I read a great article – well, an article I agree with at least – that I thought worthy of discussion.
Property stocks, and in particular office tower landlords and shopping centre owners, have been one of the sectors hardest hit by the pandemic with the reasons well litigated across financial media and discussed at Rivkin. While the penetration of e-commerce is a trend that was already underway and has undoubtedly now accelerated permanently, thus impacting the future value of shopping centres, the future of the office is a bit harder to predict in my view.
The article that has prompted this discussion was written by the Executive General Manager of the Office division at Dexus (DXS), Kevin George, and undoubtedly is written from the perspective of the ever-bullish office property investor. Nevertheless he makes some excellent points. The work-from-home phenomenon is not a trend that has accelerated but one that has emerged from nowhere to keep employees safe. In the middle of a pandemic, most companies have either been mandated or have taken the responsible action of allowing/forcing employees to work from home. And while productivity has remained elevated, this has been an easy decision to take and is now prompting many businesses to plan their futures around employees working from home. This will save a lot of money in rental costs and keep employees happy and safe.
What happens though when the pandemic is behind us and there is no reason to feel unsafe? Or, as is the case across the country except for Victoria, now that people feel safe enough to visit the pub or restaurants won’t they feel safe in the office as well? The simple fact is that one day the reason to work from home will no longer exist for the worker, and while businesses will save plenty of money on rent, this will come at what cost? There is already emerging evidence of falling productivity from people working at home, and this is only after six months when there is still a novelty to staying at home. How productive will people be in one or two years? According to Kevin George, he is already seeing frustration among CEOs about sagging productivity, but the health picture is forcing their hands. He also says that the changing winds are becoming clearer and big organisations are investigating expanding their office footprint in CBDs Australia-wide post pandemic. This could perhaps be some tyre-kicking in the expectation of lower rents, but could this also be a gamble from those more bullish about the future office environment?
In my view, the timeline of events is likely to be:
- Organisations cutting down their office footprint in response to the pandemic once lease terms expire
- Short-term leases at lower rents from those opportunistic organisations
- Productivity among employees working from home sagging
- Recognising the negative impact of lower productivity even with cheaper rent costs, organisations attempt to regain their office footprint although in a market with limited vacancies
- Rents rise again because of the new demand/supply dynamics
It is very early, and this timeline is dependent on a few assumptions such as a successful vaccine being developed and distributed. But if it is true then I think a time will come that office property trusts will offer some of the best risk/reward opportunities in the market. Most listed property trusts have already written down the carrying value of their office assets significantly, and yet the stocks still trade at substantial discounts to NTA. The question is timing of course, and my guess is that the best opportunity will come well before step 4 above when the writing will be on the wall and stock prices will already be significantly higher. Taking the plunge somewhere between step 2 and 3 would be my best bet and it will be a courageous call at the time, but no one makes big money on the stock market taking the consensus position. Names that stand out for this opportunity are: Dexus Property (DXS), GPT Group (GPT), Mirvac (MGR) and Charter Hall (CHC).
