Capital, culture and competition

30 May 2019

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A personal view of the evolving role of real estate in a world of technological, social and business change, by Richard Pickering, Head of Futures Strategy.

Capital, culture and competition

The middle ground In two-party politics, success tends to come through capturing a bigger share of the middle ground in the knowledge that anything on your side of that is safe. This is why major parties need to have broad-based support and tend to converge on the centre. The opposite was true in the recent European elections. The electorate was not voting for a party to lead the country. In fact, half of them were voting in the expectation that their favoured candidate would lose their position within months. Both sides wanted a candidate with a clear position on Brexit and that meant moving away from the centre. The result was huge losses for both Tories (9% of vote share) and Labour (14%). Meanwhile Farage’s Brexit party (32%) stepped into the shoes of UKIP (4%), while the Lib Dems (19%) and Greens (11%) saw a surge in support. The coming weeks will likely see the Conservatives being run by a no-deal Brexit Prime Minister (probably Boris) and Labour formally supporting a second referendum with the (credible, based on voting numbers) expectation of Remain. Despite finishing in P5 in the European elections, the Tories are still in the driving seat of the UK Government and so much now hangs on a new leader’s ability to bridge divides within their party. As polarisation of positions grows, however, so does the risk of polarising outcomes.

Culture and workplace The role of the office in supporting a wider business agenda is increasingly recognised by senior decision makers. This week, new data on this subject comes from a YouGov survey of 2,000 UK businesses. Talent attraction and retention is frequently cited as one of the aspirations of a well-designed office. The study supports this, with 79% of respondents stating that a high quality office design would influence their decision on whether to take a job. However, the findings go further than this. 85% of respondents believed that their clients would make judgements on their business based on their workplace, and 67% stated that the design of their workspace had an impact on company culture. Whereas churn and recruitment costs are easier to measure (and build a business case on), culture is a more nebulous quality upon which those holding the purse strings tend to need more convincing. A 2013 MIT paper found that of the cultural drivers of value, (a) a perception of integrity and (b) reporting that ‘I can be myself’ were most correlated with financial performance among S&P 500 businesses. So, if these cultural traits have proven financial benefits, how can one stimulate these using office design? Perception of integrity is typically linked to open and visible communication, and so open plan offices with visible management is likely to be augmentative. Being able to be oneself typically depends on the fit between personal and corporate values. One solution is embodying clear corporate values around office design (e.g. non-allocated group work spaces for companies that espouse teamwork or lab / experimentation / creative space for a company that espouses innovation). Another would be creating different spaces in a building to suit different people.

Beauty premium The city centre’s role has shifted over time and continues to do so. Go back a couple of hundred years and city centres were places to live. With the advent of passenger rail, the city centre’s purpose was shifted to commerce. Now, as the digital economy provides new vehicles and venues for retail and commerce, the role is shifting once again towards experience, leisure and consumption. In the wake of these changes, a recent paper by the Federal Reserve Bank of America and MIT explores how urban beauty / amenity and leisure variety contribute to the overall success of a city. Significantly, they found that lifestyle amenities were tied only with low taxes as a predictor of population and urban growth between 1990-2010. Cities with twice as many picturesque locations as others (proxied in the study by the number of leisure visits), benefited from an additional 10% growth over this period. Beautiful cities also disproportionately attracted highly skilled workers and benefited from greater house price appreciation (particularly in supply constrained markets). Finally, the study found that all of this is influenceable. Public spending on leisure amenities correlated with increased leisure visits and hence urban development. As we re-plan our cities in response to urban change drivers and obsolescence, introducing beautiful spaces becomes a logical move, rather than an opportunity cost. A great example of this I saw recently is TfL’s tiny parks. Take a look here.

Capitalism without Capital Much has been made of the global power shift away from capital intensive businesses towards businesses with a low ratio of capital assets to market capitalisation (commonly cited examples being Uber, Airbnb, Netflix etc). This trend has been driven by knowledge businesses such as technology companies, but it isn’t quite true to say that they don’t have capital assets; rather, that these assets are intangible. In a speech earlier this month at the University of York, Prof Jonathan Haskel described this concept in more detail. He pointed to software, reputation, relationships and knowledge as the new capital, and ascribed it with four defining attributes: (1) scalability (the opportunity to use an asset again and again, e.g. software), (2) sunk costs (a lack of tradability resulting in irrecoverable expenditure, e.g. a brand name), (3) spillovers (benefiting from others investment, e.g. copying product designs), and (4) synergies (the ability to combine ideas to make new ones). Capital assets, such as real estate, need to compete for investment in the face of these attributes. The evidence shows that since the financial crisis intangibles account for more than half of assets in Europe, whilst in the US this switch-over happened much earlier (1995). However, perhaps in contradiction to this trend, in the UK we have seen real estate’s contribution to GDP rise from 6.9% in 1980 to 11.1% last year, albeit that this growth has now flattened.

Gamification The robots haven’t yet taken over all of our boring tasks, and full workforce automation is likely to be beyond my lifetime. However, warehousing is one area where automation is making significant progress. This is largely on account of the linear nature of the tasks carried out in warehouse operations. Robots don’t need much motivation to carry out these tasks (perhaps some oil now and then). However, humans do, and as industrialisation of processes and workflow specialisation increases, so human motivation has been shown to decrease. Amazon is one of a number of business that is experimenting in the gamification of activities to raise motivation levels. Warehouse workers in five of its fulfilment centres have their packing and moving successes (and failures) represented in a couple of competitive video games (racing and castle building). Could similar principles be applied in our industry? Perhaps a version of Pokemon Go could be used to facilitate more rigorous building inspections (by hiding Pikachu in the plant room). Comparable evidence collation could be made more enjoyable using a Candy Crush interface (a five comps combo results in 3 valuation points). And striking out unacceptable terms in a draft lease, could be replaced by a Fruit Ninja interface (say goodbye to red pen and hello to sliced watermelon).

Links to referenced reports can found on our website under 'Snippets'. Take a look here.

© Cushman & Wakefield 2018. This information contained in this briefing is for information purposes only. Accordingly, the information contained herein should not be relied upon or used as a basis for any business decision. Any such decision should be based only on suitable and specific professional advice. This briefing is not directed to, or intended for distribution or use in, any jurisdiction where such distribution or use would be prohibited. To the extent permitted by law, Cushman & Wakefield accepts no duty of care and cannot be held responsible or liable for any loss or damages which may be incurred by any person (directly or indirectly) as a consequence of relying or otherwise acting on the information contained in this briefing.

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