Servcorp’s Hybrid Work Model Powers Growth and Global Expansion

About Servcorp Limited

Servcorp Limited (Servcorp, the Group, ASX: SRV) is a multinational organisation that sells Serviced Offices, Virtual Offices, Coworking Spaces, Meeting Rooms, Community Packages, and IT, Communications and Secretarial Services to entrepreneurs, startups, SMEs and large enterprises. It was established in 1978 and listed on the Australian Securities Exchange in 1999.

The Servcorp business model

Servcorp conducts serviced office operations across 140,000 square metres globally, in 20 cities within 40 countries. Its operations comprise infrastructure that provides five star fit- outs, on-site secure IT and WiFi communications support, dedicated receptionist, shared kitchens, and fully equipped meeting rooms.

Servcorp also provides virtual office services to handle mail, answer phone calls, and provide access to coworking. Coworking facilities offer dedicated desks, boardrooms and meeting rooms, supported by secure WiFi.

All of Servcorp’s workspace solutions are in prime CBD locations.

Servcorp doesn’t own the office buildings in which its serviced offices are located and instead leases them from building owners. Lease term maturities are staggered roughly equally for terms of 1 to 3 years, 3 to 5 years, and 5 to 10 years, with less than 10 percent of leases expiring beyond 10 years across the lease portfolio. Just over half of the lease portfolio has less than 3 years residual life at 30 June 2024.

The success of the Servcorp business model is reflected in the numbers.

In FY24 Servcorp earned a statutory pre-tax profit of $42.9 million and a ‘Mature’ pre-tax profit result of $56.6 million. ‘Mature’ profit isolates the distortion resulting from recently established immature floors that are yet to capture their full revenue potential but are incurring full operational costs. Significantly, the business generated underlying free cash of $72.5 million, about 28 percent more than Mature pre-tax profit. This left Servcorp with no debt and $115 million in cash and investments at 30 June 2024.

The hybrid work model is here to stay

A hybrid work model is a departure from the traditional workplace inside four walls within a corporate office. It is an arrangement between employees and employers that provides employees with the flexibility to work from home, in a coworking space, or the corporate office. Employees can migrate between these various locations depending on the work that needs to be done. Typically, the employer sets the days and times employees can work remotely from home and when they must attend the office.

Hybrid work emerged as a viable alternative to the traditional corporate office model during the COVID-19 pandemic when businesses around the world transitioned to remote work and used virtual collaboration tools to maintain productivity.

Remote and hybrid work arrangements appear to be growing in acceptance by both employees and employers.

Individual productivity of remote workers is improving, and businesses are seeing reduced travel and real estate costs. Most knowledge workers see the value of working from home, including greater flexibility to spend time with family and no commute time. However, knowledge workers want to attend the office for team building and collaboration opportunities with their peers.

Around half of large organisations have or are planning to reduce their office footprint to reduce fixed overhead costs.

Reportedly the hybrid work model has reduced global carbon dioxide emissions because of reduced ground transportation.

Some employers have observed that hybrid work improves job satisfaction for employees and expands the talent pool as more people are happy to work where their employment arrangements provide flexibility and related lifestyle benefits.

By bringing the office and virtual worlds together, it appears that employers and employees can have the best of both worlds. The evidence to date suggests that the hybrid work model is here to stay.

The future

After 40 years of operations and led by its Founder throughout this period, Servcorp has guided the market to at least 10 percent higher profit and a 5 percent lift in underlying free cash flow and dividends of not less than 26 cents for FY25. This compares to the FY24 dividend of 25 cents.

The outlook beyond FY25 remains positive as demand for Coworking under the hybrid work model remains intact, as businesses the world over embrace a flexible workspace capability. Servcorp has provided this capability for four decades and remains the world leader in this evolving landscape.