THE FUTURE OF REAL ESTATE
How the real estate industry has faced up to past challenges and is facing up to future challenges.
The Society of Property Researchers 30th Anniversary Conference held in September represented an opportunity to take stock of how much the real estate industry had changed since 1987, and to consider some of the issues and challenges facing real estate in the future.
Two of the most significant developments have been the expansion of indirect property investment vehicles and increased transparency. In 1985 IPD was founded offering the prospect of lifting the veil on an opaque industry. Thirty years later we have market data published on a monthly, quarterly as well as an annual basis. Data is more granular than it has ever been. Increased transparency may be uncomfortable for some who have prospered from lack of information and miss-pricing. But transparency drives liquidity and is a benefit to everyone in the industry.
Forecasting long-term challenges will always be problematic. There is the temptation to extrapolate present issues into the future. So, in 1987 it was considered that Shopping Centres were the future of retailing, financial deregulation contained more upside than risk and monetarism had tamed inflation.
By 1985, the Internet was already well established as a technology supporting a broad community of computer science researchers and developers, and was beginning to be used by other communities for daily computer communications. The threat to retail property from the virtual economy and internet shopping was an “unknown unknown” that has caused vacancy rates to climb in many High Streets and depressed the performance of retail real estate assets.
In October 1986 UK financial markets were being transformed through a deregulation that became known as “Big Bang”. This ushered in the age of the supranational, too big to fail, investment bank that spectacularly imploded in 2007 and 2008 causing the Great Financial Crisis (GFC).
In 1987 Nigel Lawson responded to Black Monday by loosening monetary policy. Interest rates were cut from 10% to 8% only to rise to 15% as inflation peaked at 10% in the ensuing economic boom; and in 1990 the UK fell into another recession. Unemployment rose from 6.9% in 1990 to 10.7% in 1993 and it took the economy 11 quarters to recover its pre-recession peak.
Issues that we are aware of today but with an as yet uncertain impact on UK real estate include Brexit, demography, climate change and technological change.
The current thinking on Brexit highlights the negative economic effect, but suggests that although London could potentially lose EU-focused business and part of its highly skilled workforce to rival cities, it might nevertheless do better than the regions. In a typical example of knowledge of the past framing intuitions surrounding the future, one investor has been quoted as saying, “It is very hard to say what the impact of Brexit will be, but I find it difficult to see why London won’t continue to be the number one city in the world.”
Changing demography is creating political tension between older and younger members of society centred around immigration (Brexit), opportunities and housing costs. An aging population will require increased health provision; families will require nurseries; and segments of the population will need affordable housing.
Over the period 2015 to 2025 London has a target of 420,000 new homes or 42,000 a year. Across the UK the need is seen to be 232,000 to 300,00 new units per year. That could mean 3mn new addresses to service, creating demand for new e-commerce fulfillment centres at the national, regional and local level.
Savings should increase as people seek to fund a pro-longed retirement. The pattern of expenditure will also change. Older customers will spend more on further education and holidays. Only retail centres that can offer an experience such as dinning and entertainment will thrive.
Higher savings represents a major opportunity for real estate as its income oriented style of return is attractive to relatively old, income hungry savers. The challenge for property will be to offer the right products. The temporary closure of open ended property funds in 2016 illustrates the need for better designed vehicles.
In the medium term climate change is a challenge that must be managed as reductions in emissions will only very slowly reverse the trend of warmer, wetter and more volatile weather causing flooding to low lying areas of the UK.
The industry will have to design its buildings to withstand climate change; and possibly to benefit from it. The next generation of distribution warehouses could deploy Solar PV cells at roof level and incorporate the ability to store green energy.
Technology and the internet has already had a profound effect on the High Street. But it is likely that this is only the start of a wave of “creative destruction” that provides opportunities as well as challenges.
Technology has the potential for locational obsolescence. Faster networks allow distance work and collaboration through video conferencing providing a reduced need for city centre office space. Home workers may retain a central office base but will not need a dedicated work-station. The internet of things is already being used to monitor the use of office space with the ultimate aim of reducing the amount of real estate used by a business.
The counter argument is that business relationships are built from face-to-face meetings. The growth of WeWork and other serviced office providers illustrates the need for a community offering such personal interaction. Certainly, in the last 10-years there has been little evidence of the so called disintermediation of central business districts by the Internet.
Perhaps the focus on the need for human interaction refers to high value employment only. Artificial intelligence will reduce lower skilled office based employment as surely as automation has reduced employment in manufacturing industry. The motor industry and Detroit in particular provide a salutary lesson of the possible human consequences of technology.
Such productivity improvements, however, require business investment. Since the GFC, UK business has shown itself more than willing to rely on cheap labour rather than invest in technology that improves productivity. Britain’s poor productivity performance has left a gap of 16% with the other six members of the G7 group of industrial nations. Output per hour worked in the UK lags well behind the US, Germany and France. Although every member of the G7 has seen productivity suffer since the GFC the impact had been twice as severe in the UK.
As cars have choked the highways, the last 20 years has seen the marginalization of Out of Town Business Parks and the renewal of urban centres serviced by public transport and providing social and entertainment facilities. Could driverless cars, drones and even flying cars reverse this trend. Google, Amazon and other tech giants have large out-of town campus operations and bus staff from San Francisco to Cupertino and Palo Alto.
Quicker networks and the roll out of 5G will increase the demand by consumers for faster and faster home delivery times. Booking grocery delivery slots in 1 hour widows 24 or 48 hours in advance will be superseded. Free one-hour delivery is already available within the M25. Such a service will put a premium price on well-located distribution facilities as well as creating demand for new buildings.
These, however, are only the known unknowns. They are the subject of discussion today and can be planned for, or not, depending on the availability of resources and the willingness of politicians. The housing shortage has been diagnosed for at least 20 years but still no remedy has been found. However, it is the unknown unknowns that will perplex and perhaps cause severe structural changes to the real estate industry. One last warning for futurists, in 1985 it was predicted that the population of London would continue to decline; and that the price of housing relative to wages would fall!