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08th April 2020

Demography, Technology and Culture: Structural changes and trends in the UK’s real estate market.

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The real estate market, like any other, changes over time. Real estate assets that are profitable one decade may not be the next. Demography, Technology and Culture would seem to be the three main drivers of structural change in the UK real estate market and they produce more fundamental changes than short term changes in the economic and political climates. Although the current pandemic is having an immediate major impact in all sectors of the real estate industry, it is likely that in the medium to long term it will be these structural changes that shape the future market.

Taking Demography first, the United Kingdom, according to the Office for National Statistics and others, is becoming more populous, more urban and older. Historically, a growing population benefits the real estate sector because, put simply, more people means there is a need for more buildings to live in, work in, consume in and spend leisure time in. At least that is how things used to work for many decades, perhaps since the beginning of industrialisation and certainly during the consumerist society of the last few decades. However, we are now seeing technological changes and cultural shifts that act as side winds to the formerly linear upward impact of population growth on the real estate market. The degree to which this old correlation between population growth and growth in the fortunes of the real estate industry still applies varies between property asset classes.

In relation to house building, helped by a largely unreformed planning law system, we can expect the UK’s house builders to do well in coming years (the Coronavirus’ immediate impact aside). The UK has demand that outstrips the supply of new stock, particularly in the south and south east of England, where prices are the highest. However, even in these areas, the gap between salaries and house prices may not be sustainable. Increasingly, central government appears to be recognising this. For example, Homes England has a clear remit to increase levels of housing stock, particularly affordable housing stock, and increasingly the state is sponsoring large infrastructure projects, such as HS2, which together with initiatives such as the Northern Power House and the Oxford Cambridge Arc, show some potential for future growth in the residential house building sector to be more regionally balanced than before. It may also be that the British obsession with mortgaged backed home ownership will decline but counterbalanced by an increase in rent to buy schemes. Another demographic trend, the comparative affluence of the generation now coming to retirement or recently retired, will be likely to drive continued growth in the building of assisted living schemes and senior living communities and the like.

Taking the warehousing / industrial shed sector, this is very likely to be another winner in the foreseeable future. Subject to fluctuations in the economy, a growing population is still likely to lead to more consumption in absolute terms. Our culture, perhaps tempered by growing environmental concerns, still seems set to remain consumerist, and as a society we seem to be less patient, or more time poor. This would suggest that there is no end in sight yet to the expansion of online retail at the obvious expense of high street shops, which in turn points to continued growth in the warehousing sector. Technologically these warehouses are becoming rapidly more sophisticated. It should be noted that warehouses and logistics hubs, as an asset class benefit from being ever more crucial for both the manufacturing sector and the retail sector. The Coronavirus lockdown has brought this into sharp focus in that the warehousing and distribution industry is crucial to the supply of both food and medical supplies alike. What is likely to change here is that the cultural shift towards ever faster gratification of consumer needs is likely to see a demand for, and the building of, smaller “last mile” warehouses, quite often on the edge of cities. Therefore, it is likely that suburban or urban brownfield sites in densely populated areas will rise in value. Another possibility is the conversion of many second-tier edge of town retail parks into warehousing and distribution units.

So it is clear from the forgoing analysis that logistics, warehousing and retail sectors are so intertwined that it seems that our cultural insatiable desire to have what we buy as soon as possible, enabled by rapid technological advances, means that the warehousing and logistics industry is likely to eat up bricks and mortar shops and instead spawn the online equivalent. Each short-term economic shock (e.g. The Financial Crisis, Brexit and then COVID-19) brings more insolvency situations for traditional high street retailers and thereby accelerates this structural dynamic. Tangible manifestations of the property market adjusting are traditional shops turning into multi-use facilities (which seems problematic in the context of current planning law) or, more usually, into bars and restaurants and other leisure facilities. If technology really can enable us to be time rich (rather than time poor as often seems the case) then, provided that technology does not have an adverse impact on the labour market and also make people literally poor, one can see a future in which property assets that serve the food drinks and leisure industry thrive. Although the owners of such properties will need to be flexible enough to accommodate fleeting changes in leisure trends. (Recent examples of such trends being trampoline parks and soft play sheds). Equally, leisure in the future could be so dominated by the world of virtual reality, holograms and avatars etc. that the need for bricks and mortar in that sector could almost disappear. Who knows whether, or to what extent, people will go to the theatre, concerts or the cinema in the long-term future?

Finally, looking at the office market, we see the influences of cultural trends and technology having a significant head wind effect against the historical upwards impact of population growth on the real estate market. Technology means that, to a significant extent, “office workers” don’t need to be in an office - aided by laptops, email and video conferencing. This has been well demonstrated by the way in which UK businesses, during the coronavirus lockdown, has quickly adapted so as to enable the vast majority of their office employees to work from home. Plausibly in the future home working could be augmented by the use of virtual reality. Many workers and business alike experience increased efficiency by the use of home working and clearly it can represent a lifeline in times of crisis (whether caused by a virus, terrorism or natural disasters). That said, there is an undeniable social element to working and it is also likely that in the future there will still be a need for human being to collaborate face to face on projects. Whilst home working or remote working has become part of our working culture, it is likely that agile working will come to be the norm. Office workers will work in the office but not five days a week, but when they are in the office it will often be to fulfil a creative need in conjunction with others.

Already, employers are becoming more mindful of the wellbeing and mental health of their employees. “A” and “A plus” grade offices are being built with break out spaces, relaxation pods, coffee shops and more. More campus style office parks are being built with onsite amenities and leisure facilities thereby creating opportunities for workers to socialise and network. In economic terms, the effect is likely to be a polarisation in the value of offices between the very best and the rest. It may well be that business occupiers will see less as more, taking up quality office space, but less square footage. This could cause owners of tired office stock to convert it to flats or hotels, particularly when it is considered that another demographic trend is for more people to live in towns and cities (London being the prime example). In their stead more high-tech office facilities are likely to be built on the edge of towns and cities and near arterial railway stations and key road intersections. (There are multiple recent examples of this phenomenon in Milton Keynes and Cambridge). Owners of existing office stock will need to be creative and flexible.

Whilst no one has a crystal ball, the above trends seem to be manifesting themselves and property investors need to consider their implications carefully. The recent economic shock brought by the COVID-19 virus seems to have both illustrated and accelerated many of these trends. We have clearly seen the crucial importance of efficient warehousing and logistics facilities to our society. Spending so much time in our houses and our gardens, for those fortunate enough to have gardens, brings home the importance of the provision of decent housing to as many people as possible. Lastly, in terms of office occupation, our working from home both questions businesses’ need for so much office space, but also makes us feel the need to be able to work with others in the right sort of office environments that enhance our wellbeing both as workers and as human beings.

For more information on this article please contact David Wells on 01908 247030 or click here to email David.