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British GRI: The rise of the 'hipster' office, Brexit and predicting the next property crash


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Essential IR Insights Newsletter - February 2023

British GRI: The rise of the 'hipster' office, Brexit and predicting the next property crash

Propertyinvestors, financiers and advisers from across Europe gathered in the palatialsurroundings of the Institute of Directors in London's Pall Mall on May 3 and 4for the Global Real Estate Institute's British GRI event. In a series ofintimate seminars, delegates debated themes such as the future of the Londonoffice market, the outlook for the retail market and the wider state of theBritish economy.

The view that dare not speakits name

The loomingBrexit referendum was unsurprisingly a hot topic at this year's British GRIgathering.

Whatwas interesting was that no delegates appeared to be willing to admit to beingpro-Brexit. When a keynote speaker at the event asked for a show of hands fromthose who favored leaving the EU, not a single hand went up.

"Itseems to be an embarrassment to admit that you are a Brexiter," oneeconomist remarked on the sidelines of the conference.

Butsome clearly saw a potential exit from the EU as an opportunity:

"Surelyas greedy real estate people we should vote Brexit, wait for the market to falland then pick up properties at a discount?" said one London-based officeinvestor, who (for obvious reasons) asked not to be named.

Will it all end in tears?

Sessionsalso addressed the issue of whether or not Britain is heading toward anotherproperty crash.

"It'simpossible to predict the cycle with any accuracy. You might as well look atthe Bible where there are seven years of feast and seven years of famine andapply that rule to the property market," one delegate, a residentialinvestor and developer, joked during a session.

Delegatesdid not seem to be too worried about the possibility of an imminent downturn,the main reason being that they felt that most lenders and borrowers have had amuch more disciplined attitude to debt than during the previous cycle. Not onlydoes this mean that companies have more solid balance sheets, it also stopsdevelopers from getting carried away and building too much, according toattendees.

Noteveryone is happy about this, William Newsom, senior director of Savillsvaluation team, said in an interview on the sidelines of the event.

"Bankersare frustrated that real estate investors are not seeking more debt. The net returnto a bank from a 40% LTV property loan, for example, is not great," hesaid.

Onething that did seem to be worrying Newsom, who is one of the British propertyindustry's most respected pundits on the commercial lending market, was today'sultra-low inflation environment:

"Iworry that Britain's economy may be heading in the direction of that of Japanover the last 25 years. We've had a 0.5% base rate for seven years plus £375billion of quantitative easing, but yet the economy has not taken off. Why isthat? We still have zero (or close to zero) GDP growth and inflation. Is itbecause the economy remains in a fragile state?"

Judgingfrom the mood at the conference, it seemed that stagnation and low returns weremore of a headache for the market than fears of a sudden bust.

New office geographies andthe rise of the hipster tenant

AsLondon grows and traditional office markets become ever more expensive (both tobuy and rent) property investors are scanning the horizon for the next emerginglocations to invest and develop in. There was almost complete consensus thatShoreditch and the surrounding areas had moved from being a "fringe"location to a very mainstream one over the past decade. Space may be expensiveand increasingly scarce, and the floor plates small, but tech companies arestill clamoring to rent offices in the area, according to delegates. Much ofthis is driven by the millennial and "hipster" preference for workingin collaborative environments with a cluster of similar businesses. Theco-working trend,spearheaded by the likes of WorkspaceGroup Plc and WeWork, has been particular hit in Shoreditch andcity fringe locations, attendees said. Serviced offices were once considered aborderline embarrassment for landlords, according to delegates. As one fundmanager put it, "if you had empty space you needed to fill and you couldn'tget anyone else in, you'd rent it at a discount to a serviced office company."However, serviced offices and co-working spaces are now considered the heightof cool.

"Co-workingis a tech-driven phenomenon and it's here to stay," Robert Rackind,partner and co-head of EQT Partners, a Swedish private equity investor, said inan interview on the sidelines of the conference.

Nevertheless,some delegates had questions about how sustainable the business model is, andwhether it had truly been stress-tested:

"Thechoice in serviced offices and co-working spaces today is enormous. But I justdon't get the business model. They look like train stations, they are noisy andmy concern is that they need to do more to keep their revenues growing enoughto offset rising costs," one fund manager said, on condition of anonymity.

Delegateswere, for the most part, confident in the potential of more exotic locationssuch as Croydon, in the South London suburbs, and Chiswick and Shepherd's Bushin West London to emerge as alternative hubs for working, living and shopping.