What to Do When Rents for Office Space Surge

The not-so-surprising news in Asia these days is the stratospheric rise in office and retail rents as the region’s economies resume robust growth after the horrors of the global financial crisis. In Hong Kong this week, for example, retailer Episode gave up the prime 10,000-square-feet of space it had been leasing in Central district for more than a decade. The rent had surged almost 70% to HK$2.4 million (US$308,160) – a month.

 
It’s not really bad news for Hans Leijten, Regional Vice President for East Asia at Regus, which bills itself as the world’s largest provider of workplace solutions. The company operates 40 business centres in Greater China, including 12 in Hong Kong, and plans to more than triple that number to 150 by 2013.
 
“The fixed costs that you have to put in your own office are getting bigger and bigger, and this is tying up your money as well as flexibility,” he says. “People will look for much more cost-efficient solutions, much more tailored and much more flexible.”
 
Leijten spoke to CFO Innovation’s Cesar Bacani about the alternatives to conventional office space, the economics of business centres and the rise of mobile workers in Asia.
 
There seems to be this perception that companies that hold office in business centres are somehow less committed because they have not taken the trouble of taking out a long-term lease or buying their own office space.
No, actually no. We have clients that stay with us three-four years or longer. We typically find solutions to a variety of customer groups. It could be a start-up company, though start-ups are only one small segment of the business we do.
 
It can be a company that started a branch office, but has no idea of how business would go and so they decide: Let’s take six months in an office like the Regus solution. After a time they can assess the success of their business, and ask themselves: Do we stay in this environment? While they grow, they stay with Regus. At a certain point in time the predictability in their business grows so they might go to a traditional solution or conventional solution.
 
So the typical trajectory would be: Come to Asia, set up temporarily and when it’s successful, then you establish your own headquarters?
Not really. Two-thirds or more of our customers in China have their registration with Regus. You conduct business in China, you need to have a one-year lease, that’s a legal requirement, so people register with us and establish their company and have the flexibility to grow that company here. At a certain point, if they are at a stage where they are more secure about their size or have a different plan, then they move to a different location.
 
What does it mean when you say they register with Regus?
In China, if you start a company, you need to get your business registration and your company license. You need to start with the bank. You need to register with the tax bureau, the district government, the industry and commercial bureaus where you file your business activity. You need an address for that and a physical location for that, and that can be with Regus, just as much as in any conventional solution. We provide the relevant documents as far as we can provide them and help them as registration agents.
 
VIRTUAL OFFICE
China would seem to be a unique place to do business. Is it easier to set up in other places in Asia?
In Hong Kong, you can [set up] a virtual office, which is basically your address and your telephone number. You can print your business cards and you can register your activity on the basis of a virtual office. We see that Hong Kong has a lot of virtual offices, much more than in China.
 
If there’s a drop-in client, then your receptionist will have to tell him or her: Oh, they’re not really physically here, it’s a virtual office and you need to call them up?
Correct. And that is the reason that China says: We like to have physical office space because then people visiting; especially authorities, would know where to find you. Hong Kong is more liberal.
 
How much would it cost to set up and maintain a virtual office?
There are different products and different addresses. If you go to IFC [in Hong Kong], it’s a more expensive location. If you go to a less impressive address, it can be cheaper.
 
You pay a monthly fee, and that’s it. If you want additional services, you call into the centre and ask for help with some faxes or do some photocopies. Then you’d be charged for the work. But in principle, if you have a virtual office, you can pay a monthly fee. Top of my head, in Hong Kong, you need to spend about HK$15 [US$1.90] per day or thereabouts, that will be the cheapest. It can go up to HK$20-25 depending on the address and the package.
 
You can choose to package in physical access to the office for five days’ a month, for example, if you want to receive guests or do some business in the centre. .
 
What about physical space in a Regus centre? How much would that cost?
An office can be for one person or two persons or for 20 people, and there’s a variety of different solutions. Let’s take an office for three-four people as standard.  A starting price for a personal private office, not a shared office, would be somewhere around HK$2,000-2,500 [US$257-321]. It can go up as high as you want, depending on the location and the size of the office. It can go up to HK$10,000 [US$1,284] if you go for the top-notch office. But in general, most of our clients would range from HK$2,500 to HK$7,000 per person per month.
 
THE BUSINESS OF BUSINESS CENTRES
Why do you have different pricing based on location? Don’t people get the same level of services and amenities regardless of where the Regus business centre is located?
If you’re a banker, you want a particular client or IT support and you want to be in the neighbourhood of other banks or your clients. Location becomes very important. Normally people have their preference and their customer base. They have specific requirements when it comes to building facilities, restaurant facilities, transportation facilities.
 
IFC [in Hong Kong’s Central district] is very prestigious. The height of the ceilings, the elevator, the lobbies, the IFC shopping malls there – the whole facility is fantastic. If you go to ICC [in West Kowloon], there’s the [upscale] Elements shopping mall, very top rate facilities.
 
If you go to Millennium City in Kwun Tong [in Kowloon’s industrial district], you also have apartments, stores, underground subway stations. Maybe your staff is even more happy because they all live in Kowloon. So there are many different reasons people choose different districts and buildings.
 
So as a business, you would want a variety of locations to meet customer needs? How do you decide where to site your centres?
We go where the customer wants to be, and hopefully, just a step before he wants to be there . . . which is very difficult. Market research helps. For instance, you can see where retail is going, where the service industry is going, where the technical industry is going. There’s a certain pattern of development that we’d like to follow as well.
 
