With concern in the real estate world over the world economy, the EU referendum and a price adjustment in London, perhaps now is the time to take a longer view.
The problem with viewing the future in one-year, five-year or even 10-year chunks is that it can be easy to become reactive rather than agile. So what if we look 20 years hence? While we can’t be certain, it is a useful exercise to strategise for longer term investment.
Investors have long seen property as a safe haven. Bricks and mortar currently provide a relatively low-risk environment for investment funds. The UK is short on space and there is plenty of demand from business. But 20 years is a long time – flexible working and living models could make property a higher risk/higher return investment than it is today.
In 20 years changing technology, demographics and business requirements will likely mean a push towards shorter, more flexible leases. Property is one of the major costs for many businesses – a workstation in central London currently costs £15,000 in annual rent, rates and service charges. Reducing costs by using space more efficiently is high on the agenda for many boards. Frequently this means being free to respond more swiftly to changes in demand.
Today, landlords feel insulated from risk during long lease terms, but responding to the need for greater flexibility means greater risk for landlords, which will require greater compensation in return.
Start-ups and SMEs want the opportunity to grow in scale as their business expands. This is impossible if they are tied to long-term, inflexible contracts. Of course, not all companies will need flexible occupational leases – if there is a core level of occupation, it will probably remain more cost-effective to opt for a traditional long lease and seek flexible space on top of that core.
Increased flexibility exposes investors to greater risk of voids, and technological change has led to faster rates of building obsolescence. Offices from as recently as the 1990s were not designed for today’s paperless and tech-driven workplaces. It is often cheaper to tear them down and start again rather than reconfigure. But who will be best placed to design the future workplace – the tech specialists or traditional developers? Only time will tell.
The smartest developers are seeking to build in flexibility to their business space. They have a tough job to anticipate changes to their customers’ businesses, when those companies may not have thought through how their business will change over 20 years themselves. Technology increases the possibility of remote working, but it should also unlock greater potential for different companies and retail concessions to co-habit under one roof.
And then, of course, there is the industry-wide disruption from new players entering the market, whether they are creating flexible office space, micro-homes or innovative live/work/play spaces.
Some investors do not appear to be focused on this prospective shift in the work and wider built environment, but it is vital for those looking to hold a property portfolio over a period of 20 to 30 years. Issues arise when investors view their investment through the lens of the past 20 years, rather than the next 20. Typically, investors will focus on the condition of a building and demand in its location – I would urge them instead to focus on the changing occupier market.
The upshot? Investors will have to work harder to think through disruptive changes in their real estate portfolio over the next 20 years but the outlook is still positive. With the development of large-scale private rented sector buildings, student accommodation and mixed-use property clusters, there will be some big opportunities for investors. They just need to evaluate the long-term sustainability of any opportunity and make sure they are compensated for the risk they take.
Andy Pyle is UK head of real estate at KPMG
