By Richard Pickering, Head of Futures Strategy
Close the Door How to solve the housing crisis? Simple supply and demand logic suggests that by removing a component of demand, the price of an asset will drop. Rather than increasing supply, this is what New Zealand’s government did last week by banning the sale of homes to foreign buyers, who currently account for 22% of the central Auckland market. We might think that getting on the housing ladder in the UK is tough; however, price-to-income ratios in the top APAC cities (inc. Auckland: 10:1, and notably Hong Kong: 18:1) outpace our own (outside London: c. 5:1). A challenge for policy makers comes from exogenous demand – in this case demand for real estate that is not influenced by domestic variables such as interest rates and average earnings. Not only does this increase aggregate demand, it adds a new demand segment that can outbid the rest of the market. For capitalists, or those selling houses, not a problem. However, home ownership touches much broader issues than capital. Displacement of domestic workers in the housing market limits their ability to add value to our economy and to create wealth for themselves. Meanwhile, exogenous demand can be capricious; the same factors that give it advantage today, could require it to withdraw from the market tomorrow.
Reel 2 Real Bloomberg recently reported a rumour that Amazon is in the running to acquire Landmark Theatres – a US chain of 52 cinemas. If true, this is a strong signal of the remaining importance of real estate to retailers. Like Netflix, Amazon has followed a route from distributing physical products (shipping DVDs utilising logistics capabilities), to distributing digital products (streaming content via its online platform), to producing this product themselves (through vertical integration of upstream creative capabilities). The film is the ultimate digital product. Of anything that you can sell or rent, this is the one that least needs to happen in the real world. So why buy a real estate-oriented business? Primarily, ownership of a cinema chain would diversify Amazon’s distribution platform for its proprietary content, hitting new customer segments. However, secondly, a cinema, much like a flagship store, still touches consumers in a way that online fails to do. It provides a richer experience, it creates a marketing buzz around new launches that cannot be replicated online, and it provides the opportunity to sell impulse bolt-on services (e.g. popcorn) that don’t as easily augment an online purchase. It is these things that will also be important to the wider retail market in the coming years.
9 to 5 Clockwatching might soon become a thing of the past. A YouGov survey revealed last week that only a tiny 6% of us work the traditional 9.00 to 17.00 hours. Many readers may wonder when we ever worked such hours. However, over the past 20 years, mobile technology has created what has been described as an ‘always on 24/7 culture’, which would put many of us outside Working Time Directive limits. For those with the luxury of limiting their hours, the average preference is to start the day earlier (7.00-8.00) and finish earlier (15.00-16.00). However, the challenge is that not everyone is an early riser; some would prefer to work late and by acquiescing to all demands for office-based flexible working, the workday is stretched out. Great from a utilization of real estate perspective? Not especially. There is a still a core element of the day (say 10.00-15.00) when everyone is in the office, and space rationalisation is difficult. Meanwhile, central administration and property management costs increase. For instance, instead of having a reception staffed 8.00-18.00, this may need to become 5.00-21.00. Meanwhile, the lighting and air conditioning are in operation for longer periods. Together with the inefficiencies of not working in unison, these are the hidden costs of flexibility, which one hopes to beat through having a more engaged and loyal workforce.
Hyped up The rapid profusion of new technology makes it hard to discern which will be the next iPhone-esque category killer and which will be the next minidisc. This poses a commercial paradox for businesses which need to act fast to avoid disruption, but don’t want to invest in costly solutions that might be obsolete within the year. Gartner’s recently released ‘Hype Cycle for Emerging Technologies’ provides guidance in this area. As you might have guessed, the area of the chart labelled ‘peak of inflated expectations’ is pretty crowded with overhyped products with long gestation periods. However, a handful of emerging technologies are set to hit the ‘plateau of productivity’ within the next 5 years. Top of the latter list are: virtual assistants, deep neural nets and 5G networks, each of which will have an impact on real estate. Virtual assistants will increase operational leverage in the workplace, for example, whereas 5G will enable a host of new technologies and better enable mobile working. Meanwhile, the ‘trough of disillusionment’ is populated by the likes of Blockchain and, despite disproportionate media coverage, fully autonomous cars are still thought to be more than 10 years from adoption.
Toxi-city Much to Mrs P’s chagrin, for the first time in 7 years her home town of Melbourne has fallen from the top spot in The Economist Intelligence Unit’s Livability Index; pipped to the post by Vienna. A key theme picked up by the analysis was a relative improvement in stability in Europe arising from a subsiding risk of terrorism. The top of the list is dominated by mid-sized cities in wealthy countries; the majority of which have a low population density. These factors in themselves are not inherent to the assessment, and so we might read something into the correlation. Wealth has always been a predictor of livability, but for urbanists the greater insight might lie in the fact that the world’s bigger cities have, during a period of densification and despite generating greater Gross Value Added, lost livability ground to smaller, less dense cities. A further push factor away from big cities is pollution, which according to a paper recently published by Proceedings of the National Academy of Sciences doesn’t just damage your health; it also makes you more stupid. The study of 20,000 people across China between 2010 and 2014 concluded that the longer people were exposed to dirty air, the greater the damage to their intelligence, with the general trend being ‘to reduce their level of education by one year’.
Ready Player One? If you’re struggling to land bids on actual sites, then why not buy a plot of land in a decentralised virtual reality metaverse? Allow me to educate you in the matter. ‘Decentraland’ is a new virtual world that intends to provide a rich gaming experience that could attract millions of users. So confident are the developers in their proposition, that they have instigated the sale of the virtual real estate that underpins the world. Investors can then develop their virtual plots into virtual buildings, which act as venues for virtual engagement and actual commercialisation with users. Ridiculous? The market thinks otherwise. The going rate for an inconspicuous 10m x 10m parcel of ‘LAND’ is currently 6,000 MANA (roughly £340 or £13,500 per acre). However, adopting real world economic principles, ‘the utility of LAND is based on its adjacency to other attention hubs’. Hence, land next to ‘plazas’, ‘districts’ and ‘roads’ drives higher values due to higher levels of virtual footfall in these locations. The current record price is $180,000 for a plot of land near the ‘Central Plaza’ where all players first enter the world. This makes it more expensive than most real land in the UK. One of C&W’s (virtual) brokers would be virtually delighted to advise you on your next purchase.