LISTEN Debate may rage about what Covid-19 means for the future of the office. And there has been no shortage of discussion on what it means for town centres too. But what about other aspects of real estate? Will there be a great reset for valuations, for landlord-tenant relations and for the government’s attitude to real estate? Won’t these be the areas where we see the greatest changes of all?
Let’s deal with office first. Gerald Kaye, chief executive of Helical, believes it will bounce back. “I’m a very strong believer that people will continue working from offices and there will be a flight to quality because I think employers will want to get their employees in the best possible office space,” he says.
“There’s still going to be agglomeration. I think we are now seeing this working from home experiment really beginning to fray.”
OK, that’s a landlord’s view but it is one that is shared by some occupiers too. “The pandemic has accelerated our views on how we look at our office space, how we look at working from home, and at agile working in its truest sense,” says Sara Bailey, managing partner, head of real estate, at Trowers & Hamlins. “The office is not dead. We want our offices. There’s no two ways about it. We just might use them slightly differently. We will be looking at how we can view our space more imaginatively. We don’t want to grow the space, I’ll be honest, but I’m not necessarily talking about downsizing either.”
There’s even a case to be made that the pandemic has made us value town centres more. “We are humans,” says Christina Ofschonka, managing director and senior fund manager at AEW. “Think of retail – footfall was dead then it picked up again over summer. We are quick to forget once we can. We will need to find a way to deal with the challenging situation we are in but eventually we are going to.”
‘We forget pain quickly’
Nick Leslau, chairman and chief executive of Prestbury Investment Holdings, draws a parallel between this crisis and the last one the world faced. “There’s a lot of drama around this word reset,” he says. “We love to talk about dramatic resets. But talking about the future of the office, like we are going to change 100 years of practice based on the last 25 weeks of the only pandemic any of us have known in our lifetimes, I think is just silly talk. We forget pain really quickly. In two years’ time we’ll be looking back, saying: ‘Gosh, do you remember how bad it was? Do you remember how we thought there would be no food on the table?’
“It amazes me that people forget that at the beginning of the global financial crisis you could have put your credit card in the ATM or your debit card and not got any cash. And yet, bam, we have forgotten that’s not an issue anymore. So I think we need to be very careful. We are in danger of over talking down what’s going to happen. Investors want income. They want capital growth. We’re all creatures of habit.”
That said, change is inevitable. “We shouldn’t be blown too far off course by what we see day to day and continue to be influenced by megatrends that will be around pre, during and post pandemic – be they demographic, sustainability, or technology trends,” says Colin Throssell, Nuveen’s head of Europe for real estate.
Ofschonka is looking long-term too. “ESG is not about a two, three, five-year horizon,” she says. “It’s about an action plan for a 20-year period or beyond. You have to take into account that at a certain point – especially at the beginning – there is a cost, or an investment capex attached to it. But very soon this will be compensated by the long-term benefits.”
And while ESG is “front and centre” to Bailey’s business, she sees change coming in “landlord and tenant relationships, how they how they evolve, how they change, how you’ve got more interaction.”
Valuations too, says Throssell. “The single model, yield profile, just assuming a long lease that’s going to continue ad infinitum with upward movements, is probably gone, certainly in a lot of the sectors. Maybe that’s still more reasonable to expect in logistics, for example. But if you were to take retail, definitely office, there just needs to be a greater coming together of tenants and landlords in sharing the up and downsides of the journey they have together. And I think that does require the greater sympathy of a PE-type valuation model, where the value of the occupant itself and what they’re doing is taken into account. It’s not purely what is the rent passing, how long is it passing for and what is the cap rate the market might pay for that.”
It might not happen overnight though. “The valuation community is slow to react,” he says. “No one likes to take the lead on these sorts of topics. I can see it being quite a long time before we see that come through in institutional investment. Within our own investment committee, these things now have far more discussion than they ever have done. And we are used to, to a degree, running operating model-style real estate. So, if I take the outlet malls we have run for a number of years, they are on a turnover-type rent basis.”
Feudal fiefdoms
Unsurprisingly, Leslau, who manages the leisure-rich Secure Income REIT, agrees. “This is part of a much more subtle, changing hinterland in our industry where we are going to have to learn new skills,” he says, which will trigger a big shift in valuation models.
“I know this sounds like heresy to a Red Book valuer, but the same asset in different hands is, I think, worth different amounts of money.”
A high-performing management team has a value that should be reflected, he argues. “Why is a piece of real estate on short leases that’s being run by management not worth a different PE? Because it’s a business and I think that’s a subtle but very important change that is happening outside of the world of long leases, which is most of the world today.”
Bruised by a high-profile battle with Travelodge this year, Leslau also wants to see change to CVA rules. And changes to the way government views this sector.
“We have seen the complete abuse of the CVA system sponsored by the government to, not protect companies nearing liquidation, but literally to renegotiate freely entered into landlord-tenant leases with absolute impunity. We are still treated like operating feudal fiefdoms, Rachmanite baddies. And the CVA process has been the biggest abuse of landlord-tenant relations that I’ve ever heard of, actually since the date of the Russian Revolution. It’s horrendous. And that’s what government thinks of us. We need to, as an industry, recognise we have absolutely failed abjectly, proving how important we are to the workings of the economy. And I think that’s a major failing on our part.”
Perhaps we have been too distracted by the future of the office.
To send feedback, e-mail damian.wild@egi.co.uk or tweet @DamianWild or @estatesgazette
