Hoofddorp, the Netherlands,

IN FOCUS : Flex offices/HNK & Sustainablility

Annual Report 2018

Flex offices

In the product life cycle of flex offices, we are now in the growth stage. Whilst the barriers to entry remain low, we see hardly any new entrants with a new innovative product or concept anymore. Most operators now offer more or less the same product, albeit with an individual twist. Many of the larger traditional landlords have stepped up and now also offer an in-house flex office product or are in the process of establishing one.

Once a product or service becomes commoditised the only way to really compete is on price. There is, however, limited competition on price at this point. This is probably because the flex market is still growing in a strong economic environment and because pricing is non-transparent as everyone includes different types and levels of services in the price. Price differentiation and transparency will improve as the flex office industry eventually becomes more mature.

For some operators the game will be to grow and gain market share as quickly as possible, establish brand value and then exit. Some are genuinely in it for the long run. We expect consolidation in the flex industry, especially in the next down cycle. The viable flex business models will come out stronger and this will allow the industry to move to a form of equilibrium, both for the flex office market itself and in relation to the more traditional office market. Asset-rich flex operators with a strong balance sheet are likely to come out on top.

In time the boundaries between the flex office market and the more traditional office market will blur. In fact, they are already blurring, as flex offices are no longer just used by start-ups or scale-ups, but also by larger corporates or temporary project teams at these larger corporates. In addition, many flex office users tend to stay much longer than one would expect from a short term flex lease, sometimes nearing or exceeding the traditional 5-year lease term.

What does this mean for HNK?

NSI has six years of in-house experience and data from running flex offices through its HNK brand, learning some valuable lessons along the way. We have seen customer demand evolve and have adopted our HNK offering accordingly. We have stopped the sizeable roll-out plans we had in 2015/16 and are now very selective in where we open new HNKs. Our focus is first and foremost on the G4 markets.

In recent years we have been adjusting the mix of flex space and more traditional leased floors to accommodate the growing demand for managed offices. We are now also seeing an increase in demand for fully serviced larger floors, mostly from larger corporates. Being the owner and operating the entire building is proving a key benefit relative to flex operators that only run a few floors in a building, as we can be more flexible in meeting changes in demand.

In 2019 we will continue to review and improve our HNK offering and the organisational set-up. One of the questions that need to be answered this year is how our strategy of focussing only on seven cities fits with our existing wider network of HNK locations. We will have to judge if provincial HNK locations contribute to the franchise value and generate sufficient excess return to compensate for what otherwise will be a modest property return, relative to our focus markets.

Sustainability initiatives

Since announcing the new strategy at the start of 2017 we have been active on all fronts to improve the business. In communications to date the focus has been on our strategy and progress, so as to not dilute the message. We have not been very vocal about our sustainability initiatives, except for stating that we are well on track to meet the minimum C-label EPC energy certificate requirement by 2023.

In 2018 we started to work on a future proof ESG programme. As NSI is a small organisation we have used an external advisor to provide the relevant support and manpower to help put together a detailed and ambitious programme.

Everyone at NSI has been involved in establishing the ESG programme. We have considered the UN Sustainable Development Goals and have engaged with external stakeholders to come up with what we believe is a well-rounded programme. The three overarching sustainability priorities we have identified are: Future Proof Buildings, Energy & Carbon and Health and Well-Being.

Our sustainability ambitions clearly go much further than scoring on government-imposed minimum energy labels. To measure and judge our programme and impact we have decided to focus on the GRESB benchmark. We will publish our first GRESB score in 2019. This will provide us with a base score and allow us to set a clear and realistic path for the years ahead, in line with our ambitions.

The team fully recognises that this programme and our participation in GRESB will take time and effort to fully implement and see effects, but it is a way of working that we have already fully embraced. Our recent initiatives reflect this.

Over the past four years we have fully renovated around 80,000 sqm of office space, including a full upgrade of the lighting with 25,000 LED units with motion sensors. We have also started to minimise gas usage and over 40% of the portfolio by sqm is using sustainable district heating, heating pumps or ATES systems. We are committed to increasing the use of sustainable solar energy but due to our recent disposals only 2.4% of our electricity usage is currently generated this way.

The forthcoming 2018 annual report will include more details about our sustainability ambitions.