Perspectives 2019

OPINION C oming at this from the point of view of a retailer, however, his focus avoids a critical dimension for real estate that has far reaching implications. Change driven by technological innovation and shifting consumer preferences has always existed, and explains human progress. In real estate, agriculture created cities, religion and government created large buildings, and trade and commerce created our high streets. More recently we have seen these formats shift; from the 1960s shopping malls, to the 1980s business parks, and now the urban tech campuses. The new replaces the old, but real estate’s monopoly role in housing human activities remains. Until now. The paradigm shift in recent years has been that the format substitution comes from the digital world; a place of infinite supply where real estate is not required. Digital activities are taking over. Whilst e-commerce is the obvious example, this trends prospectively affects all areas of real estate. Digital communications allow one to work from home, you can visit your doctor via video link, universities having begun in earnest to deliver their courses online and libraries are being replaced by the internet. Substitution and the end of real estate? The nature of the threat The appeal of the digital world is clear. Firstly, it costs less. Information goods tend to have a marginal cost of production of zero. If you are Netflix and you have sold one million subscription packages; then the fixed costs have already been defrayed, and the 1,000,001th subscription package costs essentially nothing to produce. The corresponding benefits of scale also dictate the need to grow quickly, which drives the steep adoption rates for digital models. Secondly, doing things in the digital world tends to be more convenient. If I can work from home then I don’t need to commute. If I can buy online, I don’t need to drive to the shops, pay to park, and risk that the item I came to buy isn’t in stock. If I have an online medical appointment I don’t need to sit in a germy waiting room. And if I choose to go shopping at three in the morning after most places are shut; no problem, I can do it online. This doesn’t sound great for real estate does it? Defences against the threat The good news for investors, is that there are, I believe, two clear defences to this trend. Firstly, our bodies (for the time being) remain in the physical world, so we need places to sustain them there. For instance, we will always need a place to sleep (so residential feels robust). We need places to produce nutrition (farms) and energy (minerals and power), and we need places to patch ourselves together (hospitals) and experiment (labs). These factors aren’t going away. Secondly, the advantage of convenience is limited. It is hygiene factor; a quality which management theorists believe can create de-motivation or dissatisfaction when absent, but is not capable of creating positive motivation when present, whether that be motivation to work, or motivation to buy. The kind of higher order activities which humans crave: social interactions, being part of a team, creating connections and experiencing the world are (for the time being) more enjoyable when carried out in person in the real world. This provides a reason for people to look through the physical world’s associated inconveniences. However, they will only do this if our real estate, and the activities which it houses are providing value added experiences; something significantly better than can be found online. Picking stock off shelves, or sitting at a desk all day don’t cut it. For this reason, we should anticipate that the nature of the activities carried out in real estate will change in the coming years. They will be more exciting and more focussed on social interactions. The other activities will gradually migrate into the ether. So, while real estate continues to play an important role, it will need to adapt to the changed nature of these activities, or risk irrelevance. This change brings with it obsolescence risk, but also real opportunities for those willing to lead the market with new formats. In Next plc’s annual report this year, Simon Wolfson equated the relatively recent rise of online shopping, with the consumer shift towards buying groceries in supermarkets in the 1970s. In doing so he points to the substitution of one format by another that has taken place throughout history. By Richard Pickering, Chief Strategy Officer PERSPECTIVES 26 OPINION