Why the office is still thriving in continental Europe
Why the office is still thriving in continental Europe
The Covid-19 pandemic has affected most aspects of our daily lives, including an abrupt shift to home-working for most office workers. The summer saw numerous headlines proclaiming the supposed “death of the office” but we think the picture is a lot more nuanced.
Much of the focus on the flight from offices and preference for home-working has had an Anglo-centric slant. We think it’s important to recognise that the experience of office workers in London, for example, hasn’t been repeated everywhere.
In fact, many urban areas across continental Europe saw a sizeable chunk of the white collar workforce return to the office since the initial lockdown restrictions were lifted.
The chart below shows the results of a survey of office workers in major urban centres in the UK, France, Germany, Spain and Italy. The survey was carried out in mid-August and shows London office workers were far less likely to have returned to their usual workplace than those in other countries.
It’s hard to pinpoint precisely why this might be. The pandemic situation remains fluid with different restrictions in different countries. Indeed, London is likely to slip even further from “normal” given the latest government instruction for office workers to work from home where possible.
To our mind, a key factor may be the commuting distance between home and office, and availability of alternatives to public transport. Many European urban centres are smaller and more densely populated than London, where commuters often live outside the city altogether and rely on a series of train and tube connections. By contrast, smaller, denser cities are more easily navigated on foot or by bike, or with minimal time on public transport.
The charts below, from the Schroders Data Insights Unit, compare mobility in Sweden, Germany and the UK. The three lines track workplace, transit and other (parks and grocery/pharmacy) activity.
We can see that all three countries experienced a steep drop-off in workplace activity as the pandemic took hold. The UK saw the sharpest plunge after announcing a strict lockdown on 23 March. However, both Sweden and Germany have seen a much swifter recovery in workplace activity, even accounting for the summer holiday period.
Despite these differences, virtually every company across the European real estate sector experienced a sharp share price plunge in March, followed by a limited recovery. We think this is because a generic worry about “the end of offices” is being extrapolated across the sector, with little attention being paid to companies’ individual markets, financial strength, or valuations. We think this is leading to some attractive mispriced opportunities.
Diverse sector requires in-depth research
The real estate sector is diverse in Europe. Residential property companies have generally fared best during this crisis, along with logistics/warehousing specialists. By contrast, hotel and shopping centre operators have been very badly hit. To our mind, offices sit somewhere in the middle, and even within the office segment there is significant diversity between companies.
Investors in the office property sector need to consider the specific cities to which a company has exposure. Aside from the current pandemic, some cities may have better prospects than others. For example, Berlin and Stockholm have been two of Europe’s fastest-growing cities over the last ten years.
Given the current economic situation, investors should also factor in the financial strength of a company’s core tenants. There is a sustainability angle to consider as well: is the company developing new properties, and will they be fit for a future of climate change?
Modern, flexible offices that can be used in different ways, with lots of space for group work and meetings, are likely to be in higher demand than older style offices. The ability to support the latest communications technology will also be crucial as meetings and events increasingly take place in hybrid formats, both digitally and in person.
There is also the question of stretched starting valuations. Offices in prime business districts in London and Paris went into this crisis with the highest valuations and could see the heaviest downward price pressure as falling demand leads to rent declines and vacancies. By contrast, lower rise, lower density offices in Germany or Sweden, for example, were less richly valued to begin with and may be less likely to see the same downward pressure.
For these reasons, we see interesting opportunities in some Swedish and German office operators. On the other hand, we share some of the market’s scepticism over London and Paris offices, at least until workers’ concerns over public transport are allayed.
Offices will always be needed
However, even in locations such as London, reports of the death of the office may well prove exaggerated in the long term. Moves towards greater flexible working are likely and many companies, including Schroders, are allowing employees to choose to work from home much more. Hot-desking may become more prevalent as companies will be unwilling to pay for desks left empty for several days a week. But the office will still be a company’s hub and most people will still work there on a regular, if less frequent, basis.
It’s also possible that more companies will start to worry about a potential loss of corporate culture due to extended periods of mass working from home. The future is likely to be flexible, but the office will still have a big part to play.
From an investment perspective, we think the broader market will soon becoming more discerning when it comes to office operators, and the share prices of individual companies may start to diverge substantially. Those with the most resilient income streams should fare best. Ultimately, we think the sector offers some interesting niches benefiting from good growth and low volatility, both attributes that could prove popular with investors.
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