​Consumers, crises and collateralisation ​

27 February 2020

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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.

Capped out For most of the past decade, the obvious suffix to the word ‘housing’ has been ‘crisis’. This has been directed at both the low level of supply and the lack of affordability created by an imbalance with demand. Despite numerous proposals to resolve this, few are credible and now inevitably it is the demand side which is responding. A significant percentage of major western cities are witnessing a form of urban exodus, as disaffected workers either accept a longer commute, or relocate to smaller towns with better affordability. As talent leaves, municipal governments, which have failed to stimulate housing supply, are under pressure to do more. We see this week one of the most significant manifestations of this in Berlin. The city government has announced a 5-year rent freeze for 1.4m homes, starting in 2022. On top of this, tenants can apply to rebase rents that are above a prescribed benchmark. This is a major move in a city where the vast majority of people (~85%) are renters. Whilst doubtlessly good news for these tenants, it is not such good news for investors, who are now ex-growth and faced with potentially significant write-downs. Critics of the policy (including the national government) have pointed to what will likely be a lack of investment in modernising homes over the next five years, with associated industry impacts. Other cities across the world will watch Berlin with interest. Rent caps and other forms of market intervention tend not to be supported by economists, but, absent of a market solution, they could be an increasingly adopted mechanism for addressing social issues created by our sector. #residential #housingcrisis

Lending in an intangible economy A feature of the global economy over the past 20 years has been the rise of intangible assets (software, intellectual property etc) as a percentage of all assets. As technology becomes a mainstream part of the value chain in all sectors and not just tech firms, this trend is likely to continue. A recent speech by Bank of England MPC member Jonathan Haskel explored the impact of this trend on commercial lending and monetary policy. Intangibles are much harder to secure a loan against. Unlike real estate, intangibles cannot be readily traded and, in some cases, have no market outside the firm which owns them. They are therefore riskier to invest in and more difficult to finance. Consequently, investments in intangibles are typically funded from retained earnings and shareholder capital, as opposed to bank finance or broad credit channels that rely on collateralisable capital (e.g. real estate and plant). Over a period in which the intangible-tangible ratio went from 2:5 to 1:1, US commercial bank lending secured against real estate went from 35% to 75%, with intangibles being funded through other channels. For UK SMEs, 90% of lending is secured against some form of collateral; and 60% of these exposures are collateralised against real estate or plant. Hence small firms with a focus on intangible assets are increasingly excluded from commercial lending channels. An alternative for many small private businesses is to secure loans against the director’s home. A study by the BoE reveals that when the value of a director’s home rises, the firm’s investment also rises, (statistically significantly). Hence small intangible-intensive firms are also more sensitive to the housing market. More generally, the increase in intangible wealth is creating a higher sensitivity in the economy to monetary policy, which is in turn creating higher risk spreads. #intangibles #lending

Eliminating waste As our planet’s resources become more stretched, removing inefficiencies in how we produce and consume becomes more important. For example, ~40% of food is wasted in the US; a factor which contributes equivalent carbon emissions to road transport. A recently published study sheds light on how the retail and real estate industries can help to reduce this. The paper, led by Cornell University, considers the optimum density of grocery stores in large cities. The perhaps surprising conclusion is that we need to build more stores. To date policy makers and activists have largely focussed on retail food waste. A more dispersed store model leads to decentralised inventories, variability propagation in the supply chain and a diminished pooling benefit for grocers. These in turn lead to greater retail food waste. However, that is only half the story. Decentralised, smaller (hence local) stores reduce the distance penalty for consumers; meaning that they are typically willing to make more frequent visits for basket sized purchases. In turn, this reduces household inventory levels, meaning that it is more likely that products will be consumed prior to their expiry date. The study finds that this reduction in consumer waste in most cases offsets the retail waste. It concludes that for instance in Chicago, by adding 3-4 stores per 10 sq km, food waste can be reduced by ~9% and grocery spend reduced by ~4%. There isn’t a lot of incentive for grocers to act on this, but the findings may be relevant for city planners. In a wider sense, big data is now allowing us to make better decisions on where to locate social infrastructure (including grocery stores), to maximise social benefits. There may be more surprises in store... #retail #supplychain

‘Don’t Lose Your Way’ The UK has one of the most developed and codified property rights system in the world. As feudalism declined, formal personal property rights started to emerge for instance through the ‘Writ of Right’, which restored the land of returning crusaders. Leap forward several centuries and the Law of Property Act 1925 created the basis for modern property ownership in the form of consolidated freehold and leasehold estates. Compulsory registration from 1990 provided greater still transparency; however, there were still a few loose ends to tie up. The Countryside and Rights of Way Act 2000 seeks to remove uncertainty associated with historic rights of way. Mrs P. was surprised at how we in the UK can hike down paths through farmer’s fields and in some cases through people’s back gardens; nevertheless, this is one of the great freedoms associated with our past. Until now, overgrown or lost paths could be rectified at any point following provision of evidence that a historic right of way had existed. However, from 2026, only rights registered on ‘the Definitive Map’ will survive, leading to a potential public loss of an estimated 10,000 miles of rights. The Ramblers Association, which is helping to support registrations, has now launched a campaign to recruit an army of ‘citizen geographers’ to discover and register such rights. It’s quite possible that some landowners will have a rude surprise as they find that the local walking club have a right to ramble though their kitchen. Get involved (or assess your risk) via the dedicated website. #ownership #law

#UnpluggedChallenge2020 Forget distractions like drones, autonomous vehicles and automated check-outs. There is a single foundational technology that has completely changed the way we work, shop and live over the past 25 years, and the transformation is not yet complete. In the same way that we remember the 1850s as an era of steel and locomotives, historians will remember the early 21st century as the era of the internet. The internet has in short order reshaped concepts of distance, communication and influence. It has created new business models that are now operated by the biggest companies in the world. Subtly, the internet has woven itself so inextricably with our lives that, for people like me, to do without it for a day would be like the surgical removal of a limb. ‘So, are you up for it?’. Against my better judgement, I said yes. The call had come in from a friend at WiredScore. There was some pretext about science which sounded vaguely compelling, and the date seemed suitably far in the future that it might not happen. And so, I agreed to go ‘unplugged’ for a day. Along the way I discovered a few unexpected insights into how I work, and also how I live my life. Would you be up for it? Read my write up and make up your own mind. #weirdandwonderful #internet

© 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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