a broader spectrum of clients and cultures. Having been bought by the world’s largest owner of real estate, the capacity and speed at which TOG can be expanded is virtually unrestricted. “For the right reasons we would definitely want to be a global brand. We will roll out what we do into the right cities, certainly in Europe and then who knows. That is something we will be looking at with Blackstone,” is as far as co-founder Charlie Green would say at the outset. Blackstone typically holds its investments for around five years. So where will TOG be in 2022? Valued at $18bn? But it is perfectly possible that by then a corporate customer of say Apple could use their membership card to drop into TOG offices in London, Berlin, Hong Kong, Sydney and New York when they need a desk on their travels. David Hatcher, head of news & finance To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette