Sterling, STEM and stones

By Richard Pickering, Head of Futures Strategy

Wailing banshees – Over 2 years ago, when it first became apparent that we would be leaving the EU, commentators described the potential exit options through reference to various countries that operated under those models. Most talked about was the Norway (EEA) option, but there were also Swiss and Canadian (FTA) and Turkish (Customs union) models. With six months to go, the rhetoric has shifted towards choices between ‘Disorderly’ and ‘Chaotic’ exit options. Whilst no-deal outcomes are still considered to be a minority probability, the lack of concrete progress towards a viable alternative, combined with the potential impact of such an exit, throw these outcomes into the spotlight. This week the IMF and the Chancellor have added their warnings to that of Mark Carney over the impact of a disorderly no-deal. The latter’s comments that it could result in a house price fall of 35%, have grabbed headlines and political backlash (Rees-Mogg describing Carney as a ‘wailing banshee’), but have been largely misrepresented. Carney was articulating the stress test limit for a severe economic shock, representing a worst case scenario rather than a forecast. It is also worth putting this into context. During the GFC average house prices fell by 20% over 16 months. This time around, sterling has on expectation already been repriced to at least a degree of what might be its final fall. One might also question what the response of the Bank of England would be in the event of an economic shock. Carney has been quick to point this week to the success of quantitative easing applied in 2008 in the wake of the last economic shock. Whereas the bank rate glide path is upwards, a movement in the other direction remains an option.

Mind the Gap – We are told that we are suffering from a productivity crisis in the UK. So far this year, labour productivity grew by 0.9%, which compares with pre-2008 levels when productivity growth was at 2% per annum. While unemployment is at an all-time low (4%), our output per hour remains weak. This feels at odds with the technological revolution, which is supposed to be making everything we do more productive. What is going on? A recent report by the OECD indicates that the reason could be that 28% of graduates are in jobs which do not require a degree. ‘Some people with degrees don’t have the right skills…you would label them as over-qualified, but they may not be over-skilled’. As the economy changes and education choices become more diverse, this has led to skills shortages in key STEM areas, with an estimated shortfall of 173,000 skilled workers in the UK. A recent report by McKinsey estimates that artificial intelligence has the potential to create an additional 20-25% net economic gain in leading countries. However, a misaligned workforce limits our ability to capture these gains and benefit from displacement to higher value roles. The same is true of the property industry. Many of the new roles being created in our industry are without precedent and will require either redirecting established surveying talent to new activities for which they were not trained, or bringing in new skills from a wider pool.

Ware2Go – Capacity utilisation, whether on a factory line, a hotel or a shopping centre can be a major determinant of industry profitability. Under-utilisation often arises from an inability to downscale when demand drops. This is quite typical when commitments to fixed assets such as real estate have long durations and associated amortization periods, but where customer contracts are short or ad hoc. Equally, no manufacturer wants to have excess demand that it cannot satisfy. In the ebb and flow at the margins comes an opportunity to plug temporary capacity gaps with short-term demand. That is the value proposition presented by Ware2Go, a UPS-backed technology platform that matches warehouses that have temporary capacity with merchants that have short-term demand. Their portal offers a turnkey fulfillment network including storage-on-demand in pre-approved warehouses. This integrates with UPS’s end-to-end tracking and delivery service to guarantee 2-day delivery. For logistics tenants with spare capacity, it helps their real estate to work harder. A bit like the growing coworking market, it also reduces the barriers for small businesses to utilise more sophisticated infrastructure. The question of whether this and similar models might cannibalise elements of demand that would have otherwise taken traditional leases is, however, worthy of debate.

Teem Player – Last week, WeWork announced its acquisition of office management company Teems. The Salt Lake City based start-up is a space scheduling and workplace analytics platform that allows occupiers to maximise the usage of their office space. It will be integrated into WeWork’s enterprise client consulting business, ‘Powered by We’, which according to WeWork ‘CWeO’ Veresh Sita has been their fastest growing segment over the past 18 months. With Powered by We, WeWork is aiming to provide enterprise clients with ‘WeWork as a service’ and has signed 30 customers since its launch including: Expedia, Standard Chartered and most recently UBS for three floors of their US headquarters. The service model provides the gloss and analytics of WeWork whilst leaving the customer in control of their space. This feels like a fork in the path for WeWork: a shift in focus from hardware to software, that has been followed by many companies before them. The advantages of this model are that it is more readily scalable, cheaper to implement and without the financial covenants that come with lease commitments.

Size and sleeping – In the property industry size still matters. It is an easy proxy for utility to the consumer (and hence rent), particularly in the context of office or industrial space which are still driven by desks and pallets. In other markets, such as retail, a more nuanced position has been adopted which more readily recognises the configuration of the space. However, in true consumer markets like residential, human biases come into play, and size really doesn’t count as much as one might think. Various reports point to the fact that location is the overriding search criteria, size relative to one’s peers rather than absolute size drives happiness, and selection decisions when buying a property often include how nice the furniture is, even though said furniture is removed on purchase. The nature of occupation of one’s home is also more complex than the office. A rational renter should focus more on the bedroom (or more specifically the bed); sleeping in which dominates the time that one will spend in one’s home. According to a study by apartmentlist.com the average renter sleeps 84 more hours per year than a homeowner. The latter has less time for sleep, having to spend up to 141 more hours per year on home maintenance (3.5 additional 40-hour work weeks per year), and being more likely to have family commitments.

Voodoo Child – Frustrated by your boss? If typical grievance measures aren’t working, there may be an alternative. Among the winners of last week’s Ig Nobel Prizes were a group of psychologists from the University of Waterloo in Ontario who studied the use of voodoo dolls to ‘restore a sense of justice’ in the workplace. The study found that employees were able to alleviate the negative effects of mistreatment through the harming of a voodoo doll that represented their supervisor. The findings over the use of voodoo dolls came with a warning that ‘retaliation is dysfunctional and should be discouraged’. The Ig Nobels celebrate work that ‘first makes people laugh, and then makes them think’. A feature of the awards night was the presence of an 8-year-old girl who would enforce the strict one-minute acceptance speech limit by interjecting with ‘Please stop, I’m bored’ to bring the speech to an end; a concept that could have much wider application in team meetings. Other notable winners on the night included the Chemistry Prize, which went to a study measuring the degree to which human saliva is a good cleaning agent for dirty surfaces. And the Medicine Prize, which went to research on the use of rollercoasters to hasten the passage of kidney stones.


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