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Written by Per Amundsen, Head of Research, Thinktank
When the COVID-19 pandemic struck in early 2020, one of the most obvious impacts on day-to-day life was the exodus of office workers from CBD offices. These hustling, bustling centres of commercial activity became pale imitations of their former selves, prompting the inevitable question – was the office in terminal decline and, if so, what did this mean for its long-term investment appeal?
There’s no doubt COVID is changing working patterns. Or, more accurately, accelerated trends that were evident already, with ABS statistics showing about one-third of Australians worked from home pre-COVID. But COVID made a lifestyle choice a practical necessity, and, by doing so, highlighted the benefits of working from home.
Eliminating commute times has allowed many employees to be more productive. It also gives greater flexibility to balance personal and professional lives, especially for working mothers. A 2020 US survey by the global management consulting firm McKinsey found 80% of employees liked working from home, 41% believed they were more productive and 28% just as productive.
Many employers, too, have benefited. Removing an employee’s distance from work as an impediment to employment opens up new talent pools. The enforced legitimacy of work from home during the pandemic made companies institutionalise previous ad hoc arrangements, while potentially reducing proportional premises’ costs directly benefits the bottom line.
But to cite these benefits as arguments the office is in terminal decline is an overstatement. The traditional thinking that offices enhance productivity, nurture sound workplace cultures, and help secure and retain talented employees are still valid. Under this broad umbrella, it allows employees to collaborate, be mentored and socially interact – all essential ingredients to a successful business.
But with COVID holding sway, the value of the office to businesses was undervalued. There are many ways of measuring this negativity about the office sector, but for investors market signals carry weight.
In March 2020, the blue-chip property asset manager Charter Hall was trading around $14. But when all the social and work ramifications of COVID became manifest, that share price more than halved to a nearly $6 in the space of several weeks. With industrial property enjoying a COVID-induced boom because of demand for warehousing, it was the negativity around the office and retail sectors that was dragging Charter Hall’s share price down.
Nearly two years later, the share price is trading around $19. In a recent ASX announcement, Charter Hall upgraded post tax operating earnings by 36% for the 2022 financial year compared with 2021. While industrial is still doing much of the heavy lifting, offices were making a solid contribution.
It’s not only Charter Hall that still sees value in the office sector. Overseas investors who take a long-term view of the market are finding value in this market. Singaporean investors have been particularly active in the market, suggesting a bullish outlook on Australian office space. The sovereign wealth fund GIC, for example, is establishing a Sydney office, and is looking at different property assets such as logistics parks, hospitals and suburban offices.
This year major deals have included the Asian logistics firm ESR, with GIC’s backing, acquiring the $3.8 billion Milestone logistics portfolio. GIC was also involved with Canada’s NorthWest Healthcare Properties’ bid for the $2.8 billion Australian Unity healthcare property trust. Although the bid failed, NorthWest and GIC have a 16% stake in the fund and could revisit their offer.
In addition to GIC, the Singaporean real estate firm CapitaLand has put its hand up for the 50% stake in the $900 million North Sydney landmark 101 Miller Street and Greenwood Plaza that the US asset manager Nuveen has decided to offload.
It’s also worth remembering that for the past decade it was office space that held the premier position among the different property asset classes, accounting for nearly 60 per cent of transaction activity. It only lost its mantle when COVID struck and industrial property, in part underpinned by the massive Milestone deal, came to the fore.
What overseas institutional investors and Charter Hall, which has $54 billion in funds under management, are saying is that they expect employers to be able to balance employees’ different expectations and that the office’s role in this will remain pivotal.
The simple fact is the office is critical to those functions that can’t occur virtually, especially in a knowledge economy, such as mentoring, face-to-face interaction, collaboration, creativity and spontaneity. Employees will always need places where they can meet, connect, and build relationships, albeit to a varied rhythm – a reality investors should heed.
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