Industrial/residential is the new office/retail.

In 1991, 37% of the UK institutional property market measured by IPD was retail; by 2001 this had risen to over 45%. In 1991, over 47% of that universe was offices; by 2001 this had fallen to 38%. The two asset classes combined constituted a massive 85% of the market. Industrial exposure was steady at around 13%, while the average allocation to residential property stood at less than 1%. 

How things change! Retail is as popular with investors as Boris Johnson is in Scotland and offices are hardly flavour of the month post-Covid (see above). Industrial/logistics is now the investor’s favourite sector, while residential (around 40% of the world’s property assets) is the real estate asset class with the biggest growth trajectory. 

The IPD UK universe, 1991 and 2001 (£m)

	1991		2001
Retail	17,227	37.4%	50,703	45.4%
Office	21,736	47.2%	42,866	38.4%
Industrial	6,120	13.3%	14,989	13.4%
Residential	141	0.3%	519	0.5%
Other	865	1.9%	2,685	2.4%
Total	46,090		111,761

Watch the rise of the single family rental market

The race is on to deliver very large income-producing residential portfolios in Europe. Pension funds need professional, socially conscious and environmentally competent managers, and they need access to the European markets at scale. Build to rent fails to offer that scale and comes with development risk. How can this huge asset class be made investable? Answer: the single-family rental sector, which is about to be attacked. 

Invitation Homes – the largest owner of single-family rental homes in the United States, owning approximately 80,000 homes – and others have shown the way. The key challenge is to build scale. In Europe, IMMO Capital is an example of an early mover. 

This is a ‘next-generation’ asset manager and operating partner for institutional real estate investors, which claims to use technology to source and underwrite single unit/family homes to create large portfolios offering stabilised rental income and capital appreciation through active management. 

The single-family rental sector offers a natural investment for institutional investors. There is a benign circularity to be built, connecting the growing market for families and individuals who choose to rent with pensioners that need inflation-linked secure income at higher yields than they can get through the bond market. Look out for IMMO Capital and the wave that will follow them.

Home working means flat office values

It seems that everyone’s favourite topic in the property market of the Covid-19 era is the future of the office. Everyone has an opinion – usually self-serving, it has to be said. Self-employed journalists with second homes in North Yorkshire can afford to recommend the benefits of the home office to unfortunate working mothers of three children whose husband has a strong claim on the family laptop and the box room of a three-bedroom house. 

But let’s assume we see more home working – say an extra one day a week for everyone, leading maybe to a 20% fall in office occupation. What will happen to rents?

Well, not much to begin with. Office leases of five to 10 years will take time to be renewed and re-negotiated, or not renewed. And it will take much longer to work out how to deal with reduced average occupation. 

Growth in rents follows the growth in service sector employment – normally, say, 2% annually. A 20% fall in occupation takes out 10 years of rent growth. So we can expect flat rents for 10 years. However, new supply will probably be curtailed: models show that there is some flex or elasticity in the development response, with the result that weak demand will lead to reduced development.
So we may see slightly higher rents in 10 years’ time. 

Employers could reduce central office costs – rents, business rates/property taxes and utility costs – but rent is not a huge proportion of corporate expenses and employers could choose to compete for talent by providing more space per worker, defending rent growth even more. If, on the other hand, they reduce costs, assuming no hit to revenues, the money saved could be put to other uses. But this assumes no impact on productivity. One of the scariest Covid statistics suggested that in the past 18 months we have been working longer hours and have become less productive (in my case, staying at my desk and staring at BBC Sport for hours). Is the home office really a good option?

Look out for third spaces 

The ‘third space’ is based on sociologist Ray Oldenburg’s idea of a gathering spot distinct from your home (your ‘first space’) and from your work (your ‘second space’). A third space is a safe zone where you can work informally while building relationships outside your workplace. 

“During the Covid lockdown, the proportion of employees interested in working only from home permanently fell from what were initially very high numbers”

During the Covid lockdown, the proportion of employees interested in working only from home permanently fell from what were initially very high numbers and the proportion of those who wanted to work full time in the office rose. 

More flexibility is the likely outcome, but this is a classic case of ‘be careful what you wish for’. Some employers have been vocal about their plans to reduce their office portfolios, meaning that employees will lose the choice between work and home. If home working is impossible, inefficient or unpleasant, what then? Enter the third space.

The case for third spaces is all about productivity, and design, facilities, atmosphere and community are at the heart of the offer. Location is, of course, vital. Witness the Arc Club in Homerton, East London – decentralised, but not in the sticks and close to home for many. 

Expansion of this concept will see high-density residential developments in and around London being anchored by Arc Club and other third spaces. 

I have often wondered why high street banks don’t offer this product or service to their unfortunate customers. The service-free zone that is the current bank proposition could easily be transformed into vibrant third spaces. Imagine my delight, then, when I saw Santander Work Cafes in Santiago, Chile – yes, Chile. But quite a schlep from the City. 

 

Logistics prices – sustainable?

Which leaves us with logistics. Everybody I speak to in the market worries about cap rates for logistics being at an all-time low. There are two ways to think about this. One is technical analysis (history, patterns, trends); the other is fundamental (economics). Forget what yields used to be, what should the yield be? How risky is this stuff? What rent growth are we going to get? And how will the asset depreciate?

I am currently looking at a picture of a big development of warehouses in Arizona. It looks very hot. The roofs are not green and there are air-con units sticking up everywhere. Is this sustainable? How much will it cost to remediate this property in line with carbon targets? As Harry Hill was fond of saying to some unfortunate in the front row of his live shows: You! Go and find out.