Real Estate: working from home and the future for offices
Table: UK property
trusts hit by virus
With millions of people getting their first sustained experience of working from home during the coronavirus lockdown, the natural question is what will happen to offices when things do return to normal?
Fund managers of UK real estate investment trusts (Reit) invest in varying degrees in offices in London and around the country.
They say flexible working spaces will be the order of the day but are not tolling the death knell for the office culture yet.
We also look at the impact of the Covid-19 restrictions on UK Reit returns, rent collections and dividends.
The Covid-19 pandemic has confined almost half of the UK’s workforce to working at home but it has also accelerated a shift in the way businesses use office space and the opportunities for property investors.
The swift and seemingly successful switch to working at home, and realisation that it may continue for some time under social distancing rules, has raised questions about the potential for remote working and ultimately whether large office spaces will be needed in future.
Given lockdown restrictions, furloughing, and workforces working from home, it is no surprise that the property market has come to a standstill, and real estate investment trusts (Reit) have taken a blow as tenants struggle to pay rent and dividends have been cut.
However, Stephen Inglis, fund manager of the high-yielding Regional Reit (RGL), which invests £315m in offices outside the M25 London orbital road, said this was ‘short-term inertia’ and there were many tenants ‘still looking for office space’ at a time of historically low levels of supply.
‘So far, it would appear that agreements pre-Covid-19 - where existing tenants are looking to expand within existing buildings, for example - are still progressing,’ he said.
‘The main difficulty is the inability to view and then carry out technical and specialist surveys, and execute fit-out works to progress and complete leasing deals.’
Inglis said in the short term, social distancing measures would mean offices having to be reconfigured in order to reduce ‘density of occupation’ with breakout areas and meeting rooms utilised and staff working in ‘shifts’.
Richard Shepherd-Cross, fund manager of the £323m Custodian Reit (CREI), which also invests in the regions but with 10% in offices, said the coronavirus outbreak had sped up existing trends in commercial property.
‘Trends for smaller desks, breakout spaces, and hot-desking started 20 years ago,’ he said.
‘Those trends have accelerated in recent years because the technology has got better…[but Covid-19 has shown] that people who thought they could not work from home can do two or three days a week.
‘There has also been a big change but a subtle one; it has taken away the stigma of working from home. In the past when you worked at home for the day, people assumed you were having a cheeky day off in the sun but we are all working hard at home.’
Flexible working has shot past its infancy stage thanks to Covid-19 and is here to stay. Savills Global Sentiment Survey of research heads in 31 countries revealed 84% believed home working would increase ‘somewhat’ and 16% expected it to ‘greatly’ increase.
Does this shift mean the end of the road for traditional offices? Michael Morris, chief executive of the £321m Picton Property Income (PCTN) Reit, which is 34% invested in offices, referenced Mark Twain’s famous quote: ‘The reports of my death have been greatly exaggerated’.
‘Offices are here to stay,’ he said. ’But the future of office work will be about choice. You will have the choice to go into work or work from home and companies will still generally provide a reasonable amount of office space, although they may occupy slightly less.’
Shepherd-Cross predicted companies would adopt a more ‘hybrid’ approach to their offices, with a main headquarters with a prestigious address backed up by local office hubs and some staff working from home.
He said the ‘Covid-19 experience’ would help some businesses come to decisions they have ‘been wrestling with’ over where to base staff, and the conclusion is likely to be not all staff need to be based ‘in the city’.
‘You can have a small [city-based] office where you can have client meetings but the rest of [the staff] are located [outside of the city] and do not need to get on the train everyday,’ he said.
Morris agreed there would be a distinction in how different types of office spaces perform, believing that the office market in the regions would bounce back before London’s did.
In the short-term, he believed London would be hampered by its reliance on public transport. ‘Regional offices will do better than London because they are less reliant on public transport, offices have parking and people can go from home to work in their car - those will be more in demand,’ Morris said.
He added that large tower blocks would also become less popular as ‘social distancing when you’re getting to the 30th floor becomes a problem’ and offices with ‘their own front door will be popular’.
Picton is underweight London offices, which make up around 4% of the portfolio, and Morris has focused his offices in places like Colchester’s business park.
‘To me it feels that in the regional offices, businesses are starting to go back to work,’ he said.
Inglis said offices outside London also had the benefit of ‘significantly lower total occupation cost - rent, rates, service charge’.
‘The regions are no longer the “back office” servicing London and indeed have become vibrant and attractive centres in their own right,’ he said.
However, Morris said London ‘is a dangerous place to bet against’ and it always ‘reinvents itself’.
Shepherd-Cross agreed that the London market has the ability to recover from even the most difficult of situations.
‘London has confounded every critical forecast that has been levelled at it - whether that is residential house prices, office demand,or Brexit - so I hesitate to bet against it,’ he said.
The fund managers also noted that the cost of office space in London had remained good value, failing to keep pace with the inflation seen in other parts of the business such as wages and utilities.
Morris said property costs ‘are a relatively small component of most business overheads’, with property costs for offices in the City or West end being ‘generally about 15% of total costs’.
The benefits of spending more time with family and in the community had shone a light on the question of where offices should be based and whether a London address really trumped quality of life for employees.
Shepherd-Cross recalled a chief executive of a US technology start-up that shunned New York or Los Angeles in favour of Denver, Colorado, for its head office because it was a ‘nice place to live’ and videoconferencing meant it could connect with customers across the US easily.
‘Why not relocate the business to where you want to be,’ said Shepherd-Cross. ‘Why not put you HQ in Bristol if you do not need to be in central Birmingham or London.’
He said a ‘two-tier’ market would develop where ‘Oxford, Bristol, Cambridge, Bath, Norwich and other nice places to live will do well’ but ‘grittier’ areas will not be as attractive unless they can offer large, cheap spaces for operational properties such as call centres.
Whatever type of office or location, there would be more care taken over the quality of working environment provided to employees due to the coronavirus outbreak. Shepherd-Cross said the ‘desk density’ in some call centres meant workers were like ‘battery chickens’ stuck in buildings ‘not designed for that number of people’.
‘There will be greater focus on things like air ventilation...and buildings will be designed to cope with high levels of air change per hour and also greater levels of hygiene such as self-flushing toilets, which will be expected as standard,’ he said.
‘Some of those things we will learn to expect. Some offices will no longer be fit for purpose.’
Many offices may need a revamp in order to live up to higher, post-virus standards, and businesses may reconsider the types of office they need or its location, but what all real estate fund managers agree on is that working from home will not become the dominant way of working and offices would always be a vital part of how businesses operate.
Although there is lots of talk currently about the demise of office working, Shepherd-Cross said ‘we are forgetting that everyone is working from home and no one has any competitive advantage’.
‘If you take two businesses, each with 50 employees, and one business has everyone working remotely and the other has an office, you would feel confident that the one with the office has a competitive advantage in terms of collaboration and training,’ he said.
‘How would you instil a culture of a company in a new hire if everyone is working from home?’
Morris agreed that offices enabled staff to ‘be collaborative, social, train, and be supervised’.
‘We are looking at things in the model of now and saying [Covid-19] will change things forever, and it will, but not as much as some people have said,’ he said.
