The Opportunity Report

Baschurch and the Big Society

Since the Beeching cuts of the early sixties removed their station, Baschurch has had an infrastructure problem.  Some 10 miles north of Shrewsbury and 15 miles from the M54, the 1,500 population have, hitherto, been off the pace in the connectivity stakes. This is all about to change. Baschurch has been named by BT as one of six superfast broadband hubs to be delivered in 2012. This follows a nationwide contest to discover where there is greatest demand to get online. Well done them.

The six communities which garnered the highest proportion of support from their residents were Baschurch, Blewbury in Oxfordshire, Caxton and Madingley in Cambridgeshire, Innerleithen in Tweeddale and Whitchurch in Hampshire. Each will get a broadband hub by early 2012 that will allow download speeds of up to 40 megabits per second.

BT is spending £2.5bn on its network to reach two-thirds of homes by 2015 and the project is part of a publicly funded drive to get broadband to all parts of the UK. £830m will be diverted from BBC licence fee revenues over the next seven years to help pay for extending fibre networks to rural areas.

The UK Government wants every community to be within reach of high-speed digital infrastructure using optical fibre by 2015 – potentially, a more ambitious target than the 2Mbps aspiration offered by the previous administration. The Government wants local authorities to bid for public subsidies to build the broadband hubs though how this fits with the financial straightjacket planned for the next five years is not clear.

Clearly, the growth of fast broadband infrastructure is a good thing. For some years now the UK has been significantly behind other European countries in the delivery of capacity in this area, putting the country at an increasing competitive disadvantage. Whether allowing local pressure groups and Local Authorities to set the spatial priorities for investment is the best way forward is, at very least, open to debate.

It sits very nicely with the “Big Society” ethos, but may have limited economic effects. Comparing the six chosen locations, with one exception, they are all satellites of bigger towns with the employment opportunities that offers. Bar one, Innerleithen in the Scottish Borders, they are all significantly above average on indicators of economic activity,  job level and the level of qualifications in the workforce. Even Innerleithen sees above average economic activity and qualifications.

This is not a measure targeted at improving the economic infrastructure in disadvantaged areas, just mildly inconvenienced ones. It hardly dispels the feeling that “Big Society” actually translates as “Devil take the hindmost.”

Feeling the way

Real Estate can be an emotional industry - all too often "gut feel" replaces rational analysis.  This is not to say that emotions are unimportant.  The origins of the current situation probably lie in over optimism for example.  The cycle of market emotions charts a recession starting and ending with optimism but exploring the full range of feelings inbetween.

This begs the question as to where we are now on this chart. My feeling is that we are somewhere between capitulation and despondency ie approaching the bottom - the time of maximum opportunity.

Rationally, different countries and sectors are at different stages of the cycle.  It is possible that UK residential property is sitting at the point of maximum opportunity already while UK commercial property probably has further to go. Generally, the big European markets are probably at the capitulation stage while fringe markets are hitting the panic button.

How best to monitor when we are reaching the bottom? Usually we only find out with hindsight - by which time it is too late!  However, on the basis that the press reflects what people are thinking and feeling, an analysis of the use of key words over time might give a clue. Already we can see that commentary has moved on from doom and gloom to sanctimonious tosh about "new world orders" and "different paradigms". The technique here is to take a positive word and a negative antonym to see the balance between the two - in this case "recovery" and "recession".

As the chart shows, these two words trundled along at their "normal" level in the FT until the Autumn of 2007 when they both began to increase in incidence with "recession" becoming more prevalent at the end of the year.  There were a lot of recessionary column inches in early 2008 followed by a relatively quiet period then, in October, "recession" moved from around 500 mentions a month to 1,750 and it has remained at that level ever since.  By comparison "recovery" moved from around 500 to the 750-1,000 range.  By the end of Quarter 1 2009 it had moved above 1,000.

Although the gap between recession and recovery has begun to shrink, which is encouraging, it remains substantial and doesn't point to a real improvement just yet - just more despondency and depression. Remember however, that between the two lies the time of maximum opportunity.

Decolonisation

In January, just over two million people in the UK were unemployed and the gloomier forecasters see the figure going over three million by the end of the year. Unlike previous recessions that I remember, this downturn is being led by the service industries, particularly financial services and, although there are many, many manufacturing casualties, from my London-centric perspective, it is having a big impact upon office employment.

The hierarchy of office needs

Across the coffee shops and park benches of the capital, a new breed of independent ex-office employees can be seen fiddling with their blackberries and searching for power sockets for their laptops.

Some will thrive as independents, most will be reabsorbed by the body corporate in the fullness of time. However, when they return to the mother ship they might find that things are not quite the same – they won’t find territory.

There have been a lot of column inches written about the increasing mobility of work and how effective new technology has proven to be in enabling a new breed of mobile worker. This recession will be the acid test. 

Even a few years ago the “light dusting” of snow in early February would have been enough to bring the City to its knees and, in some sectors, it did. The Health and Safety Stasi put paid to any chance of a bus service, but I was pleasantly surprised to find a functioning rail service overground and underground that enabled me to slip away to a snowless ULI meeting in Paris with minimum inconvenience.

