Copyright: David Lawson - Financial Times June 2001
When dot.com turned to dot.gone, much of the real estate industry appeared more relieved than annoyed. While vociferous pioneers exclaimed long and loudly that wired buildings, internet dealing and brash new tenants would rejuvenate a tired and declining sector, many saw just another fad. ‘Look out there,’ said one real estate broker, gesturing from the 27th floor window of a Manhattan tower. ‘Remember how computers and hot-desking were going to destroy offices? Can you see any empty buildings?’
Are these sceptics right? ‘A lot of property company chief executives are probably happy,’ says Joe Valente of DTZ Research. ‘ They no longer have to come up with e-commerce strategies to please financial analysts.’ They won’t be so happy with the cost of initiatives that failed to take off. Web listing and transaction services have run out of cash or customers, leading to a spate of collapses and mergers. Tenants remain cool about buildings wired for broadband communications.
But investors court disaster if they settle back into old routines. Valente points out that new technology has not gone away. ‘These are early days, and people are still not clear which way to jump,’ he says. One thing becoming increasingly clear, however, is that measures of location and value must change.. A two-year study of 350 technology-oriented companies in 10 world cities by Jones Lang LaSalle came up with few surprises. Access to high-capacity internet connections and a preference for public transport top the list, so future hotspots may not be traditional business clusters. Internal flexibility is also more important than building appearance, while short leases are a top priority.
Sceptics cannot dismiss this as a fad, says JLL, as the ‘new economy’ will remain the fastest growing sector for decades. Even more importantly, these demands will be taken up by conventional companies as they adopt new technology as part of their basic business infrastructure. Looking across Manhattan or London’s Docklands, the old order of major corporations taking big office blocks on long leases seems as strong as ever. But it will fade over the next decade.
Other classes of property face similar pressures. Retailers preening over the collapse of dot.coms could be signing their own death warrants unless they realise the threat is still real. Online sales could still grow to as much as 5 per cent of total sales by 2005, says Dr Tim Dixon, a leading real estate forecaster at the College of Estate Management in the UK. A study done for the British Council of Shopping Centres showed rental growth could be cut by between 0.2 and 0.5 per cent a year. Retailers are also pressing for shorter leases.
So how do investors factor in these uncertainties? Some simply ignore them. ‘You won’t see any change until there is hard evidence that a wired building is worth more than an unwired one, or a high street travel agency less than a fashion store,’ said a leading UK valuer. ‘And that will be difficult to argue when so many wider market factors are at work.’
One Wall Street equities analyst admitted ignoring initiatives such as broadband provision – only a year after condemning property companies which failed to participate. ‘The income has to grow a lot more to be important,’ he said.
But not everyone is willing to sit and wait until that happens. JLL is already exploring factors which could become important. ‘One day we may be judging buildings by how much data can move in and out of a zone or building. We have to start preparing the groundwork now,’ says Rosemary Feenan, European director of research.
Martin Barber could be forgiven for believing Wall Street analysts are better than their City of London colleagues at breaking out of narrow valuation techniques. He chairs the Chicago-based CentrePoint Properties, which merits high praise for measures including co-location centre development. But he is also chief executive of Capital & Regional in the UK, which has failed to impress analysts with technology initiatives such as an agreement with NTL to link customers and advertisers via mobile phones in his shopping centres. C&R’s shares remain heavily discounted, reflecting general disillusion with retailing, yet Barber points out that four per cent of fees come from non-property revenue such as this.
There is a bright side, however. Real estate companies which poured millions into new technology have not suffered the blanket condemnation heaped on the high-tech sector. ‘A study by Bank of America reveals that 34 US real estate companies spent $234m on e-initiatives. That compares with a market capitalisation of $105bn, which puts the spending in perspective and may be why real estate stocks have performed well when tech stocks have crashed,’ says Andrew Waller, of consultants Ernst & Young.
Significant benefits have also been overlooked by concentrating on the product rather than the process. Introduction of enterprise software systems generates fewer headlines than web listings but has made a big difference to the efficiency of real estate companies by improving the financial reporting of capital projects. This kind of quiet progress is the real lesson of the last couple of years and will gradually impact on the way analysts judge companies, he says.
DTZ’s Valente agrees that lessons from the surge of new technology may be neither obvious nor immediate. ‘It is no longer whether real estate companies have e-initiatives but how they use them to competitive advantage.’ Ironically, technology will be judged successful when it is no longer ‘new’ nor a matter for analysis, but a basic part of the fabric of buildings and their landlords.