Hiatuses, HQs and humans

Hiatus  ‘Too near for a substantial rethink of Brexit, but at the same time too far away to prompt any action’. So said Guy Verhofstadt of the EU 6-month extension of the Article 50 deadline, expressing concerns that ‘it will import the Brexit mess into the European Union’. In this he refers to the EU elections, which take place on 23 May, and in which the UK will surely now play a part. Verhofstadt’s assessment of the lack of urgency appears correct. As he noted, the first decision made in the Commons after the extension was to take a recess. Meanwhile the topic of Brexit, which has dominated the headlines in recent weeks, is now as eerily absent from newspaper front pages as are passengers on the trains in the run up to the Easter weekend. Indeed, web traffic for the term has dropped to 10% of its volume in the previous month (based on Google Trends data). Has everyone given up? Not Nigel Farage it seems, whose new Brexit Party is polling above UKIP. Nor the Extinction Rebellion activists, who have locked down London this week. Perhaps the people of the UK have more polarised views, left and right, than many in politics would care to admit. Whilst the centre ground can’t seem to resolve the impasse, Farage looks to better his winning performance in the last EU elections. The outcome might serve as a proxy for a second referendum. Alternatively, the threat of a Brexit Party whitewash might be the catalyst to pull the two main parties back into earlier action. In Verhofstadt’s words, ‘the only thing that can save us now is Nigel Farage’.

 

Retail renewal  The retail sector continues to evolve, with the big news of the past couple of weeks being the collapse of Debenhams into administration. On the face of it, a highly-leveraged business, falling into the hands of its lenders, wiping out the equity, probably to be relaunched in a new slimmed-down offering, is a story that could be applied to many retailers. However, undoubtedly, department stores are feeling the pressure more than others, and the need for innovation is greater. Colleagues in our retail research team, have recently published a great primer on which retail assets are most affected, here. However, even within these groupings there are subtleties. One only has to look at the launch of the new Primark in Birmingham this week to see how different the large anchor store of the future needs to be from the department store of the past to survive. It also indicates to Debenham’s new owners the investment required to relaunch successfully. In short, this means removing some of the sales space and replacing it with space to deliver services and customer engagement. In Primark’s case this takes the form of a Disney café, a beauty studio / nail bar, a barbers and five restaurants. The dichotomy and challenge for a business such as Debenhams is: (a) whether to pare back and minimise damage, or to invest in repositioning, and (b) if the latter, then where the money will come from to double down and invest at a point where the market is bearish on the sector.

 

A new normal  Ignoring your customers’ changing needs is a recipe for disaster in business. This is as true if you are an office investor with a corporate customers / tenants, or an in-house property CRE lead with an internal customer base of employees. The needs of the former are changing quickly in response to the even quicker changing needs of the latter. Testament to this are the findings of workplace giant IWG’s recently published global workplace study, which finds that more than 50% of workers are now spending more than 50% of their time away from their HQ; ‘a new normal’. Assuming that the HQ is where most people’s fixed desks are, this puts a theoretical cap on occupancy of 75% under traditional models. However, this is an output. The input is the extent to which employees value the ability to work flexibly. 70% of respondents stated that having a choice of work environment was a key factor when evaluating new career opportunities. For more than half, this was more important than their holiday allowance or the reputation of the company that they are joining. For employers, adopting flexible practices translates to a self-reported productivity increase of more than 40% (say 37% of respondents), but long-standing work culture is the biggest barrier to implementation. For landlords, better understanding and responding to the changing needs of the ultimate users of real estate, will be a key differentiator in landing the best tenants.

 

No-lose situation?  Fancy buying a Grade 2 listed mansion in Greater London, set in 4 acres of land including a lake? I do. However, the £5.25m valuation is a touch more than I can afford, and so it looks like I will be living in Cherry Tree Cottage for some time to come. The reason for asking is that the opportunity to acquire such popped up in my Facebook feed this week. The owners have set a ‘competition’ to sell the asset, with an entry price of £13.50. The clever bit is that there is no obligation to sell unless 600,000 people take part (i.e. equivalent to the entire population of Bristol, which is perhaps why the deadline has been extended). If that target is not reached the prize is substituted for 75% of the total receipts. Whilst the winner will no doubt still be delighted with this outcome, this creates a no-lose situation for the owner. In the seemingly implausible event that all 600,000 tickets are sold, the owner will gross £8.1m, which after costs should still leave them well ahead of valuation. In the event that they are not, then the owner takes 25% of the takings and keeps the house. So everyone wins? No, not really. If say half the target tickets were sold, the losers will have likely misconceived the risk adjusted quantum of the return at the point of purchase. But being just £13.50 out of pocket, they probably won’t be too bothered. There is relevance here to fractional ownership models being promoted in commercial real estate. For mom-and-pop investors laying out a couple of hundred quid to get a share in the next big City tower, they are very unlikely to correctly appraise risk, nor probably be too bothered if the risk doesn’t pay off (a bit like when Mrs P. bought £200 of bitcoin). By opening up ownership to this type of investors, there is potential therefore to drive up valuations, particularly for properties that command a trophy reputation.

 

Magic number  In real estate we often look to divide space by units of people; whether that’s 10-person meeting rooms, 6-person student housing clusters, a 50-cover restaurant, or a 30-child classroom. There are many factors which dictate this headcount, but in an ideal world, into what units should we divide people? For teams, the academic evidence suggests that something in the order of 6 people is optimum to maximise engagement and decrease ‘social loafing’. For brainstorming, a group size of up to 18 people is advised, and for broadcast messages, you’re advised to top out at 1,800. A study published late last year by the Singapore Management University found that people are less happy at high population densities, referring back to various other studies which commonly found that the optimum size of a community is 150 people. This is called ‘savannah theory’, evoking the size of early communities established by hunter gathers. In part this is a function of brain size, and relates to our ability as humans to act reciprocally, develop risk aversion and be thought of as part of a network. As offices and residences evolve to become working and living ‘communities’, where community cohesion is a strong component of the total offering, this might be a number worth contemplating for operators.

 

A load of rubbish  Knowing about something after the event is helpful, in that it allows us to document baselines, create benchmarks and indexes, and create time series that describe the past. However, the real value of data comes in being able to make some measure of determination of the future. A big part of predictive analytics is leading indicators; these are observable metrics that have a bearing on future outputs. For example, for a pharma business, the number of patents granted in any year is likely to have a bearing on future profitability. For service businesses this may be something like the results of customer satisfaction surveys. For real estate a measure typically used as a sign of the health of the market is the number of cranes on a city skyline. I would argue that this is a lagged, rather than a leading indicator – if anything it shows the potentially for oversupply. The better metrics relate to the demand side, e.g. the number of Google searches for 2-bed flats is likely to be a predictor of future demand. This week a reader drew to my attention to an article in The Times where the author used the number of skips on his street as a measure of the strength of the housing market (from ‘zero: no growth to four: unsustainable boom’). Elsewhere, I’ve seen the number of attendees at MIPIM used as proxy for market overheating, but I’m sure we could do better. In the world of economics, leading indicators found to predict downturns include: men’s underwear sales (‘the hole isn’t that big, right?’), car showroom closing times (pricing to sell quickly and get home) and even ‘the hotness’ of waiting staff (attractive people rise up to better job opportunities in the good times). What are the most arcane metrics that we could use to predict the property market? Answers on a postcard.