What has been the impact so far?
“Covid-19 hasn’t really produced anything new, but it’s dramatically accelerating existing trends that have been affecting global cities for a number of years. We previously thought some of these trends – such as working from home and higher levels of e-commerce – would take place over the next 5-10 years, but we now think they will take place over the next 2-3 years. The impact of these trends will be to erode the value of certain assets, such as office buildings and retail units.“
How will Covid-19 affect global cities?
“A lot will depend on whether or not we get a vaccine for Covid-19. If we move into a world where there’s no vaccine, human interaction in cities such as London will be greatly reduced. Interactions will still occur, but people will only come into the city centre for an important meeting or engagement. However, the premise of a city and its efficiency is all about the sharing of information, so we think that certain cities will remain specialists in their particular field and so interactions will still be important.
“Boston is a good example of this. The city is a focal point for the life sciences sector, with many people working on a vaccine for Covid-19. It’s impossible to do this kind of work from home, you need to be in a laboratory, so there are many instances where interactions will still be essential, even though there may be fewer of them.”
Will working from home continue after Covid-19?
“None of us will be working from home five days a week any time soon. I don’t think any of us want that as we are all craving interaction with other people. We believe that after the crisis, the number of days that people work from home will dramatically increase. So, whereas before the crisis I worked from home maybe one or two days a month, that may increase to two or three days a week. However, I’ll still want to go into the office to meet people. The interactions will reduce, but they will still be necessary.”
If there are fewer people in a city, less often, how will that affect restaurants, hotels etc?
“These sectors really are front and centre right now. Even before the pandemic struck, when we looked at the most vulnerable income streams, they were always on the cliff edge of the economy. A hotel is a classic example of that. Every night the price of a hotel room can change. If there is more demand, the price goes up, if there’s less demand it goes down.
“Now there’s less demand for hotels, and also less demand for physical shops as people switch to online shopping. However, e-commerce is not a new trend, it’s been hitting the retail sector for a number of years and it explains why we are pessimistic regarding the long term opportunity within this sector of the real estate world.”
Is office space destined to go the same way as retail?
“It is clear that there are some similarities. There can be no doubt that technology now means we do not needs as much office space. For instance, at Schroders we are quite an interesting example of this. We are now in a new HQ which only has desks for 70% of the workforce. If our management team were looking to sign a lease on a new building today, it is highly likely that the 70% figure would be even lower, perhaps 50%, or less.
“To add to the weak outlook for the office sector, flexible office spaces have been slowly eroding the pricing power for office landlords. Offices have become quite commoditised; there’s nothing particularly unique about most office buildings. If we are now moving into a global recession then there will definitely be less demand for offices as fewer people will be employed and those that are employed will probably spend part of their working week working from home.”
If there’s no vaccine, what do you think cities will look like in the future?
“If there’s no vaccine we will see a far higher number of younger people in cities. It’s clear that younger people are less affected by Covid-19, so potentially cities will become younger in the future. There will clearly be less demand for offices as people will still be working from home. So in a year’s time, you will see a number of organisations having reduced their demand for office space because they no longer need it. They will also seek to ensure that their offices are in locations that people can move into and out of easily. This could be by cycle lanes or via public transport. Trying to reduce the numbers of employees travelling at peak hours will also be key. However, I think there will still be a demand for a central office hub for people to meet in.”
If we have a vaccine will office demand still be less than before the crisis?
“Yes, demand for both office and retail space will still be weaker. E-commerce is seeing a huge increase in penetration levels. All those people who never wanted to order their groceries online are now having to do it and are realising that it’s a pretty efficient experience. Even with a vaccine, the same trends will continue and these are likely to accelerate.”
What will happen to the excess office space?
“It will mean more pain for landlords as income streams are reduced and then people will start to look at alternative use values. We saw a really interesting deal recently in North London where Amazon acquired a retail park. Retail parks today are persona non grata in property markets, no one wants to touch them. However, Amazon is going to transform it into distribution warehouses. So, when you have these type of assets in densely populated affluent areas there is clearly a higher alternative use value, which for us, as investors in global cities can provide resilience to assets.”
Finally, how sustainable are global cities?
“Sustainability is front and centre with regard to cities. It is very clear that if you live in a city you have a smaller carbon footprint than someone living in a rural area. So in order for governments to achieve the zero net carbon emission targets that they have now committed to, cities are going to be an essential component in achieving these goals.
“So we think, with or without a vaccine, governments will continue to encourage people to live in cities, to live in apartment buildings that use less energy than houses and to use public transport rather than driving a car. It is very clear to us that over the long term, cities are part of the solution when it comes to sustainability.”
Important information
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.