On 12 September 2018, delegates from across the real estate industry gathered in Aon’s Leadenhall office in London to listen and take part in a panel discussion on the future challenges – ranging from technology, to Brexit, to changing consumer habits and expectations – confronting the property sector.
Moderated by Lord Digby Jones, the panel featured Helen Gordon, Chief Executive Officer of Grainger Plc; Bill Hughes – Head of Real Assets, Legal and General Management; Ryan Prince – Vice Chairman, Realstar Group and Founder of UNCLE; Jack Sibley – Innovation and Technology Strategist, TH Real Estate; and, Sarah Slater – Chief Executive, The Eyre Estate.
Helen Gordon, Chief Executive Officer of Grainger Plc, opened the debate arguing that societal changes are already being reflected in the property sector particularly in the rise of new alternative investment classes in the property sector such as build to rent, student housing, self-storage companies, and hotels. “They all have one thing in common in that they have a high degree of operation that is required in order to make their occupiers stay with them longer. The real drift into alternatives requires property managers and investors to be far more fleet of foot and invest in their operational platform.” On the build to rent market, Gordon highlighted the anticipated huge growth in the rental sector – there are about 4.7 million households living in the private rented sector and, according to PWC, that will grow to 7.2 million households by 2025 – driven by economic reasons such as the affordability of housing, and changing social factors. “There are people who do not want to necessarily own their own home. Greater job flexibility, later family formation – all these factors are making people stay in rented accommodation for longer,” Gordon said.
How the industry responds as owners and investors said Gordon is all about dedication to customers or tenants. “We no longer have the luxury of full repairing and insuring leases (FRI Leases), we no longer have absentee landlords – we need to be there with our customer all the time.”
People are more demanding
“There is no doubt that people have become more demanding,” added Bill Hughes – Head of Real Assets, Legal and General Management. “They have concentrated more on immediacy. Technology has played a part in that but that is not, in my view, the only thing that has been going on. There is this instant gratification or expectation that was not there a decade ago. We need to think about the change that that implies.”
Unfortunately, the property industry is entrenched and very slow to evolve said Hughes, with a real mismatch between what people need and want and what the industry provides. “Take the retail sector; there is still this prevalence of upward only rent reviews and long-term institutional leases. The consequences of this are businesses all over the UK being suffocated because landlords have squeezed rents. In the office sector, the prevalence of institutional leases, upward only rent reviews and expectation of 5,10- or 15-year leases [still exist] when occupiers want flexibility, and want to think about hot desking. They don’t necessarily want to be located where they used to be and they may not want to be in the buildings we’ve been building.
“We’re seeing the early stages of the death of the institutional lease and the implications are that anyone who invests in real estate needs to understand that they have an obligation to operate businesses in a shorter more helpful timeframe,” concluded Hughes.
Change takes time
The real difficulty is that change can take time said Ryan Prince – Vice Chairman, Realstar Group and Founder of UNCLE. “Industry participants have challenges but there are some real structural challenges in the hand that we’re dealt – the planning system and getting things built. How you change those things is not as easy as changing a razor blade overnight.” It also requires wider thinking, Prince said, about what transportation is going to look like? Where are people going to want to live? When will people get married? How long will kids stay at home for? What will technology look like? “We have to forward plan and make some guesses to try and make sense of all of these things.”
When it comes to housing Prince also argued that people will question the rationale of owning. “Long ago, offices decided that owning their own office campuses was not the best use of their capital and they became tenants. Housing is the last to fall. Take what would be your deposit and if you had forced savings and the same tax treatment as owning your home and put it in an index fund, over time you would do the same or better and have more liquidity. Pure renting does solve a lot of our housing crises in all major cities – not just London because it puts much more supply faster, more effectively, and more professionally managed with more accountability.”
Work life integration
Focusing on the future of work and the workplace, Jack Sibley – Innovation and Technology Strategist, TH Real Estate argued that the concept of work life balance is no longer as relevant as work life integration. “Work is part of your lifestyle now,” he said. “It is not two separate things that you do from 9 to 5 and then before and after work. As work becomes more and more part of your lifestyle, your expectations for the environment in which you work start to become more and more similar to those where you would actually choose to go as part of your lifestyle, whether that’s a hotel, or restaurant, or home.”
Given the increasing importance of talent as a core asset said Sibley, businesses are increasingly looking to their workplace or real estate strategy as not sitting on the side of their business but as a core plank within their core business strategy when it comes to attracting and retaining talent, and making sure talent is as productive as possible.
Echoing the other speakers, Sibley argued that it was going to take a real change in the culture of the property industry to meet the changing environment. “That means not being afraid to go back and question conventions like lease length and structure for example especially within offices, while it probably means getting into an iterative product mentality of trying lots of things, while accepting that some will succeed and some will fail.”
There is also a lot we can learn from taking a global perspective said Sarah Slater – Chief Executive, The Eyre Estate. “I spent a lot of time explaining to a board in Toronto on the English leasing system – we are in a period of change and how we lease buildings is going to change in the future. Lease lengths are getting shorter. A lot of our global investors are looking at net operating income and thinking about things slightly different from how we are. We can bring those ideas into the UK market.”
Slater also focused on how the industry needs to use technology to its advantage and not be scared of it. “At Eyre, it’s all about modernisation and automation so I can have quality data to then make informed decisions. There is a lot we can embrace in technology in terms of working practices. In terms of our skillset, we really have to challenge the status quo and do things differently.”
The panel also debated on the challenge of Brexit and what businesses can do to prepare. “There is a lot of confusion over what a hard Brexit means,” said Sibley. “The best thing we can do is keep close to our tenants and clients and react as well as we can when there is more certainty.” Slater echoed those thoughts adding it was important to, “shore up your income as much as possible; really understand your portfolio; be close to your occupiers; and be ready to be nimble.” Gordon added that there might be a workforce challenge: “If we have a growth agenda to build houses or any form of infrastructure and are reliant on people who find it less lucrative and less possible to work in the UK, that will be a challenge.”