By Richard Pickering, Head of Futures Strategy
Now and then As we pass the two-year mark since the referendum, it feels like a good time to take stock of how the vote has affected our economy, and perhaps more interestingly, how this compares to a longer horizon. On the whole the impacts have been minor – so far. Immediately following the vote, there was perhaps a naïve expectation that the world would change overnight; however, as time passes it becomes clearer that the impact will be drawn out over a much longer term. GDP growth is slowing, but the two-year average (1.65%) is not far behind the c.10-year growth rate since the last recession. The pound fell against the dollar (from $1.46 to a low of $1.20), but recovered to $1.33 just 4% down against its post financial crisis low (this actually beats the average rate of depreciation against the dollar of 1% pa assessed over the past 50 years). Both base rates (0.25% > 0.50%) and Treasury yields (0.73% > 1.29%) have risen slightly since the vote, but herein lies the starkest differential when assessed over a 10-year horizon. In 2008 the base rate was 5.00% (with Treasuries marginally higher). The dramatic post-GFC downshift has defined asset pricing over the subsequent 10 years. It could be easy to lose sight of the economic cycle in the context of Brexit. However, with a flattening US yield curve, tightening monetary policy and record valuations, the smarter discussion might be focused on the length of the global growth runway.
Intangible capital In a speech at Mansion House last week, Mark Carney set out a vision for a new UK economy which responds to the fourth industrial revolution. In this he noted that, ‘Intangible capital is now more important than physical capital. Data is the new oil.’ This statement represents the fact that long term intangible investment (e.g. brand, reputation, software, and R&D) is now valued higher in the UK than tangible investments (e.g. real estate, infrastructure, commodities, securities). In this new world, it is the customer, not cash, that is king. Real estate is the epitome of a tangible asset, and our industry is built on physical capital. However, even in real estate we are starting to see shifts towards the intangible world. Brand equity is playing an increasing role in the valuation of real estate companies, particularly as traditional investors bolt on operating businesses to provide services, but also as buildings and centres take on distinct personalities of their own. Additionally, new sources of data collected by operators provide the opportunity to create intellectual property and proprietary technology (e.g. ‘WeOS’). How long before we need to take the ‘real’ out of real estate?
City living Urbanisation (the relocation of people from rural areas into urban areas) has been described as a major global trend. And it is. However, too often this is then lazily applied to the UK without a second thought. The top 50 countries in terms of rate of urbanisation are almost all African nations. Next comes Asia, and by the time you get to Europe, the rate is typically <1% pa. This is not surprising, because these countries are already well urbanised. Nevertheless, data published by Centre for Cities paints a different picture in respect of the more narrowly defined movement of people into city centres (defined as <0.8 miles from the main shopping area, or <0.6 miles in the case of smaller cities). Liverpool’s city centre population for instance has been growing at c.5% pa, comparable with South Sudan’s urbanisation rate. The city living revolution started in the early noughties, has been largely driven by the young, including students and young professionals. In fact, those in their 20s account for about half of all city centre residents, which in turn has led to increased demand for corresponding social amenities. The big question is whether this situation is durable. When people hit their 30s they tend to move out of the city centres. If the structural growth trend has played out, then so might we expect the growth of city centre amenity to tail off in parallel.
Destination 2028 Earlier this month, Unibail-Rodamco-Westfield unveiled their thinking on what destination shopping will look like in 2028. The concept envisages features such as: allotments, libraries, interactive events, maker presentations, facial recognition tech, smart loos and foodhalls. Framed as ‘a hyper-connected micro-city’ there is some commonality in the ideas presented. Firstly, the centre is repositioned away from being a place to browse and buy, to being a place to engage and interact – serendipitous interaction is hard to engineer online. Secondly there is a strong focus on wellness, provenance and authenticity – another strength of the physical world. Finally, and crucially, the centre is a place to buy services (recreation, education, rented products) rather than just being a place to trade goods. When you think about it, 10 years is not a long time, particularly in terms of real estate. Ten years in the rear-view mirror marked the opening of Westfield’s flagship London centre.
‘Doing gender in the new office’ In the UK, the shift towards open plan office layouts started in most industry sectors some time ago and might now be considered the norm. This has been driven by a desire to promote collaboration and egalitarianism. Nevertheless, there are it seems unintended consequences. A study published recently in the Gender, Work and Organization journal found that a move by a UK local authority to an open plan office, precipitated an increased sense of exposure and self-consciousness that presented itself particularly among female employees. This in turn caused these employees to ‘subconsciously act and dress differently’, which they found ‘unsettling rather than liberating’. Some women reported sitting closer to walls than corridors to reduce personal attention, whilst others reported feeling ‘watched’. The conclusion by some that the open plan office is inherently sexist, feels political charged. Nevertheless, the study highlights the psychological impact that office design can have on employees and serves to illustrate the importance of well-thought through design for those wishing to leverage it as a productivity and retention tool.
Space Force Who wants to be a pilot anymore, now that the US President has launched his ‘Space Force’? The new mission ‘separate but equal’ to the US Air Force has provided every child with a new aspirational career avenue. It is not yet clear whom Mr Trump will be fighting in space, although the Klingons remain a probable contender. But that doesn’t really matter. Where military spending boldly goes, so commercial innovation usually follows. Without the military we would not today have consumer products such as satnav, microwaves and EpiPens. The race for space is also a race for resources, the nearest of which are to be found on the moon. In an attempt to regulate this, the UN’s Office for Outer Space Affairs (ever wondered what your taxes get spent on?) devised a treaty called ‘The Moon Agreement’ (1979) which among other things prohibits establishing military bases on the moon. The world sleeps safer knowing that the seven ratifying states including Morocco, Peru and Uruguay will not do so. However, since the treaty hasn’t been ratified by any state that either has ever or has any plans to launch a manned space mission, could Space Force’s conquest of the 38m sq km lunar estate be The Donald’s most audacious real estate play to date?