Wellian Weekly 18.05.2020

Property in a Post Covid-19 World

As a multi asset manager, I have the privilege to spend lots of time talking to lots of fund managers about lots of different asset classes. I also have the ability to talk to economists and strategists about the macro environment.  Many managers I talk with are specialists, many are generalists. Investment styles and philosophies are discussed, as are portfolio construction techniques and many other conversations are held.  It’s not surprising that I write a lot of notes when talking to managers as the amount of information and data that is sent my way is massive.  On top of that, markets are constantly changing, the investment landscape is always reacting to different stimulus and the same stimulus can affect one industry completely differently to another.

As we now enter week “x” of the lockdown (I’ve purposefully put week “x” because in all honesty I’ve kinda forgotten which week it is (not that I was counting anyway), and in reality I don’t really mind working from home either) one conversation that lots of people are talking about is “the new normal”.  This can mean so many things to so many people, and the new normal will encompass a great deal of different things, but I would like to put some thoughts down relating to property – both as an investment, as an asset class and how it is likely to change in the future…

There are, obviously, a number of assumptions made, and in no way is this piece claiming to have crystal ball insights – who knows, the cure for Covid-19 (and Covid-20, Covid-21 and all future strains for instance) might well be discovered, and all health pandemics banished to history, but, there is no cure for the common cold, or the flu, and many diseases can and do mutate, so I feel it safe to suggest the effects of Coronavirus might alter certain patterns of work in the future.

Technology exists and has proven itself in the last couple of months to allow those businesses that can work from home do. Software seems to be working well. People have come to realise that a reliable broadband signal is almost as important as getting a delivery slot from your supermarket. Zoom, Teams, LoopUp, WebEx, TeamViewer and myriad other conference call facilities are now downloaded on my PC and I know how to operate them. Although I miss seeing my colleagues face to face in the office (and they no doubt miss the lack of chocolates I usually have on hand), I DO NOT miss the cost of my daily commute – which I have to pay for – out of after-tax earnings. I DO NOT miss the time taken that my daily commute takes from me. I DO NOT miss getting up in the dark. I get extra sleep every night and still get to my office earlier. I am lucky that I have an office in my house and I am very grateful for it. I bet the experience I have – with a desk and office chair, twin screens, a printer, natural light and the ability to close the door when the day is over is quite different to a number of other who are working from home. I have an office away from the office.

I recently listened to a conference call hosted by Goldman Sachs from the US. The conversation was with a C-Suite director who was calling in from their headquarters in New York who mentioned that he was one of 60 people in the building that day, and these 60 people consisted of security and maintenance personnel too. The building, constructed at a $2.1bn cost (finished in 2009) is 44 stories and approximately 2,100,000 square feet in size. It is the home to over 7,500 employees. I’m fairly sure 60 people in 44 floors and 200,000 square metres of office space will not have any issues relating to social distancing…!  I know Goldman Sachs employs over 38,000 and has global representation, but they still seem to be operating albeit maybe at a reduced capacity. It does make you wonder whether they actually need such a building in the first place.  Or, if they do, do they need to house 7,500 employees all at once?  Given the option, would their employees choose more flexible working? When Lockdown is lifted, will employees want to return?  If you were on the board of the company, will you think and act differently as regards property. After all, 2,100,000 square feet of office space is not going to be cheap to maintain. I wonder what the property taxes are? I wonder how much the building costs in heat and light annually? I wonder how much space is actually needed?

In talking with managers of property funds over the last couple of weeks, other thought pieces have been raised, and one of them is that companies might need MORE office space. With social distancing likely to be common place from now on (I’ve even heard things such as “I’m never going to shake hands with anyone ever again”) maybe the space an individual has in an office will have to legally increase. Current desk formation or size might not be suitable for the post Covid-19 office environment. Maybe there will be changes to air circulation / conditioning, or maximum occupancy numbers. Maybe office layouts will be forced to change, all of which will reduce the number of people working in one location. Maybe retail stores will change operating hours, or limit the number of shoppers in their store at any one time…

Will public transport change? Will the use of it change? What will happen to the congestion charge? Will this ultimately have negative connotations for the environment as we all start to travel alone as opposed to using mass transit? Will this mean a greater number of offices in satellite towns and cities? Will country living change? Will people either (a) want to move to cities, or (b) want to move from cities?

Will lease lengths change? How will yields react? Will leases change entirely? One property manager was discussing that rents charged might be directly related to turnover generated from the site – if the company does well, so does the landlord – this approach certainly aligns commercial risk between tenant and landlord!  Will this recent shift to online shopping become entirely entrenched in our psyche? What will happen to the traditional High Street? If we are looking to invest, should we focus entirely on logistic locations – the depots that service my Amazon delivery for instance? Should our “retail” focus be only on supermarkets as they seemed to be the only shops that were allowed to stay open? Should we avoid leisure investments – gyms, hotels, restaurants, bars? It has been long-said that the UK is a nation of shopkeepers and maybe we have too much property dedicated towards retail. Maybe the ability to re-purpose property could be made easier. I’m fairly sure an office block can easily be made into a residential block of flats for instance. A friend of mine used to operate his incredibly successful business out of a converted church, so I’m fairly sure a shop or a shopping mall can change – take some capacity out of the system and a change of use could provide some development opportunities.

Property as an asset class is not dead. It needs to change though. One problem though is it is easy and relatively quick for a company to pivot its business plan; it’s not so easy or quick for a property. The property business model is under scrutiny. There will be winners, there will be losers. Property has always been considered a diversifier when it comes to investing and has delivered income streams and capital values in different manners to equity, fixed income, cash, derivatives, commodities and so on. How this interaction and correlation will change in the future will be very interesting to see.

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