100 and counting

By Richard Pickering, Head of Futures Strategy

There is nothing permanent except change’; Heraclitus
I’m delighted to say that this is the 100th issue of New Europe, and for that reason today’s format is a little different. We started New Europe a week after the EU referendum. At that point, many of our clients were grappling with what this surprise result meant for them. Many still are. And with this week’s announcements the path remains unresolved.

Whilst we at C&W didn’t profess to have all the answers, we wanted to provide a timely critique and analysis to help readers form their own view in uncertain times.

However, the real estate industry faces greater uncertainties than Brexit; and the ebb and flow of the economy and market give way to greater structural changes. As part of our Futures programme at C&W, we therefore widened New Europe’s horizons to cover issues around change, society, strategy, urbanism, technology and, of course, how these might impact on real estate.

In this 100th edition, I wanted to draw out a few themes that have woven their way through the dialogue to-date and offer a provocative view on each below.

For the competitive among you, there’s also an opportunity to test your knowledge with…


Good luck, and thanks for your continuing support, challenge and readership.

‘Politics have no relation to morals’; Niccolo Machiavelli
‘In war you can only be killed once, but in politics, many times’; Winston Churchill
Brexit has not been the only surprise political result in recent history. Donald Trump’s election is surely of greater global importance; and we are perhaps now starting to see how this plays out. Whilst victory escaped Le Pen and Wilders, a little-fancied Frenchman Emmanuel Macron won his country’s vote, and the position in Italy is far from resolved. What’s happening? I have a theory. People fundamentally dislike change; especially when that change worsens their own position. The financial crisis changed Western economies. Rather than punishing the rich for their speculation, the poor (and young) have suffered, as capital continues to replace low-value labour. With a prospective wave of automation, the outlook for many is weaker social mobility, increasingly meaningless work, getting left behind on the economic ladder, and fear of what lies ahead. In this context, alien forces such as immigrants and technology are marked out as bogeymen, and snake-oil protectionism appears attractive. Many similar conditions (disenfranchisement, industrial and social change, nationalism, automation) were present prior to the First World War; the result being an oversubscription of volunteers when war broke out. Hopefully we won’t end up there. However, social inequity and indifference provide a hard underpinning for our modern world, which we ignore at our peril.

‘The digital revolution is far more significant than the invention of writing or even printing’; Douglas Engelbart
The fourth industrial revolution has been described as the ultimate convergence of the digital, biological and physical worlds. We in real estate represent the physical world, and the digital world is heading rapidly in our direction. To date, the retail sector has had the greatest interface with the digital world in the form of e-commerce. However, every area of property will soon feel its impacts. Property has value because it is scarce. As Mark Twain said, ‘Buy land, they’re not making it anymore’. However, digital real estate is infinite and the marginal cost of producing it converges on zero. Virtual meeting rooms do not yet provide as rich an experience as real ones, in the same way that the internet is a less rich shopping environment than the high street. However, there should be no resting on laurels. As virtual reality, processor speed and online user experience rises, more and more people will substitute real-world experiences for cheaper digital alternatives. Not convinced? How many Skype meetings have you had this month that previously would have been face-to-face? Does your child spend more time in the playground or on social media? Can you access your network drive from home, and do you ever work there? Rather than putting heads in the sand, the world of real property needs to recognise its competitive advantages and emphasis these. Meanwhile, investors will need to be increasingly selective in choosing stock which is defensive to these trends.

‘For good ideas and true innovation, you need human interaction, conflict, argument and debate’; Margaret Heffernan
If processes become automated, and mundane activity both in commercial and retail environments is digitised, then what of real estate? Two things. Firstly, there will always be demand for those activities which provide sustenance to the human condition. Somewhere to sleep, land for food production, minerals and energy will always be needed. Secondly, with functional needs met, real estate itself becomes a luxury product, which concerns itself with higher order activities of community, experience, and human interaction. In the past 50 years ‘community’ in the UK has collapsed (transience, density of living, loss of local services, failure of religion, remaining single for longer), but real estate can be part of the antidote. The retail sector has been quick out of the blocks in forming its thinking on ‘experience’. Offices need to follow suit, with disruptors like WeWork providing an incentive for change. The office of the future is not a Taylorist factory full of desks; it is a flexible space that drives interaction, innovation, productivity and social bonds. In a world of shortening leases, the intangible and non-contractual bonds of community, differentiated proposition, brand and excitement are what will keep tenants coming back to buildings.

