Folio Edition 1: State of flux
Written by
Andrew Jefford
Account Director
Do you remember when industrial property was boring? Unglamorous boxes with unchanging rents and gently fluctuating values? Only the brave would have predicted SEGRO, the warehouse specialist sniffily nicknamed ‘the stamp collector’, becoming the UK’s biggest listed propco by 2018.
Or maybe you recall the 1990s explosion of shopping centre development. No town was too small for a grand scheme of its own, with retailers falling over themselves to fill as much space as possible. Shopping was now ‘a leisure activity in its own right’ and the boom would never end. Such confidence, we can now say, was somewhat misplaced.
Property is littered with such examples. Wrong assumptions, over-optimism and excessive caution are the grease that oils the wheels of the cycle. If every investment is a bet on the future, the market thrives on some of them not paying off. Shopping was now ‘a leisure activity in its own right’ and the boom would never end.
The permanence of the end product – in essence, big blocks of concrete and steel – can lull even seasoned operators into assuming today’s norms will continue. Just as retail developers could never foresee towns needing fewer shops, underestimates of warehouse demand led to years of reduced supply. But the shifts, when they came, were rapid.
Wider dynamics
These shifts are often a straightforward reflection of wider society. All assets ultimately exist to serve the needs of people and businesses – for homes, workplaces and leisure – and these are moving away from old certainties. As priorities and preferences change, property must respond in kind.
Most trends can be viewed through this lens. Retailing is shifting away from high streets (fewer shops) and towards online (more warehouses). Renters want a professional service (build to rent) with socialising space nearby (more leisure). Workers are increasingly home-based (fewer offices) and holidaying more (hotels). Even the life sciences boom is in part due to a renewed focus on health post-pandemic.
A quick glance at the list of risers and fallers suggests the internet has much to answer for. It has certainly disrupted the business models of the traditional ‘big three’ sectors of retail, offices and industrial but away from these macro impacts, it is more subtle effects that will perhaps have the biggest long-term bearing on real estate.
The first is speed, of both change and information. To borrow a phrase from social media: new trends are around the world before the status quo has its boots on. Where innovations would incubate and slowly spread, new approaches are almost instantly known to all.
There is a parallel in market knowledge. There has been a democratising effect on information, with reams of research and insight available to all at the click of a mouse. Opportunities that were once restricted to a close network are now available to all. If there is a niche to be exploited, it is not long before a host of competitors arrive to stake their own claim.
The second effect is an atomisation of wants and needs. It is increasingly difficult to group people together, with their real estate demands becoming increasingly bespoke. Much as the internet has driven a segmentation of media consumption – away from the traditional television and newspaper behemoths – so too, the property industry needs to work out how to cater to these diffuse requirements.
Yesterday’s problems today
But real estate is not only wrestling with new problems. Many of the current challenges have been faced before; for example, developers remain hampered by a planning system, much of it dating back to 1947, that moves at a glacial pace and is backward-looking almost by design.
There is also the monetary and fiscal environment. After 15 years of incredibly cheap money, investors are grappling with the effects of surging interests and a tax regime that is increasingly acting as a handbrake on growth. The best operators will be rewarded, but there will be pain too.
A lesson from the 1970s (and late 1980s and early 1990s) is about to be re-learned.
Energy efficiency is another major factor, but again not quite as recent a concern as many believe; the first regulations on heat loss came into effect in 1965. Today’s standards are more stringent, and set to become increasingly demanding in the years to come, but the issue has been seen before.
At a fundamental level, the challenges are the same as they ever were: working out what type of space is needed, not just today but tomorrow too, against an ever-changing backdrop of regulations and financial restrictions. It’s just that today it all takes place with a speed and unpredictability that has never been matched.
Embracing uncertainty
And so real estate finds itself at a crossroads. It has adapted before, and will do so again. Take a look at the buildings that have been repurposed numerous times in their lifetime and you get a feel for property’s gift for reinvention.
For every ‘obsolete’ asset there is someone with an idea and a plan for how to make it happen. But it is only right to ask: what will define tomorrow’s success stories?
Specialisation – genuine, comprehensive insight into specific niches – would seem to be a prerequisite. So too would be an intimate understanding of end users and their shifting behaviour. If space is increasingly a service, deep knowledge of clients’ ultimate needs will be rewarded.
But perhaps more than anything it is adaptability, and the humility to admit when change is required, that will be most prized. As trends seemingly shift with the direction of the wind, a building’s eventual role could be very different from what was planned when spades first went into the ground.
When the future cannot be predicted with any real confidence, such flexibility can be the difference between success and failure. Look closely across the industry and you can already see this being built into strategies. Real estate has a proud history of reinvention; maybe a little less certainty is the something we should all be aspiring to.