Remit Consulting’s Snowbusiness survey of over 100 property professionals found that 92% of them worked from home during the bad weather and that the vast majority had full access to all their emails & files. 49% estimated that they had a 100% effective day, with only 9% saying that their effectiveness was 50% or less. This would indicate that any technological barriers to working effectively away from the office are no longer an issue provided that companies have invested in making that a possibility.

But back to territory. In addition to a salary, employment brings with it a number of other things.  Principal amongst these are working relationships, connectivity and a place to work. The thing that has bedevilled more effective use of space traditionally has been personalization of that space and the assumption of territorial rights.

When redundancy strikes that reduces the salary cost to the erstwhile employer, but does not reduce the costs associated with place. Actually it increases them because the place is no longer as productive.

In the short term, responses are limited. If the empty space is big enough, or organized appropriately, sub-letting might be an option but more usually the space remains empty until business picks up. What better time to re-examine how that space is used?

As the newly redundant road warriors are finding, full connectivity out of the office is no problem wherever there is a mobile signal. Having a place to sit temporarily can be resolved by using Starbucks or squatting in one of the many serviced offices’ business centres. If working relationships are worthwhile they will be maintained. In fact the only thing missing, apart from the salary, is territory – that slice of real estate surrounding a desk that every man calls his own.

Getting the right amount of space is not easy for any business.  Property is notoriously inflexible with respect to expansion and contraction.  Traditionally, serviced offices have provided a safety valve for fast-expanding businesses but, increasingly, they are providing that part of economic capacity traditionally provided by “the office”.

And serviced offices are a multi-layered business model.  If all that is required is coffee, comfort and connectivity one of the many branded coffee shops functions as a serviced office. If you need a mailbox, there are companies that provide that service or, if you need the full service with meeting rooms, a desk, telephone answering and concierge services then there are packages available to suit from serviced office providers. Figure 1 shows this as a hierarchy of needs.

As an itinerant of many years standing, the only real gap in provision relates to locker space. Even this may be a London problem. In smaller cities, Munich for example, the Hauptbahnhof has plenty of storage lockers available for a few euros per day, but it is a much smaller city and the station is pretty central.

Once you take away territorial aspirations, the conventional office starts to look very like the serviced office with core services being called off (and paid for) on an “as needed” basis. The model doesn’t preclude desks, but provided on a hotelling basis.

The net impacts would be twofold. Firstly, to increase employment densities significantly, potentially freeing up surplus space for disposal or assignment and thereby reducing costs. Secondly increasing the productivity of the space that remains, really make this expensive asset work.

In recent history there have been a number of periods of active decolonisation. The breakup of the Spanish Empire in the nineteenth century; of the Austrian and Ottoman Empires at around the time of World War I; of the British, French, German, Italian and American Empires in the wake of World War II; and of the Russian Soviet Empire following the fall of the Berlin Wall in 1989.

Some were resolved by peaceful negation, others by bloody revolution - all had basic economics at their core. Are we about to see another?

Devils on Horseback

Today, the 25^th of March, is a “quarter day”. The significance of quarter days is now limited, although leasehold payments and rents for business premises in England are often still due on the old English quarter days. In the Middle Ages, when rent was collected on horseback, four times a year was the frequency felt to be most practical. In order to help tenants remember due dates, the dates selected coincided with festivals in the Church calendar. These are the “usual quarter days” still enshrined in most leases. In these days of instant everything from messaging to gratification, this seems at best quaint, at worse a pointless constraint, yet here it is built in to modern, enforceable contracts.

Normally, reform of this kind of nonsense would be somewhere near the back of the queue for remedial legislation but there is increasing evidence that it is causing real harm to retailers particularly.  The British Retail Consortium, for example, has called for an end to quarterly rents and for monthly payments as standard practice on all new lettings. The particular problem identified here is the strain put on cashflow by having to find three months rent as a lump sum rather than a more regular outflow.  This is, of course, exacerbated by the current retail downturn.

Setting aside an apparent inability to plan cashflow. this is actually a problem that affects all tenants and how their tenancy is managed.  Given their current arrangements many landlords are opposed to change on the grounds that monthly rent collection would increase their administrative burden or that of their managing agents. Additional rent demands would need to be prepared and dispatched and, clearly, issues of late payment, notice etc need to be addressed.

I lease a car (outside the Landlord & Tenant Act!). I make the monthly payment by direct debit. I am not bombarded with monthly demands from Audi, I get an annual statement.  As far as I know, Audi do not employ agents to collect this money, there are no clunky rent collection systems involved, nor people using dubious collection rates as a measure of performance – the payment is made every month on the designated day. My cash flow planning is simple and transparent.

There have been a number of initiatives in this area. As well as the BRC, a consortium of large retailers led by Sir Philip Green have wrung some limited concessions from property owners by exercising their buyer power. The British Property Federation, after much deliberation, have conceded that monthly rents are “consistent with the 2007 lease code”.  Nobody seems willing to grasp the nettle here - save with the protection of some very thick gloves.

It seems blindingly obvious to me that all property leases should be paid monthly by direct debit.  Such a reform would save landlords significant sums of money by making the income available on time all the time. It would also dispense with the need to buy rent collection experts and the assorted paraphernalia that purports to manage rent collection. Property managers would be free to manage property rather than collect rents. 

Finally, it would allow tenants to better manage their cash flow and, in this kind of market, it could allow rental levels to be more flexible - given the landlords savings.

It would transform a 16^th century system into a 21^st century one in one jump.