141. Brazil and European real estate dominate the second quarter of 2021
Juliet Schooling Latter and Darius McDermott return to discuss the major issues impacting markets in...
Lockdown restrictions started to lift this week and I, for one, can’t wait for some social interaction with my friends, family and colleagues that doesn’t involve Zoom or emails.
But as I sit here thinking about what before and after school clubs I’ll soon need again, as well as finding a dog sitter, I’m also not looking forward to the earlier starts, the commute, and swapping my slippers for high heels. I’ll even miss the school run.
And I’m sure I’m not the only one. After more than a year of the ‘new normal’, how ready are we for the changes ahead and what will ‘normal’ look like from here?
A number of prominent figures, including Andrew Bailey from the Bank of England, have said in recent weeks that they believe the five-day-a-week office commute is over.
Many companies too have already announced a change to their workplace settings. Nationwide Building Society is the most recent example, having unveiled plans to allow 13,000 employees to choose where they work. Almost 60% have said they want that place to be home, while more than a third said they preferred a mix of home and office-based work.
But our experience in the UK has been a lot different to that of workers in some other countries.
Schroders’ co-head of global real estate securities, Tom Walker, believes that things will play out differently around the world, making for a nuanced picture for investors.
“Cities that have contained the pandemic have seen less disruption to normal working patterns and therefore a more muted work from home trend,” he said.
“Despite being the initial centre, China, for example, has been successful in containing the virus and enabling normal activity, including office work, to resume quickly in its cities. Other examples include Hong Kong, Singapore, Tokyo, Sydney and Oslo.
“By contrast, when the authorities’ handling of the pandemic has been less successful, the working from home trend has been more pronounced. London is a case in point here, along with New York.
“It is also worth noting that both these cities have a large amount of high rise buildings. Moving large numbers of people around a skyscraper is almost impossible when you have to adhere to social distancing.”
At the start of the pandemic, Marcus Phayre-Mudge, co-manager of TR Property Investment Trust, told us that skyscrapers could have peaked. “I very much doubt we’ll see another skyscraper bigger than 22 Bishops Gate,” he said. “That may be the peak of that market.”
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Such is the current uncertainty over the future of offices that some investors have decided to divest and wait to see what happens. The managers of TIME:Commercial Long Income, for example, have zero exposure to the sector today.
“Following the completion of its property sales and acquisitions over the last 24 months the fund has shifted its sector exposure, with logistics now the largest within the property portfolio at 27%, and no exposure to the office sector,” the managers said.
Others are being more selective. The managers of BMO European Real Estate Securities like selective offices around Europe, for example. They have 7.3% in Germany, 5.4% in France, 2.6% in London, 1.3% in Norway and 0.4% in Ireland*.
Alex Ross, manager of Premier Miton Pan European Property Share, has slightly more invested in the sector – 23%* in fact – even though he believes that working from home is now very much entrenched in working practices going forward.
“We think less office space will be required,” he told us in a recent video interview. “About 10-20% less. Poorer quality, old office buildings will struggle, but there has been a flight to quality, with firms looking for newer, more energy efficient buildings, closer to transport hubs, with better amenities.
“In places like Paris, Stockholm and Berlin, vacancies in this type of building are very low and we can access best in class offices today at discounts to NAV as there is so much uncertainty.”
Schroders’ Tom Walker agrees competition will be fierce: “Office owners will now have to compete even more aggressively for customers,” he said. “Improved broadband speeds and communication platforms, as well as the rise of flexible office providers, threaten traditional landlords.
“However, we think employers will always want to retain an office presence, even if not every employee is working there every day.
“From an employer’s perspective, the collaboration and idea generation that happens when people are together in the office is crucial. Workers also need to make connections with new colleagues and train junior staff. These things are not impossible when working virtually but they are easier face to face. Even maintaining existing work relationships becomes harder if communication is solely via email or Zoom for a prolonged period.
“The reality for many is that a new hybrid working life will now be normal. The winds of change were already pushing real estate markets in this direction – Covid-19 has just accelerated the inevitable.”
*Source: fund factsheet, 28 February 2021