Duke of Westminster’s Property Group Bets on Hybrid Working

Grosvenor is the property company of the Duke of Westminster. It has made a large bet on flexible workplaces in order to meet West End tenants’ post-Covid needs and increase returns.

The group plans to double the size of its flexible offices to 300,000 square feet, or about a fifth its UK office portfolio.

Mark Preston, chief executive of the company, said: “What surprised us was just how attractive this product is now for businesses who might have been inclined to believe that it would require a longer-term commitment.”

He said Grosvenor tried to push flexible workspaces – which include shorter contracts, furnishings and additional services – several times in the last two decades. He said that it hasn’t “really taken off” yet, and attributed this to the “post-pandemic hybrid work patterns”.

Grosvenor has joined listed landlords like British Land, Land Securities and London office specialists such as Great Portland Estates, Derwent and others who have increased their flexible workspace offering to appeal to tenants that are adopting more hybrid working.

Savills reports that flexible office space accounts for 15% of the UK office market. London’s Mayfair, and Victoria are undersupplied.

Preston stated that some Grosvenor “large corporate occupiers” are swapping their traditional offices for flexible spaces.

He said that hedge funds were the mainstays of Mayfair’s office market and were sticking to traditional leases. However, corporate tenants from sectors like tech, marketing, and communications were more likely than others to change.

In the past, landlords would rent out floors that were empty on long-term leases, usually 10 years or longer, and tenants would pay for the interior fittings.

While providing WiFi and reception, landlords who offer flexible spaces will often pay for the furnishing upfront and sign tenants up on shorter leases. Preston said that landlords are “getting better about providing services and not just bricks and mortar, and collecting rent”.

The new model will increase the upfront costs for landlords and give them less certainty about how long tenants are likely to stay. It also allows them to charge higher rents at a time where many are in need of more income for debt repayment.

Grosvenor’s annual results revealed that its urban property holdings had dropped from £8.6bn to £400mn. The losses in value were less than many investors who have suffered as interest rates rise and property prices drop.

London’s West End which is the bulk of this portfolio has held up well and continues to attract tenants and investors.

The group is privately owned by the aristocratic Grosvenor Family, whose London real estate interests date back more than 300 years. It includes vast agricultural properties and a huge overseas portfolio, which ranges from logistics in Poland, to student housing, in Brazil.

The pre-tax profit of its property business fell from £52.7mn to £41.5mn, after excluding changes in valuations. This was despite increased profits in the UK. Preston stated that losses in Grosvenor’s international business had impacted the bottom line, especially on residential developments in San Francisco.

Grosvenor, which has a net debt-to-equity ratio of 27 percent, is a lower debtor than most landlords. However, its net finance costs for the year have increased by £20mn from 2021. In an effort to increase the yield on its investments, it has recently launched a UK-lending strategy and increased its overseas investments.

Grosvenor’s UK property business has reduced its carbon footprint over the past three years by 32 percent and completed retrofitting works to 1 million square feet in London. Preston said that green credentials are key in attracting tenants for its new developments.