Will a return to the classroom also signal a return to the office?
What the working-from-home shift might mean for investors.
As millions of children return to school – many for the first time since March – another question arises. How many office workers will also resume their commute into city centre workplaces?
The question is being asked across the globe and is critical on several levels: work-life balance, the risk of a second spike in coronavirus cases, the impact on landlords, investors and small urban businesses, many of them in retail, dependent on busy city centres for their trade.
The evidence so far paints a picture of reduced demand and increasing vacancies.
Estate agent Savills reports a 41% decline in central London office take up in the first of half of 2020, compared to 2019. At the same time Aviva Investors believes, “It will take a significant drop in infection rates…to exit this second phase…and for life to return to something like normal.” The Royal Institute of Chartered Surveyors (RICS) UK Commercial Market Survey, Q2 2020, reveals that 93% of respondents envisage businesses scaling back their office footprint over the next two years.
Companies are also giving us more evidence of a fundamental shift in working patterns. Schroders and PwC have publicly stated that their employees need not return this year or in some cases, ever, to the office.
Is there any demand for office space?
British Land – a business whose model revolves around letting office space – believes it is not a case of writing the office off but rather tenants re-evaluating the space they need. There’s a focus on higher quality, collaborative space as opposed to the traditional desk and nine-to-five set up.
Certainly, there are companies committing to new office space and investors eyeing up assets. Fund manager Baillie Gifford is relocating to a new base in Edinburgh; Merck the pharmaceutical company is planning a £1bn research hub in central London.
However, figures for Q2 reported by RICS show an overall 55% decline in occupier demand, with the decline most keenly felt in retail, down 86% and offices, down 79%. RICS concludes that the near-term outlook for rents is negative with 85% of respondents to their survey expecting a decline in retail rents over the next three months. Interestingly, 64% of their respondents also expect offices to move to the suburbs.
The impact on small businesses
The return to offices is also a major issue for thousands of small businesses in retail, hospitality and services who usually serve the office population. The CBI employers’ organisation is calling for office workers to return. They see the lack of office workers as the reason for the hospitality sector struggle. Well known restaurant chains, like Pizza Express and retailers including John Lewis are closing stores or shutting up for good, changing the face of lots of high streets.
Jace Tyrrell, chief executive of the New West End Company representing retailers in central London, has been calling for a strong political message that more workers should return to offices.
He said West End shops currently have half the number of customers compared with the same time last year. Mr Tyrrell also said: “We are encouraging a very strong instruction from the Prime Minister and the current mayor of London to encourage Londoners back to the office and work. That’s the only way we are going to survive this year for the retail and hospitality in the West End.”
What does it mean for investors?
The key question is what will be the ongoing impact on property funds of empty or under-occupied offices and businesses related to that.
There’s also the question of what effect this shift in behaviour will have on the economy as a whole and therefore companies’ performance in other sectors, particularly those dependent on thriving cities and towns.
JP Morgan expects rents to rebound by the end of 2022, citing the low supply of space in the market and the limited development pipeline as reasons to be positive. However, it admits that on the downside, the accelerating changes that may affect demands for offices include “mega trends” such as work-life balance and climate change. In contrast Aviva Investors expects current conditions will apply to investments being held over the next ten-year period.
The lockdown period saw open-ended property funds come under scrutiny. Lots of them weren’t able to accurately value their assets because of uncertainty caused by the pandemic, resulting in them suspending sales and purchases of their units in March.
The FCA has since announced a review of open-ended property funds, citing liquidity concerns. It’s consulting on a new structure to ensure better alignment between the assets the funds hold, and their liquidity promises to investors.
We should hope the coming months give us some answers. Has the pandemic accelerated a structural shift that was happening anyway with the increase in online shopping and a push towards more flexible working? Or will a reduction in rents and a reassessment of how offices are used mark a resurgence of city centres as they start to look more attractive to tenants?
Clearly both scenarios will impact the value of certain types of property and will no doubt have a knock-on effect to the wider economy – particularly the hospitality and leisure sectors.
There are a lot of moving parts to what all of this means for investors. Remember, property is not an asset that can be turned into cash quickly. So the closure of some open-ended funds must logically be expected in times of economic stress. And while there’ll be some opportunities for investors, there’ll also be some pitfalls.
That’s not to say you shouldn’t invest in companies or sectors that could see a tailwind from these changes. But we think you should make sure the investments you do choose form part of a well-diversified portfolio. That means no matter what happens and who wins or loses, you should have something working well for you.
This article isn’t personal advice. Remember all investments can go up as well as down in value, so investors can lose money. If you’re unsure of what to do, you should ask for advice.
Charlotte Walsh is a partner at the Boscobel & Partners consultancy.
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