By Richard Pickering, Head of Futures Strategy
Fiscal Phil – With austerity firmly behind us (what?), the Chancellor had a bit of slack to play with in the budget this week (the OBR disagrees, although 2019 growth forecasts were raised from 1.3% to 1.6%). He chose to do so by making above inflation budget increases for the NHS and a reform of universal credit. However, in other areas expect further cuts. On the agenda for real estate were: the abolition of PFI, the limitation of lettings relief, and the combined impact of (a) business rates relief (b) a ‘Future High Streets Fund’ and (c) a Digital Services Tax on the high street (in fact probably not that great, unless you are a small business). Consultation, we are told, is to follow on a reform of CPO and the Use Classes Order, which will likely facilitate change of use and transformation of outmoded assets. Of lesser, but noteworthy importance, the Chancellor announced new mandatory business rates relief for public lavatories ‘so that local authorities can at last relieve themselves’. The budget feels like a belated acknowledgement of the manifest change that is happening to the UK’s high streets, and one that will support it on its journey rather than halt it. Brexit remains the elephant in the room. The budget has been predicated on achieving some form of deal with the EU. Whilst this remains likely, a no-deal outcome would presumably mean ripping up the budget and starting again. Take a look at my colleagues’ comments on the budget here.
The knowledge – ‘Knowledge clusters’ play an increasingly important role in how our cities evolve. They create a concentration of like-minded businesses focussed on higher value-added activity – particularly relevant as automation hollows out lower value areas of the job landscape. We sponsored a recent report by Future Places Studio, which explores the driving forces behind London’s knowledge economy and what can be done to ensure its continued success. The dominant knowledge economy sector in London is the Life Sciences sector with clear agglomerations developing in King’s Cross and Euston, Whitechapel, White City and Sutton. The study found that in all instances, a key anchor institution was the driving factor in the development of a knowledge cluster, such as the Francis Crick Institute in King’s Cross and the Imperial College campus at White City. However, an acute shortage of lab space across London is impeding further growth. Build costs for lab space are up to 30% more than for conventional office space. Nevertheless, over 2m sq ft of this specialised space will be delivered over the next 5-10 years in response to anticipated demand and the higher rents that it commands. View London’s Knowledge Clusters report.
FA IPO? – As real assets become more and more valuable, their size can create liquidity issues. Relatively few investors can bite off a £600m purchase or tolerate the lumpiness of an asset of this scale within their portfolio. Such exposure becomes more challenging when the asset has niche characteristics, such as being a football stadium. With Shahid Khan’s bid for Wembley foundering, an alternative proposal from the International Property Securities Exchange (IPSX) could prove to be interesting to the FA. IPSX is proposing to establish the first regulated securities exchange for trading companies owning a single commercial real estate asset. It proposes the idea of listing Wembley on their exchange, which would allow investors to buy shares in the vehicle owning the stadium rather than buying the asset directly. This has a number of potential advantages. Firstly, it opens up the market to a much wider group of purchasers (including retail investors), by reducing the entry price. Secondly, it allows the FA to divest only a minority stake in the asset, thereby keeping control whilst realising some of its investment. It will be interesting to see how this plays out. Whilst a stock purchase is not the same as direct investment in the underlying real estate, it could conceivably become a disposal option of choice for larger, unique lots such as Wembley, especially where the alternative is a thin market targeted by investors with higher return requirements.
Try before you buy – At present, the ability to touch and feel products online is a matter of science fiction. This is good news for the offline community, and a particular issue for the online-only fashion industry. Consequently, brands such as Missguided and Boohoo have opted to pursue the online-to-offline route and open bricks and mortar stores to showcase their products in physical space. Last week Amazon also stepped into this space opening their own pop-up store in Baker Street. The store changes its stock every two days and will host events throughout the week including yoga sessions and jeans customisation. ‘Fashion is a key category for us as it’s central to people’s lives,’ says Susan Saideman, Vice-President for Amazon’s European fashion division. We see this in the recent launch of ‘Prime Wardrobe’ which allows Amazon’s Prime customer base to order 3 to 8 items of clothing, with a zero cost returns policy within 7 days. Nonetheless, the recent pop-up offering suggests that the retail giant is not restricting itself to an online only model. A spokeswoman for Amazon UK Fashion commented in The Guardian this week, “We know with fashion, customers love to touch and feel the product. We are definitely an e-commerce brand, and that is a part of everything we do, but we are experimenting and trying new things.”
Zip and zzz – Giving the customer what they want is usually a good recipe for success in business. For many of those staying in a hotel for the night, what they want is simply somewhere to sleep. Whitbread’s new ‘Zip’ concept does precisely that. By offering ‘pod’ rooms measuring just 8.5 sq m on the outskirts of town, pricing can be set as low as £19 per room per night. For those wanting to stretch their legs, a large communal area is also provided. The Japanese have, since 1979, taken this a step further by offering capsules to sleep in with volumes of circa 2 cu m. It is tempting to think that customers want more than they do (and that they are willing and able to pay for it). The problem with real estate is that the service ‘bundles’ are relatively inflexible (you can’t add a bath to a room at the last minute to suit a customer), meaning that developers need to guess which bundle to build that will optimise the net operating income. However, by debundling real estate elements to their lowest common denominator, it is possible to offer a tailored product. In the case of hotels, this means separating: sleeping, eating, lounging, watching TV etc. Sleeping is (for now) a private activity that still requires a private space. Other activities can be pushed to communal, optional or flexible space at lower cost. The home offers even greater options for debundling, and as cultural barriers erode, the (flatted) home of the future could also be a much more tailored proposition.
Blinkered – Do you sit next to a particularly distracting colleague at work? A recent survey found that loudness and complaining are top of the list of gripes. In the days of cubicles and cellular offices this was less of a problem. However, in today’s open plan and coworking environments the price of always-on interaction is occasional annoyance. Never fear, tech to the rescue in the form of Panasonic’s latest product prototype. Dubbed ‘Wear Space’ the lightweight, wraparound fabric screen (which bears an uncanny resemblance to oversized horse blinkers) features noise cancelling earphones that ‘instantly create personal space’ according to Panasonic. Other futuristic tech includes the ability to adjust the viewing angle by pulling the ends of the device apart. Perhaps the most effective element of the device is the clear message that one conveys to one’s colleagues by putting on a large helmet in the middle of the office. To find out more and support the crowdfunding of the prototype take a look here: https://greenfunding.jp/lab/projects/2463