By Richard Pickering, Head of Futures Strategy
Taxing Land, Not Investment – The Liberal Democrats last week published a report calling for a radical overhaul of commercial property taxation. The premise is that business rates are a tax on the cost of inputs to an operating business, and hence a tax on investment rather than a tax of profit. The proposal is to remove these, and instead replace them with a levy on the landlord, based on the value of the land. Socialist policies have over past centuries directed their attention at redistributing wealth away from the landed elites and bourgeoisie and towards laborers. Encouraging investment by removing the misalignment of business rates feels like a good idea. However, if the intention is to redistribute the cost burden to landlords, then ultimately this won’t work because land is an economic residual. In the long run, the surplus value of activities carried out on land inevitably accrue to the landowner as a function of market competition. In the proposed case, this will, over time, take the form of a counterbalancing increase in rents. In the short run, however, a tax of 59p in the pound on land would create severe corrections for investors. As a silver lining, the prospect of the proposed annual revaluation cycle should excite rating surveyors (albeit the complexity of valuing the more nebulous qualities of land will be of course be solved by adopting a ‘computerised approach’). The Lib Dems have odds of 250/1 to achieve a majority at the next General Election, but the debate over business rates should continue.
Project F.L.X. – In the modern world of short lifecycle retailing, speed to market with new products is a key competitive factor, and consumer customisation of products is a recipe for success. Enabling last minute assembly of products close to the point of sale keeps inventory costs low; whereas the act of consumer customisation enables a ‘segment-of-one’ marketing approach, creates differentiation and creates a feedback loop in what it has called Project F.L.X. (‘future-led execution’ apparently), Levi’s has found a way to change its manufacturing process to create a bespoke pair of jeans in just 4 hours, allowing last-minute customisation. This is made possible by using ‘hyper-local’ production capabilities and ‘by staging garments that await their on-demand finish order closer to the market’. What should we expect if other fashion brands follow suit? Whilst demand for front of house retail space might be softening, this is an example of the greater integration between the manufacturing and retailing processes. ‘Hyper-local’ manufacturing could feasibly mean within the same centre as the retail store; it could even mean within the shop itself. It also opens the door to a greater focus on ‘maker’ experiences in store, where the customer gains involvement in the manufacturing process. Gone are the need for endless rows of different-sized products; you will soon have yours made to order.
Net absorption – In recent years coworking has moved out of its niche and into the mainstream, in the process raising strategic questions for traditional office investors. The number of operators in the market has proliferated and perhaps most notably WeWork emerged as the single largest leaser of space in Central London from 2012 to 2017 significantly flattering the take-up figures – read more in our UK Coworking 2018 report. However, the question remains whether this is new net demand, or if it is simply cannibalising existing demand that would be otherwise satisfied elsewhere. A recent follow up report by my colleagues in the US suggests that it’s both. By layering the profile of members onto leasing figures, the report suggests that for every million square feet of coworking space leased, 400,000 sq ft of space is net new absorption. This reflects a shift in the profile of the typical coworking occupier away from the plucky hipster with a MacBook and towards established corporates looking to add flexibility to their office portfolios and capitalise on the ’feel’ of a coworking environment. The report cites that the ‘percentage of WeWork members who work for companies with more than 100 employees quadrupled from 2010 to 2017′. As coworking venues emerge as viable substitutes for traditional offices the question of how to treat this space (or at least 60% of it) in market analyses becomes a pertinent one.
Machine built – 3D printing has become associated with small objects, such as parts for cars, running shoes and prosthetic limbs. But could it one day be used to create a city? The Prime Minister of the UAE thinks so and has set an aspiration that by 2025 25% of every new building in Dubai is to be 3D printed. The technique will focus on lighting productions, bases, foundations and construction joints. Beyond the gimmick, there are potentially compelling reasons to move to 3D printing and forms of modular construction. The Dubai 3D Printing Strategy ‘aims to reduce labour by 70%, reduce costs by 90% and reduce time by 80%’. This appears very ambitious, and if achieved would clearly confer significant competitive advantage and profit potential for the firms that can deliver it. However, beyond the firm level impacts, a significant abbreviation in the time that it takes to develop large offices would change the fundamentals of investing in property. One of the factors which creates systematic risk in real estate is the risk of oversupply created by a lagged development pipeline; the problem being that it takes a long time to turn off the tap. If offices could be built in say 3 months, supply would more closely match market demand, thereby ameliorating this risk and improving values across the board.
You decide – In most areas of life, we duck the opportunity for radical candour in favour of ruinous empathy. However, the reason that most reality TV shows opt for a ‘vote-to-keep’ mechanism rather than ‘vote-to-evict’ one is not because evicting is mean, but because they specifically want to keep the more divisive characters on the show. We have our own version of this in the property industry in the form of Building Design’s ‘Carbuncle Cup’ where readers are asked to vote for Britain’s ugliest building. But what qualities make a building ‘ugly’? Monotony is one of the top answers. A neurological experiment carried out in NYC found that participants felt most unhappy when passing buildings that were ‘bland and passionless’. The opposite is also true, that people feel more excited when passing architecture with greater optical variety. Despite this, the greatest ire is usually reserved for those buildings that go too far and look out of place in their surroundings. However, history tells us that one generation’s carbuncle become the next generation’s celebrity, (e.g. the Eiffel Tower, the Lloyd’s Building and the Millennium Dome). On that basis I’d defer judgement and vote-to-keep the Nasty Nicks, the Megan Barton-Hansons and the Simon Cowells of our city skylines.
Paradoxes and Pieces of eight – With the world transitioning into a new era of unpredictability, it has become a lot harder for those whose job is prediction to get the answers right. Last year, noting overreliance on economic forecasting, Bank of England Chief Economist Andy Haldane admitted that, ‘It’s a fair cop to say the profession is to some degree in crisis’. At some point in the future, forecasting is likely to be done by an all-seeing machine, at which point the answer will never be wrong. This does however beg the question that if we know what the future will look like with certainty, then how would that affect decisions in the present that might then have an iterative effect? (see: Biff’s copy of Grays Sports Almanac). In the meantime, a study by the Max Planck Institute for Ornithology reveals that an alternative solution could be parrots. Under a test environment where the feathered forecasters could either take sunflower seeds immediately or earn tokens that they could then invest in a better long-term reward, the prescient parrots were ‘capable of making surprisingly subtle decisions to maximise their payoff whilst minimising their effort’. If you have positions vacant in your investment strategy department, I’d be pleased to introduce you to a blue throated macaw, who did particularly well.