12 March 2020
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.
The impact of supply on rent Conventional economics holds that greater levels of supply in the face of static demand means lower prices, however, this is not always the case. In some supply constrained markets, new products can test consumer appetite for higher price points, or simply unlock new evidence on pricing that wasn’t available in a poorly traded market. Two recent studies address this subject in the context of housing. Firstly, a paper last year published by MIT considers the impact of ‘upzoning’ areas of Chicago for high rise development. A second, more recent paper focussed on New York published by the Furman Center for Real Estate and Urban Policy asks, ‘Do new housing units in your backyard raise your rent?’. In Chicago, the study made a surprising finding that the act of re-zoning had no perceptible impact on the number of new planning consents over a 5-year period. However, the study went on to show that notwithstanding the first finding, the value of properties and housing cost in the affected areas rose in anticipation of change over the same period. Meanwhile, in NYC, the study found that high rise developments attract new amenities, such as restaurants, which augment pricing. However, the study finds that the supply effect is greater. For every 10% increase in housing stock, rents within a radius of ~200m decrease by 1%, and sales prices are also negatively impacted. The impact was greater for close substitutes (similar size, type and specification) to the new flats. In combination, the papers paint a picture that buyers anticipate value increases on re-zoning, but when the new stock is actually delivered it has the opposite effect. #housing #economics
Regeneration markers ‘Buy on rumour, sell on fact’, was one of the first things I was taught when I started working in real estate. The modern equivalent of rumour is increasingly sophisticated data markers that indicate the likelihood of structural change to a location. Gentrification is a double-edged sword. Getting a position on gentrifying areas at the right time is good news for developers and hipsters, but often bad news for incumbent renters (often displaced by the change), and local authorities who need to deal with the impact. Many city governments have developed their own methodologies for predicting where this change might occur, the results of which might be equally interesting for investors. A recent study by MIT considers the differing approaches of policy makers across 7 major US cities. It finds that of the 18 variables used to predict gentrification likelihood, only 2 were common to all assessments. The result is that when these methodologies are applied to a single city, Boston, each method makes different predictions on the location and severity of gentrification. Not helpful. The kinds of explanatory variables employed included: the introduction of new public transit and other public investments, new public and social amenities, demographic factors such as income, racial mix and education, and the stock levels of protected subsidized housing. Common to the assessments is the concept of rent gap; i.e. the differential in capitalised rent between the existing use and an alternative use. The greater the difference, the greater the likelihood of gentrification. The authors conclude that the ‘the growing availability of novel sources of data, means that future efforts to map gentrification may need to evolve beyond earlier academic models’. The prize in achieving a truly predictive model will be greater for investors than the public sector. Get in touch if you’re interested in seeing our own model. #urbanchange #gentrification
Underground heating A private sector investor is usually keen to ensure that it can capture the large majority of the value that it creates. If for instance one invests considerably in placemaking initiatives that increases footfall, one wouldn’t want a large percentage of the associated rental uplift to be captured by other adjacent investors. However, for the public sector the considerations are wider. In deploying public spending, the potential to create positive spillover effects for society are often factored into the spending case. The recent launch of the Bunhill 2 Energy Centre gives an example of how such externalities can be harnessed by the real estate sector. Sited in the long disused City Road underground station, the centre collects waste heat from the London Underground by means of a huge underground fan which extracts warm air from the Northern Line. This air is then distributed via a 1.5km network of new pipes to buildings in the surrounding neighbourhood, providing heating and hot water to 550 homes and a primary school, with capacity to serve a further 2,200 homes. The thermal energy would have otherwise been lost entirely. TfL is reviewing the opportunity to use a further 56 ventilation shafts for similar purposes. Particularly as our world increases its focus on resource use and carbon emissions, looking for ways to recycle the waste from the processes of others will be a route to value. For those in the private sector, this might necessitate a cooperative approach between landlords and tenants, and also between traditional competitors who collectively are able to harness value that would not be possible on an individual basis. #sustainability #spillover
Gender inclusive cities A woman is more likely than a man to die in the same car crash. This is thought to be because car safety features are designed to accommodate men’s frames and therefore serve the average woman less well. The same principle applies to city design, according to a new report by the World Bank. A lack of women in the top-ranking roles in architecture (~10%), engineering and public policy globally, leads to a deficit in perspective for urban planning. The focus of the paper is on emerging and third world economies, where women are more likely to suffer marginalisation; and more likely to undertake non-paid work, making their activity patterns differ more significantly from those of men. The report suggests six ways in which this applies: (1) Access (e.g. segregation of (a) amenity-laden work zones dominated by men and (b) living zones where women are more represented), (2) Mobility (e.g. transport infrastructure not catering well for shorter off-peak trips more often taken by women), (3) Safety (e.g. women are more at risk from violence in dark, narrow or secluded places), (4) Hygiene (e.g. women tend to use public toilets more often), (5) Climate Resilience (e.g. woman are shown to be disproportionately disadvantaged by natural disasters), (6) Security of Tenure (e.g. 40% of global economies disadvantage women’s property-owning rights from those of men). The paper’s advocacy for integrating multiple perspectives in urban design has universal application. The report contains practical suggestions and frameworks to address the identified challenges. #planning #inclusion
Staycation For the first time ever, this year I planned all of my holidays in January and booked the time off in my diary. Oh well. With at least half of these now appearing to be jeopardised by the looming threat of travel restrictions, Plan B is being dusted off. The proposed Pickering family road trip around Europe might now look a bit more like a day trip to Bognor Regis. However, this is not just a 2020 phenomenon; the great British staycation has been on the rise for several years according to a report by Barclays last year. This is particularly true of Millennials, more than half of which want to spend more time holidaying in the UK. The South West is the most popular destination, followed by Scotland, but if you’re looking for some inspiration on places where you can escape the contagious crowds, how about one of these: (1) No-Man’s Fort (located off the coast of Portsmouth, this converted sea fort is a safe 3 miles from the coast), (2) The Old Forge (the UK’s most remote pub can only be accessed by an 18-mile hike or 7-mile ferry crossing from Mallaig), or (3) Glendu Hill (in the north Pennines, this is the map point furthest from any road in England). Don’t forget to pack your Scrabble set!
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