12 December 2018
May, Maybes and Manners
Playing it through The 11th December is a pivotal point in Brexit, and the timing of one of the most significant Commons votes in recent history. Parliament will be asked to approve Mrs May’s negotiated EU deal, but in all likelihood will decline to do so. Bookies have the odds of Parliamentary approval at 18%. In assessing this position, they will doubtless have taken account of the fact that 100 Tory MPs (for differing reasons) have said that they will not support it. Amongst the General Public, support is also weak (27%). So, if the deal is moribund, what next? Michael Gove has stated that failure to ratify the deal risks ‘no Brexit at all’. Playing through the game theory, if the vote doesn’t go May’s way, then Labour should trigger a motion, ‘That this House has no confidence in Her Majesty’s Government’. (Sir Keir Starmer effectively stated as much this week.) If that passes, then the Government has 14 days to reinstate confidence before Parliament is dissolved under the Fixed Term Parliaments Act, and Labour are likely to then be in the driving seat under a fresh General Election. However, it might well not pass. A motion requires the House’s support, May’s approval rating is still well above Corbyn’s, and the Conservatives have a 5-point polling lead. What then? May could go back to the EU for another deal (unlikely?), or, increasingly likely, Labour shifts policy in favour of a second referendum, and seeks to persuade enough Tories to their position. At that point the EU would need to agree to a new timetable, say another 6 months (likely they would). Then the public could lay this to rest one way or another; but even the outcome of that possibility is unclear.
Stressed The recent Bank of England Financial Stability Report made real estate headlines for the wrong reasons. Various journalists described the analysis of a scenario where CRE values fall by 40% as ‘forecasts’, ‘impacts’ or ‘projections’. They are not. They are hypothesised inputs to a scenario designed to test the impact of a severe shock to the banking system, (comparable to the financial crisis where values fell by this amount). The good news is that BoE finds that even with these inputs, the system is resilient. What scenarios do serve to highlight is the still huge spread of potential economic outcomes being considered for Brexit. Immediately after the referendum we tracked 30+ forecasts for economic growth in 2017, which at the time ranged from minus 1.5% growth to plus 2.5%. Although the scenarios are now polarising, the outcomes are still so far apart that economic and market forecasting has been reduced to a largely stochastic exercise, or one which is heavily caveated through reference to a defined scenario. For this reason, whichever way the politics goes, it feels unlikely that the market can have unanimously priced the correct outcome – good or bad. Although compared with other assets, real estate has some level of buffering to short-term corrections, expect some volatility in the months to come.
Predictions We’re into December, which means two things: advent calendars and 2019 predictions. Quickly out of the blocks on the latter is Forrester with its thoughts for the road ahead for business. Their prediction that digital transformations will shift from company-wide enterprise efforts to incremental targeted change will draw empathy from many in the world of real estate, ‘because it is extraordinarily hard, expensive, and frustrating to move people from context A to context B without a customer-obsessed, digitally ready culture in place’. Also relevant to our industry is a prediction that high employment and quit rates throw sharper relief on talent retention. This is perhaps why employee-focussed initiatives around office design are getting greater traction. In this context, Forrester predicts that digital automation might, in 2019, be more about using robots to address ever more apparent skills shortages in our economy, than about substituting expensive labour for cheaper automation. Blockchain is considered through the lens of increasing visibility in the advertising industry, where it will shine a light on hidden fees and margins, and expose poor performance. Blockchain application in our industry is still in its infancy, but we might well expect to see similar impacts.
Upward only? In the normal course of things, systems ebb and flow. So when markets are overpriced, buyers stop buying and equilibrium is restored. Similarly, when the pressures (cost, amenity, discomfort) of living in our big cities grow beyond a point, then rationally people should choose to live elsewhere. However, such is the advantage and inertia of our big cities, that this is not happening at the speed it might. This is particularly relevant for the strain that unfettered growth and density puts on public service provision. However, it is also relevant to the economic decline of those areas from which population is ebbing. Some Japanese towns and villages for instance, faced with the dual forces of a falling national population and redistribution of demand towards cities, are now in sharp decline with significant real estate implications. Some of Japan’s 7.5m empty homes are now literally being given away, whereas the government has recently suggested offering residents of Tokyo up to £20K to move to the countryside. Unlike Japan, the UK has both a surplus of births over deaths (175,000 in 2015), and significant net migration, (330,000 in 2015). However, again this in unevenly distributed: Tower Hamlets is growing at ~18% pa, whereas the Isles of Scilly are falling by ~5% pa, creating different challenges for each.
Backyard The modern wave of platform businesses typically started from a position of owning virtually no inventory (low capex, easy to scale) and staying close the customer (control over demand). However, with pressure to grow, diversify and offer operational synergies, many have found that they can do this either by integrating upstream supplies or downstream services into their operations. Netflix, for instance, did this by moving into movie production. This is likely to be a continuing theme of the next few years as these industries reorganise themselves. Airbnb has recently developed its own version of this, which it is calling ‘Backyard’. Being the go-to platform to satisfy demand for micro-rentals, an opportunity is presented to take a position in its own supply chain. It will do this through designing smart, modular, prefab housing tailored for short term occupancy and co-living concepts for purchase by investors. The first prototypes will be tested in 2019. Essentially this moves Airbnb in the business of architecture, and perhaps construction. The lesson here for other businesses is to stay really close to your customers. If you can act as a funnel for demand, then a world of opportunities materialises.
Courtesy 2.0 Are you the kind of person that speaks to robots politely? Instead of saying, ‘Hey Siri (/ Alexa / Google) turn on the lights’, Mrs P. typically adds pleases, thank yous and ‘would you minds’ to her discussions with our smart speakers. Waste of time? Perhaps not for much longer. Google is now teaching its bots to reply in kind when their user is courteous to them. And so, an occasional ‘please’ might elicit a cheerier tone of response, or a ‘thanks for asking so nicely’. Their intention is ‘to encourage polite manners in your family (adults included) … so that everyone can feel the warm rewards of politeness’. How quickly might this spread into the workplace? Although our office coffee machine typically receives due courtesy, I sit relatively near to a printer, which is the subject of some very impolite language about its cyan toner on a regular basis. However, as digital automation gathers pace, it is easier to imagine a more harmonious society. Robot cold callers are already an improvement on their forebears, autonomous cars will make road rage a thing of the past, the self-service checkout always welcomes you, and I much prefer my Nespresso machine to the attitude on our local hipster barista. I’ll put on the roadmap: AVMs which commiserate with you when your asset loses value, tenancy schedules which organise a congratulatory round of drinks when a new tenant is signed, and tedious briefings which thank you for reading all the way to the bottom. (Thank you).
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.
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