IWG shares plunge as profit outlook disappoints amid rent reductions and strategic shift

Shares in International Workplace Group, the world’s leading provider of serviced office space, suffered their steepest fall in five years after the company issued a warning that its annual adjusted underlying profit would come in at the lower end of expectations. IWG, which operates renowned brands such as Regus and Spaces, reported a successful first half of the year, with the addition of 338 new centres to its portfolio. Despite this expansion, the company’s shares closed down 12.8 per cent at 200p, following confirmation that rental prices have been cut to support long-term occupancy.

Founder Mark Dixon has overseen a significant strategic pivot since the pandemic. IWG is emphasising a ‘capital-light’ approach, increasingly partnering with landlords who provide existing space for IWG to manage, rather than acquiring or leasing outright. This model facilitates quicker expansion without tying up significant capital, as IWG continues to collect management fees while sharing rent proceeds. Nearly all new office openings between January and June adopted this format, with IWG now operating 4,260 locations in 121 countries and targeting 1,500 further openings within the coming 18 months.

The recent downturn in share price is attributed to increased investment in expanding the capital-light business model. Allen Wells, business services analyst at Jefferies, observed that the outlook for free cash flow generation looks disappointing. The majority of IWG’s growth is now focused on smaller towns and rural regions, reflecting a post-pandemic acceleration in hybrid and localised working. New UK locations in areas such as Quedgeley, Barnsley and Wilmslow underscore this shift. Dixon noted that the traditional need for a fixed headquarters is waning, as digital infrastructure allows for greater workplace flexibility.

From a client perspective, IWG’s offering has become more attractive, providing both lower costs and flexibility in an environment of economic uncertainty and shifting tariffs. On average, rents are three per cent below last year’s figures, a decision designed to boost occupancy and unlock more ancillary sales opportunities. Dixon highlighted IWG’s diversification, mentioning that the group now sells over 100 million cups of coffee each year in their spaces, illustrating robust ancillary revenue streams.

Financially, IWG’s first-half revenue rose two per cent year on year to $2.16 billion, surpassing the previous record for the opening six months of 2024. Adjusted underlying profits increased six per cent to $262 million. However, statutory pre-tax profits fell to $12 million from $32 million, largely due to increased interest payments. The interim dividend has been increased by five per cent to 0.45 US cents per share, and IWG has expanded its share buyback programme by $30 million, with plans to repurchase a total of $130 million of its own shares in the second half of the year.

Dixon lamented the market’s reaction to IWG’s growth strategy, observing that British investors might be undervaluing expansion in contrast to their American counterparts, who tend to reward it. The current trajectory positions IWG to benefit from future demand for flexible working arrangements, even as it faces near-term profit pressures due to reinvestment and shifting market dynamics.