In China you can see [development trends] in first-tier cities. You can see where business hubs are developing. The infrastructure in Shanghai improved massively before the World Expo [last year], and that meant that business can be done easily anywhere in town. You now have great [transport] connections to anywhere and avoid traffic jams. The evolution of a city helps us [decide whether to] go to the suburbs, which sometimes have better facilities than the main districts. Traffic is major concern in large cities in China.
 
Another factor is the economic flow. We look at high speed train routes from Shanghai going to Suzhou, to Nanjing. We have centre in Chengdu; we’re going to open in Chongqing; we have a couple of centres in Guangzhou, in Shenzhen; we have one in Dalian. We follow where people do business and we expect that, in the next three years, we will be many more cities than we are currently operating in.
 
Who are your biggest competitors?
It would still be the conventional office buildings. I have this image of grey offices where a third of the space is always empty because people do their business outside. They’re engineers or sales people or marketers and so they’re always visiting clients. And people that traditionally go to [such an] office have their traffic jams.
 
It’s much easier if you can do business anywhere in the city. For instance, Nokia does this. They have their sales and marketing staff use our eight centres all over Beijing. Instead of spending an hour in a taxi in a traffic jam, they just go to the nearest Regus centre and do the business they need to do, their emails, prints, phone calls, meet with customers and use the flexibility of their network.
 
MOBILE WORKERS
That’s really interesting. Can you tell me how this works for Nokia?
They have a Business World membership, which exists in different varieties. You can use the Gold level, which means you can use our business lounge anywhere in the world. At the Platinum level, you can touch down in our shared office, our campus office and make your phone calls, work on your laptop and get an Internet connection.
 
You can do all that on a city level or on a Greater China level or a regional or global level. It’s a floating office wherever you want. So if you work in Hong Kong, you may want [access to Regus centres] in Greater China because your business includes China and Taiwan. You can say, please do me this platinum-plus Business World concept for Greater China.
 
How much would it cost?
There are so many price points. At the Gold level, which gives you a touchdown place anywhere in the world, it’s HK$430 a month. For Platinum Plus for Greater China, it’s HK$4,580 per month and HK$11,880 for global access, both for unlimited access. We have different price points for five days a month and ten days a month use and for city access in Hong Kong only, Greater China and global access.
 
Did Nokia purchase a city access Platinum Plus Business World cards for each of its sales and marketing people?
In this particular arrangement we tailor-made for Nokia, their sales and marketing people can use any [of eight Regus centres] in Beijing. Nokia has one office in the south of Beijing, but their sales and marketing people need to make client visits in the whole city. When they make a visit, they need to write a report, make a phone call to colleagues, do international communication. Whatever they need to do as follow-up, or before the next meeting starts, even if it’s only to drink a glass of water, they can go to any Regus centre in Beijing. This gives them the touchdown place to do their business and prepare themselves for the next meeting.
 
Another example is Yellow Pages, which had 18 sales offices across the UK. They closed them down and now use 140 Regus offices in the UK. The flexibility went up tremendously and they save 1.5 million pounds per year. The productivity and happiness of their staff went up [because there is] less traffic jams, less traffic time, people don’t have to sit in a train or a bus or taxi all the time.
 
How many Nokias and Yellow Pages do you have as clients in Asia today?
It’s in the area of about ten of them. I have an insurance company that uses our network on a very flexible basis. I can see that the technology sector, marketing and sales, engineering, people doing service or needing to see clients on a regular maintenance schedule and so on – these are industries that need this kind of flexibility.
 
One study states that, in 2013, there will be 750 million mobile workers in Asia. The mobility of people is increasing very quickly. Twenty years ago the mobile phone was a rarity, if it existed at all and you needed a car almost with you. Nowadays, you’re available anywhere. Why wouldn’t work change in the same way? You can take everything with you nowadays, so you can choose any location [from which to work].
 
And the fixed costs that you have to put in your own office are getting bigger and bigger, and this is tying up your money as well as flexibility, because you sign up for three years. People will look for much more cost-efficient solutions, much more tailored and much more flexible.
 
SECURITY AND OTHER CONCERNS
What about the question of security? As a mobile worker, I may find I’m sitting beside my competitor in a Regus business centre. Or I’m uploading data and who knows whether someone else is downloading it?
We do make sure that people have separate environments, also a firewall to keep out all kinds of attacks and interested people out of our systems, and your systems. We have the right protection in place. I don’t think there is a particular risk. If people say, can you please let the cleaning lady clean when I’m there, we let the cleaning lady clean when you’re there. If you say, can I put my own server into the computer room, we have the space for that. If you say, I want a dedicated line to my server and I don’t want to share it with the facility, go ahead.
 
In terms of employee behaviour, though, having a mobile worker outside of the mother ship, as it were, is a new thing. Do you conduct training on what mobile workers need to do to protect themselves and their company in a business centre environment?
We did a lot of training and education with the workforce of Yellow Pages in the UK. To make mobile working actually successful, you need to really educate the workforce.
 
Does Regus assume any liability if anything goes wrong?
We are liable when we do stupid things ore when we deliberately damage people in their business. We train our people to make sure that they don’t do stupid things. If you leave your door open and your neighbour takes away your laptop, we’ll help you to the best of our ability to sort it out. But there is a limit to what our liability is.
 
A lot depends on the competence and capabilities of your people.
Yes, and that means we have to attract the right kind of people and have the right kind of service attitude selection process. China is always a concern because staff there is very fluid, especially if they’re born after the 1980s. The mobility is higher and it’s a big job for us to make sure we attract the right people with the right attitude.
 
If you lose people after two or three years, I hope they had a good time. I always ask [departing staff] if it was an interesting experience. If they say yes, I had a great time; and maybe we’ll see each other again, then it’s good for both sides.
 

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