19 June 2020
A personal view of the evolving role of real estate in a world of technological, social and business change, by Richard Pickering, Chief Strategy Officer, UK.
Over the past few years, the tempo has been increasing to call out and address systemic inequalities and unfair treatment in society. Movements like #MeToo and #blacklivesmatter often start with a catalytic event, and in a world where mass communication transcends borders, spread like wildfire in a way that was not possible just 10 years ago.
The recent movement, instigated in the US, arrives at a time where inequalities are being hastened by COVID-19. Sadly, real estate and the design of our cities have significant roles to play in creating and maintaining these inequalities.‘Wherever there is great property there is great inequality. For one very rich man there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many’. So said Adam Smith, the father of modern economics. The pressure will come on, and hopefully from within, the real estate industry to change. It is up to us to show strong leadership at this time, or be judged by our inaction retrospectively.
COVID-19 is exacerbating inequalities in several ways. We know that older people and men in particular are much more likely to die from the virus. Topically, it appears that the BAME community has also suffered disproportionate health impacts. The recently published review by Public Health England confirms that people of Bangladeshi origin are twice as likely to die from the virus than white Britons. Whilst there was no clear indication of why this is, the report notes that a significant contributing factor is the increased prevalence of comorbidities (multiple health conditions) among these groups. This in turn is a function of other demographic factors, such as deprivation, occupation and locational factors. Be thankful if you live in the UK; during the Spanish Flu there was a x30 mortality difference between rich and poor countries. Ultimately wealth is a big driver of outcome.
Social mobility tends to be better in the West than in the developing world, however, among this Western group, the UK, and notably the US, perform poorly relative to our peers. If you are born to a poor family in the UK, it takes on average 5 generations (125 years) to arrive at the median income. On average. If you suffer from other mobility barriers such as racial discrimination, you might never get there. The factors influencing the ability to change include: economic capital (conferred wealth), social capital (your network), cultural capital (common experiences and outlook), early years influence (family stability), education (hugely important), health (ability to work), and area-based influences (transport, amenity, dislocation). These factors tend to work in step and conspire to protect the status quo. Most correlate in some way with wealth.
Importantly, for most of us wealth is protected and enhanced through property. Typically, our main asset is our house, and in a recent climate of escalating house prices, many homeowners have made more from capital appreciation than poorer earners have made through their labour. Those who have money earn more money through investment, whilst the labour share of GDP falls and renters suffer. At the other end of the spectrum, it is no surprise that the rich list is heavily skewed to those whose business is property, or who have significant property portfolios.
This dates back centuries. Preeminent British economist David Ricardo realised that land is an ‘economic residual’. By this he meant that the price of land varies dependent on the activity carried out on it; not because it has fixed inherent value. As a result, when the economy does well, it is not the labour force or even the capitalists that gain. Due to competition for scarce land, the profits from the economic activity flows through to the landlords, (back then, typically the aristocracy). Moving to today the same principle holds true. Consider the high street. When the economy grows, more money rings though shop tills. Retailers have strong negotiating power over commoditised staff, particularly in increasingly automated operations, and so real wages barely rise. However, competition to be on the best spot on the high street where the most money can be earned translates to higher rental costs, and so the profits relocate from the retailer to the landowner. Ricardo concluded that ‘the interest of the landlord is always opposed to the interest of every other class in the community’.
This sets the scene for what we see today. As the economy turns downwards, it will be the poor who suffer most, as they always do. They are more sensitive to the change, and they have less agency to address it.
Take homeownership as an example. The rising cost of housing in recent years has left a gulf between renters and homeowners. For both renters and those homeowners without pre-existing wealth, housing costs have become a more significant percentage of their total income. The ratio of one’s fixed monthly expenses to one’s income is much higher for the working class than for those with wealth. Not only does this leave poorer people less able to address things like interest rate movements, but it also creates a wage slavery not present for the wealthy. If you live in constant fear of losing your job and home, you lose the luxury of choice, and the luxury of negotiation with your employer. Those with less financial sensitivity meanwhile can continue to roll the dice and find opportunity.
Consider also the particular issues now associated with coronavirus. Many readers will be working from home right now. Teleworking is a luxury of clerical and professional workers, who tend to enjoy wider privileges such as education and greater earnings. You would not be working from home if you were a shop attendant, a nurse or a factory operative. This in turn either means that you would be more likely to be furloughed (often with a salary reduction), redundant (with limited short-term employment opportunities), or working (and at greater health risk). COVID-19 disproportionately impacts the poor.
And what of those working from home?
In the short term, the fortunes of those with a spare room and a garden are markedly different from those with a small flat share. Partly this is an age thing, but it is also a class privilege. Those young urbanites with middle class backgrounds may now have gone home to live with parents in the suburbs; but for many others this will not be an option. And what happens next for homeworking? If, as many feel might happen, home-working becomes a much bigger component of the work model; then the cost of providing office space will essentially be redistributed from the employer (in a traditional office) onto the employee (wherever). Those who live at distance from the office (typically higher paid, older, professional workers) may be happy with this trade off against their commuting costs; however, for the less well-paid urban workers, it might mean finding a bigger flat. Who will pay for this?
And if you are working from home with no schools open, who does the task of looking after children typically fall to? Evidentially, women and those less able to afford private childcare.
How can the real estate industry start to tackle inequality?
We work in an industry that is about creating wealth for investors, and this might seem like a diametric opposition to the challenge. However, it is worth remembering that today’s landowners are in effect you and me. By value most commercial property in the UK is owned by vehicles such as pension funds - not high net worths or aristocrats. The biggest investors in private equity are similarly pension and sovereign funds. With this in view, we, and those that manage these funds need more licence to maximise societal wealth through the removal of systemic inefficiencies. This was Ricardo’s position: tax the landowners rather than people or the entrepreneurs, and it will ultimately remove inefficiencies and create more wealth for all, including the landowners. This however is not an easy pivot and would require a willingness to rethink how investment is incentivised.
Secondly, the government has a significant role to play in accelerating housing delivery to reduce pricing and therefore ease household financial pressures. It is increasingly difficult to escape the conclusion that this requires a new, properly resourced public housebuilding programme.
Thirdly, in an advanced society such as ours, the prospect for windfalls arising from planning gain should surely be shared by society and not accrue to landowners. This might be an unpopular opinion among this readership. However, windfalls are not part of the plan of most long-term real estate investors, and lead to pricing risk and misalignments. We need an effective and predictable planning system, which shares out wealth and proactively addresses amenity deficits and localised deprivation.
Finally, chances are that if you are a recipient of this note, you enjoy similar privileges to me. I grew up in a white, middle-class family and went to a private school, (they do exist in Hull). Nevertheless, when I moved down to London and joined the property industry, I was shocked at how this background put me in a low socio-economic group relative to my peers. I’d like to say that a lot has changed since then, but I’m not sure it has. Relative to other industries our lack of diversity is becoming an embarrassment. Collectively, we need to work much harder to encourage the best talent from all backgrounds into our industry. This includes a frank assessment of why this has not worked so far. We need to be more introspective and recognise and dismantle the barriers that exist, and the ones that we might inadvertently create.
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