‘I hate these blurred lines’; Pharrell Williams & Robin Thicke
Sectors aren’t what they used to be. Firstly, in the context of the modern breed of genuinely mixed-use assets, the Use Classes Order is starting to look decidedly old fashioned. If a co-working centre contains a public restaurant, is that an ancillary use? If a coffee shop is really a flexible office, is it still a shop? How much can we load into sui generis? Secondly, if the value proposition of an asset changes (sales to marketing, buying to experience, shelter to productivity) how do the existing per square foot metrics for monetisation respond? Thirdly, if the nature of how we use and derive utility and value from real estate assets shifts, how well correlated are the returns from those assets likely to be with their past performance, and what does that do to our ability to forecast future returns or allocate investment to sectors? The complexity of these issues is increasing, and we need to be collectively inventive about the solutions, which may result in throwing away the rule book. If shopping centres of the future offer a fantastic experience, then why not charge customers an entry price? If offices are about productivity, then why not equitise the rent? For investors, as leases become shorter and as rent is pegged closer to the underlying activity, the financial behaviour of real estate is likely to shift away from being a fixed income proxy and towards being a stock.

‘It’s very important that historic cities are allowed to reinvent their future’; Zaha Hadid
Cities exist because people want to be near other people, and rents are highest where the majority of people want to be; that usually being at a locus of activity at the city centre. However, distance from the centre becomes less important when you can travel there quickly, and further reduces if the time taken to travel between places is not lost time. Between 1850 and 1900 the size and population of UK cities almost tripled due to a simple innovation – the passenger railway. Similar innovations will change the form of our modern cities. Much feted Hyperloop and autonomous vehicles would create radical changes to the urban ecosystems and value contours in the UK. But we are not reliant on the delivery of these somewhat speculative, high-profile innovations. Perhaps more likely, a simple shift to faster, bigger, more regular trains, combined with smarter infrastructure that smooths demand will gradually encourage people to live further out of our city centres, whilst still being able to commute in to enjoy the social and financial benefits. Admittedly, on a rainy day waiting for a delayed train on a Southern Rail platform, this might feel a distant prospect.

‘Careers very rarely are a waste of time; jobs usually are.’ Donald Glover
Whether you are an investor, an estate manager, a civil servant or a supplier of professional services, the role that you hold is likely to change considerably over the next 20 years. In the search for differentiation and new revenue, investors are increasingly moving downstream into operating businesses. These require new skills in branding, technology and service provision. For those procuring and managing real estate for occupiers, a shift from real estate as somewhere to keep dry towards real estate as a productivity tool requires skills in human resources, strategy and operations. The public sector will soon find that it is not the only show in town on matters such as urbanism and policy. Increasingly, big technology companies will have roles to play in how we design, plan and manage our cities, and partnering with the public sector will become ever more important. And for lawyers and agents, a relentless focus on process efficiencies will cast sharp relief on the value added through advice and consultancy, as opposed to simple execution. Lifelong learning, adaptability and diversity of skills for all of us will be increasingly important going forwards.

‘Life is 10% what happens to you and 90% how you react to it’; Charles Swindoll
‘People rarely succeed unless they have fun in what they are doing’; Dale Carnegie
With change comes uncertainty, risk and obsolescence. For many this might feel daunting. Change doubtlessly unsettles the status quo and creates losers. However, the flipside of the coin is that with a greater variance in potential outcomes comes the opportunity to win (and win big) by getting it right. And not just financially – change is a vehicle for personal fulfilment and an avenue to make a difference to the world. Uncertainty can be encapsulated in a simple difference between you and me – which is time. I am writing this prior to 19.00 on Wednesday 11 July, whereas you are likely to be reading it afterwards. For me, this means that the prospect of England getting into the World Cup Final is alive but uncertain, whereas for you the result has crystallised. In turn that means that I have potentially two exciting games of football in prospect. You on the other hand, have a maximum of one game to watch, at best feel relieved (in which case I too will soon) or worse, feel dejected (which I don’t feel yet) – and quite possibly you have a hangover. Who would you rather be? (OK, you could be Scottish). Dream big, embrace uncertainty and remember to enjoy the journey!

Richard will be on holiday next week, but New Europe will return for the 101st edition the following week. 

While you wait, don’t forget to take this week’s quiz.


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