A Fund managed by Swiss Life Asset Managers UK Limited
A Fund managed by Swiss Life Asset Managers UK Limited
14 December 2020
Mayfair Capital's Big Themes for 2021
1) Environment
Environmental issues have been rising up the real estate agenda for some time, and rightly so. Whilst the pandemic has focused minds on more pressing concerns this year, we expect the environment to return with new impetus in 2021. This concerns the natural environment and the move to net zero which will be turbo-charged by the new US administration. It also encompasses the physical environment as the importance of health, wellness and social sustainability in the places we live, work and play has been brought into stark contrast by recent events. Real estate will be expected to offer genuine solutions to climate change, users wellness and community cohesion. In our view it is up to the challenge and in 2021 we will it shine.
2) Flexibility
Flexibility will be prominent in 2021. This is not just about flexible leases, although they will certainly become more prevalent in office and retail markets as a response to weaker occupier demand and continued business uncertainty. There will be a fresh focus on worker flexibility. We expect most office-based companies to adopt flexible arrangements as standard practice, empowering workers to choose where they work and when. This shift will require offices to be more flexible and capable of accommodating fluctuating numbers of employees undertaking different activities on different day. Successful offices must deliver real value to companies who can now choose not to take a physical office and they will be more demanding of landlords. We foresee more building use flexibility as the lines between an ‘office’, a ‘retail’, a ‘leisure’ and a ‘logistics’ asset blur. Expect a wider mix of uses in the same building and traditional offices accommodating everything from cafes, shops and last mile logistics through to fitness studios and data centres. Categorising real estate into distinct sectors will become harder than ever.
3) Partnership
The pandemic has forced landlords to communicate much more with their occupiers. In the hardest-hit sectors like retail and leisure, bespoke arrangements for paying rents or renewing leases have been negotiated after honest discussions about the challenges for each business. This approach treats each occupier as an individual, rather than a generic rent payer, and creates a tailored solution. As real estate becomes more operational the landlord/ occupier relationship will become more of a partnership model with occupiers and their staff viewed as customers. This is likely to lead to what could be perceived as riskier income streams due to shorter leases, turnover-based rents and potentially weaker covenants. Asset management and capex costs will be higher as buildings become more hospitality based and need to adapt in real time to respond to user feedback. Ultimately though with the right product and the right partner, landlords should see more resilient and profitable income streams from happier customers.
4) Cities
Cities have had a hard time lately given at the sharp end of coronavirus restrictions. Scenes of empty offices and deserted shopping strips have framed the backdrop for much of the year. When society emerges from restrictions, we expect cities to regain their “mojo”. Cities provide the hub for sharing new ideas and experiences; they inspire creativity and bring people together. As we move towards a post-pandemic world, either through a vaccine or by learning to live with the virus, we expect cities to nourish the release of pent up demand for physical and mental stimulation, human connection and meaning. Repeated surveys show that most employees miss being in the office at least some of
the time. High consumption during periods of looser restrictions show just how much people want to go out and spend on social and shopping activities. Cities are the epicentre of work, leisure and entertainment which is why they have thrived for centuries despite wars, famines, fires and pandemics. In 2021 we rediscover their joys.
5) Transformation
We expect 2021 to be a year of transformation. The pandemic has accelerated many of the structural changes that were already underway, such as flexible working practices and the rise of e-commerce. It has forced the evolution of business models away from old patterns of activity towards new ones. It has been hard for many businesses this year, with high street retailers going bust and difficulties in letting out offices, but it has brought forward much needed adaptation. Next year we will see more offices pivot towards providing the type of amenity rich, multi-functional and engaging space that the new world of work demands. We will see more failing retail parks repurposed for urban logistics or to provide much needed housing. We will see former department stores reimagined as co-working spaces, food halls or co-living developments. This year we had the pain, next year we will have the gain with more purposeful and relevant real estate.
Individualism: One theme to bind them all
Individualisation, a concept which elevates the importance of every human as an individual, is becoming an increasingly pronounced characteristic of Western society. Each one of the trends outlined above is underpinned by a higher weighting afforded to individual needs, preferences and experiences in the way we live, work and play. Increased tailoring to the individual is driving a greater focus on our personal environment impact, our preferences in how we work, a bespoke rental solution for every business, choice in how we use the multiple leisure options available in cities, and enabling a change in human needs to trigger the transformation of newly obsolete real estate.
If the individual is becoming more powerful, which all of this suggests, then real estate owners must cater to all those individual human needs by providing responsive, inspiring and empowering space. A “cookie-cutter” approach to real estate development, ownership and management will no longer work with more bespoke human-centric approach being the order of the day.
Tom Duncan
Senior Associate – Investment Strategy and Risk