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EXPENSIVE OFFICE SPACE LEADS LONDON'S
STARTUPS TO LOOK AT VIRTUAL OFFICES

CHRISTOPHER GOODFELLOW
London's virtual offices are playing a crucial role in providing the capital's entrepreneurs with city-centre locations as rent costs increase and the number of new startups sets post-recession records.
More than half a million startups were launched in 2014, 14 per cent more than the previous year and the highest annual total since the start of the recession, according to the latest Companies House statistics.[1]

However, competition for commercial property is increasing, making it difficult for the capital's entrepreneurs, and London overtook Hong Kong's Central Business District as the most expensive place to rent office space in the world in 2013.[2]

Lack of access to city centre offices has the potential to stifle entrepreneurship, leading many new businesses to consider using virtual offices, which provide a postal addressphone answering service and on-site meeting space in a desired location.

Simeon Howard, director of international office space and virtual office solutions provider City Office[3], says he's seen a dramatic increase in demand in the capital:

"Interest in the concept of a virtual office has grown dramatically with an increasing number of entrepreneurs seeing value in these services and, even though the vast majority of people still don't know this offering exists, we've seen interest levels double over the last two years."

Utilising a virtual office can help London's startups free up capital for building the business and rising office costs have increased the strength of this argument.

BNP Paribas Real Estate[4] found the amount of office space that was leased in Q4 2014 increased by 45 per cent on the same quarter in the previous year, bringing the 2014 annual total to 16.03 million sq ft, the highest since 2000.

Dan Bayley, head of letting and sales for Paribas' City and West End leasing team, says: "The vacancy rate of 6.11 per cent for central London offices is the lowest recorded since 2008. With limited development completions forecast in 2015 and the continuation of strong occupier demand we foresee an impending supply crunch that should put further upward pressure on rents."

Flexible solutions are gaining popularity with startups in London's suburbs and towns in the south-east, which often use virtual offices to establish respectability, particularly if they're working from home.

The increasing popularity of virtual offices is linked to the level of home working, with nearly half of UK office workers now having the capability[5], and the increasing number of people who are self-employed.

Improvements in the tools used to manage and communicate with remote workers and the increasing acceptability of starting a home-based business is reflected in City Office's client base. In London 85 per cent of those using the service are sole traders, home workers or part of a micro-business.

"There's massive value in having staff in the same office together for synergy. However, it depends on the type of roles that people are doing. If people are accountable then home working isn't an issue," says Howard, who adds: "This leads back to cloud computing and globalisation generally; it's more appropriate to work from home or have people in multiple locations than ever before and that's the future of office work."

The remaining share of the businesses using City Office's virtual office solutions are ten per cent SMEs and five per cent large corporations.

Often small businesses that are starting to expand will use virtual offices to set up in new locations. For example, a Leeds-based recruitment agency may want to place candidates in roles in London or a marketing firm represent clients from their sector who are based in a different region.

"If you're a commercial property investment firm or an estate agency, virtual offices are great," says Howard. "Let's say you're based Watford and you want to start picking up sales or letting in Mayfair, you can set up a virtual office with a W1 postcode and that would be a great way to start driving sales or lettings leads."

About half of the businesses using City Office's virtual offices in London are based in the south east. The majority of the remaining UK businesses are based in or near other large cities, primarily ManchesterBirmingham and Bristol, and there are a number of multinationals that don't have a permanent presence in the country.

"UK businesses based in London will typically only have a virtual office in one location. The ones outside of the capital are more inclined to have multiple cities. The same rule of thumb applies to internationals," says Howard.

The large corporations that are using virtual offices normally require a presence in several different markets and may have registered in a number of countries.

Howard believes the increase in new businesses in the capital is being driven by better availability of credit, particularly through grants and angel investors, and the increasing climate of entrepreneurship, which is reflected in the popularity of shows like The Apprentice[6] and Dragons' Den[7].

Developments in software as a service and cloud computing have been a game changer for startups over the last few years because they mean small businesses can scale up industrial-quality infrastructure cheaply and quickly.

"The popularity of tech startups is down to a number of things including the massive success that tech companies are having in terms of going public – everybody is chasing that dream – and the fact that technology has made it much more accessible for people with less capital," says Howard, who estimates ICT companies now make up about 50 per cent of City Office's portfolio.

The falling costs of starting up are particularly true of tech companies geared towards developing apps and software. Forecast company Oxford Economics expects London's digital tech sector to grow by 5.1 per cent per annum over the next decade, creating an additional £12 billion of economic activity and 46,000 new jobs.

Joanna Shields, chair of Tech City UK, says: "London is producing world-leading digital businesses, which in turn are fuelling wealth creation and employment. London is one of the fastest growing tech hubs and is proving its credentials as the location of choice for entrepreneurs to start and scale a successful digital business."

Tech City's map of East London's[8] technology and creative community shows the sheer scale of entrepreneurialism around this area and the web of contacts that's evolving between these businesses. The area boasts Last.fm, Wonga and King, designer of mobile game Candy Crush Saga, among its luminaries.

Howard says the cost and risk involved with conventional and serviced office space create a huge barrier for startups and where funds are available it makes more sense to invest in the business:

"For me, it would be a mistake for any startup company that doesn't need physical office space to take it. They should use that money to hire staff, build platforms and pay for advertising."

It's clear the level of entrepreneurship in London's going to continue to grow. As office space becomes more expensive and remote working solutions more viable, the role virtual offices play in the capital's startup scene will become more permanent.
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