Regus, the international serviced office provider, which is to make an initial public offering in London, has just agreed terms to move its Irish operation to The Sweepstakes in Ballsbridge, Dublin 4. It has been operating out of the Harcourt Centre for several years and will move next month to three floors of the final block in The Sweepstakes where it will pay £30 per sq ft for 29,000 sq ft and £1,500 for each of the 36 car parking spaces. The move from Harcourt Street to Ballsbridge underlines the increasing strength of Regus which is to raise £250m sterling. The company has a valuation of about £1bn.
From its modest roots in an office building in Brussels, Regus has had a meteoric rise, swiftly becoming the world's leading provider of serviced offices. Its success may well be a function of the skill and vision of its management, But it was also in the right place at the right time.
A study to be published by property consultants DTZ Debenham Thorpe concludes that corporate occupiers increasingly want flexibility in their accommodation and greater certainty of cost. "The major providers (of serviced offices) are responding to a gap in the market - an increased desire on the part of occupiers for a greater degree of flexibility in their accommodation arrangements," the report says.
DTZ conducted a survey of central London serviced office providers and found that immediacy of occupation was almost as important as flexible leasing terms for tenants of serviced offices, while certainty of cost ranked a close third.
David Harris, an analyst of real estate investment trusts at US-based investment bank Lehman Brothers, says that the boom in serviced offices started with the great corporate restructurings by US companies in the late 1980s and has spread to European organisations.
He says the driving force is corporate outsourcing as companies try to cut costs. As they concentrate on their core activity, everything from building facilities management to information technology support is farmed out to start-ups formed to offer these services. Support service providers need new premises, preferably near their customers. As customers move, companies follow.
The DTZ report notes that in the US, serviced offices have been a feature of the landscape for about 35 years, and estimates that there are 3,500 to 4,000 around the country accounting for about 10 per cent of all office stock. Annual revenues, it estimates, are roughly $2bn to $3bn.
There are a handful of large providers, which the report notes specialise in offering high-quality premises with the latest communication technology and service provision to international organisations.
Regus is the first of its peers to seek a public listing, although rival CarrAmerica Corp has said it intends to spin off OmniOffice by the year-end. While its strategy is clear, valuing its shares is more challenging.
Regus has said it does not intend its shares to be listed in the property sector of the FT-A All Share Index, but in business services, with the likes of Hays and Johnson Controls.
This means that rather than the traditional method of valuing property company shares - which focuses on a company's net asset value - an earnings-derived model will be needed.
The company's tangible fixed assets, totalling £54.7m at the end of last year, include furniture and fittings, computers and cars, some of which are held under finance leases, but no buildings.
Assets held under finance leases are recorded in the balance sheet and depreciated over their estimated useful life, unlike property companies which do not depreciate their buildings at all.
An estimate of the market value of Regus's assets, after taking account of debt, gives few clues as to the company's worth. Moreover, it takes no account of the value of the brand name.
But even the traditional EBITDA (earnings before interest, taxation and depreciation) approach - the method favoured by investors in other business service companies - offers complications.
"With high growth companies, you have got this problem of how to value assets coming on stream," says Mr Harris.
Furthermore, like Internet companies, Regus is loss-making and growing rapidly.
In 1998, it recorded a pre-tax loss of £11.2m ($17.92m) on revenues of £112m, against a 1997 £4.5m pre-tax loss on revenues of £58.8m. Of the £112m revenues in 1998, £76m came from centres opened in 1997 or earlier. In 1998, a further 60 Regus centres were opened, and 27 centres were opened in the first quarter of 1999. Not one is expected to make a contribution in its first year.
In 1998, start-up costs of new offices were £11m, although elsewhere in its accounts, Regus says it spreads all costs incurred up until the opening of a new building over a three-year period.
The nature of many of Regus's leases further complicates the process of making projections about revenue streams. While investors may take great comfort from the knowledge that rent at many new Regus centres is directly related to its profitability - Regus' rental costs remain low while its offices are vacant - landlords have the opportunity to benefit from profitable centres. Thus, forecasting future EBITDA might require knowledge of lease terms.
Moreover, in a company heavily dependent on debt, pricing the shares at some multiple of a number which excludes interest costs might be misguided.
However, the biggest difficulty valuing Regus shares, analysts say, is that there is no other quoted company like it.
The explosive growth which Regus and its competitors have experienced suggests a strong need for capital. Investors need a suitable framework for valuing serviced office providers to make that capital forthcoming.
