There is a running theme in the British comedy television series, W1A, a satire of working life at the BBC. The central character, Ian Fletcher (head of values) - who one would expect to have a cushy corner office with a city view - is instead forced to find a new desk each day. The fictional company's aim to boost creativity by installing hot desks* ends up misfiring.
Risk Warning: The value of investments and the income from them can go down as well as up and your clients may get back less than the amount invested.
The office environment is an amusing backdrop to comedy shows like W1A and The Office but, in the real world, companies need to adapt their office environments periodically in response to internal and external demands, with tangible impacts on the way people work.
One of the drivers is that the requirement for office space, arguably more than any other property sector, is very sensitive to the upswings and downswings of the business cycle. In good times, companies expand and can outgrow their space, necessitating a move or a change in how space is utilised.
Likewise, when businesses weaken they often cut headcount and costs and downsize where lease events allow, or attempt to sub-let space. The location and quality of their buildings can be secondary to the quantum of space and its suitability to how the business operates.
In contrast, retail tenants, for example, will be far more wedded to a precise trading location, as the location itself is a driver of revenue.
But aside from these standard market dynamics, there are long-term structural changes that are having a disruptive effect on the way companies use office space. Companies are increasingly aiming to be more efficient in how they utilise space. They are becoming more flexible in their choice of office location and are willing to relocate, while shorter leases and the greater prevalence of break options gives them further flexibility.
An annual study by MSCI** showed that the weighted average length of new office leases has fallen from 11.1 years in 2002 to 6.7 years in 2014. A similar MSCI study showed that the proportion of leases renewed has reduced by a quarter since 2007 and the proportion of tenants exercising break options has risen by 18% to 49% since 2007.
For a property investor looking for attractive rental income growth in the office sector, these statistics represent a challenge; the benefits of very long, upward-only leases are, in the majority of cases, a thing of the past.
Alongside this flexibility to move premises, the actual way in which space is used has changed markedly over the years. Technological advances have been a major factor driving this trend and have made different ways of working possible. Anyone working in a typical office in the 1980s will likely remember the bulkiness of computers and endless filing cabinets housing vast paper records.
Today, we have laptops, flat screen monitors and digital archiving of records, all reducing space requirements considerably. Modern construction techniques have reduced the size or even need for columns within floorplates.
Major advances in heating, ventilation and air-conditioning systems allow areas of much higher density occupation. Buildings are now designed with eight, sometimes even six, square metres per workspace, compared with 20 square metres 30 years ago.
These advances suggest that many buildings are underutilised and older buildings may be hampered by their inability to offer higher density.
Many businesses are transitioning towards collaborative environments where workspaces are more easily shared and offices are used more efficiently. This will reduce the total space required and mean some older stock is either obsolete or only able to command heavily discounted rents.
The implication from this is downward pressure on rental values.Other structural factors could drive the reduced need for office space. The housing crisis may have an indirect effect, not least in London where the undersupply of houses is most acute.
As house prices and rents rise, becoming even more out of kilter with incomes, and available school places remain in short supply, workers will be forced further out, increasing commuting times. Businesses will most likely wish to remain in central London to have access to the widest pool of talent. But this talent will become increasingly dispersed.
Increased incentives to utilise commuting time productively will encourage greater use of laptops and tablets on trains. That technologically driven mobility will drive higher rates of hot-desking and work in collaborative spaces.
Long commutes may also translate into businesses offering more flexibility to work partially from home, which will also encourage the sharing of workspaces in the office, also reducing total space requirements, as space is used more efficiently.
Despite these trends being, in aggregate, negative for rents, opportunities to leverage these trends exist. Ultimately, it is more important than ever to understand what occupiers want and how their businesses utilise office space, even if, as W1A gently pokes fun at, many occupiers are still getting to grips with how to create the optimum office environment.
Investors that provide the right kind of space, suited to the location, will attract the right tenants who are more likely to be committed to the building, thus generating the most durable income streams over the longer term.
*Hot desking is a system where multiple workers using a single physical work station or desk at different times
**Morgan Stanley Capital International
For more property insights visit http://www.bigpropertyideas.co.uk
Important Information
For professional investors and financial advisers only - not for use by retail investors
The above marketing document is strictly for information purposes only and should not be considered as an offer, or solicitation, to deal in any of the investments or funds mentioned herein and does not constitute investment research as defined under EU Directive 2003/125/EC. Aberdeen Asset Managers Limited ("Aberdeen") does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials.
Any research or analysis used in the preparation of this document has been procured by Aberdeen for its own use and may have been acted on for its own purpose. The results thus obtained are made available only coincidentally and the information is not guaranteed as to its accuracy. Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make their own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations, as they may consider necessary or appropriate for the purpose of such assessment. Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither Aberdeen nor any of its employees, associated group companies or agents have given any consideration to nor have they or any of them made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document. Aberdeen reserves the right to make changes and corrections to any information in this document at any time, without notice.
