Talking exclusively to Mix, Aviva’s global property analyst, Jonathan Bayfield, explains why everything in your world is about to be completely different. David Thame reports.
What happens in the office property development scene is, ultimately, determined by the people who pay for it: the big private investors, pension funds and institutions.
Get a little face time with those people with serious skin in the game and everything looks very different from their long-term perspective. And you quickly learn some surprising news for the world of office interiors.
It is this: your world is about to be turned upside down.
Half an hour spent talking to Jonathan Bayfield, Senior Research Analyst for Global Real Estate at Aviva Investors, is time well spent – because this is the clearest insight you’ll get (short of spending an expensive weekend in Davos) of the direction of the global economy as it effects the office sector.
Aviva Investors is one of the big names of UK fund management. Growing out of the old Norwich Union business, Aviva Investors manages £337 billion assets, invested in 15 countries. Like all institutional investors, it is interested in stable income over the long-term to meet their long-term insurance and pensions liabilities. Aviva is not (necessarily) out to make a quick buck, so they think seriously about longer term trends.
So where will Aviva be investing in the office market? The answer is simple: London, Manchester, Birmingham and Cambridge.
Pretty much everywhere else in the UK is not on their radar.
“So we are looking to invest in buildings that people want to visit, places with strong amenity offers. Not the stale institutional buildings of 20 years ago”
Jonathan explains: ‘The big change in the UK economy is a change in the role of cities. We’re going to see them as hubs of inter-connected networks and we are trying to focus on the locations that are best equipped to thrive in this changed world. So really the likes of central London, central Manchester, Birmingham and Cambridge.
‘Our job is to manage risk and we want to be in the locations that are most resilient to the upcoming change in the economy, and those four cities are the best because they have significant pools of talent, significant business clusters and significant knowledge networks. And they have scale.’
In other words, the people skills and experience you need to make the modern economy work are to be found in those four cities, and found abundantly enough for Aviva to feel it isn’t much of a risk. The key word ‘scale’ also means something more precise; that the local office investment markets in all four locations are fairly liquid. Simply put, Aviva know that if they decide to sell up, somebody will want to buy an office block in Cambridge or Manchester.
The arrival in Manchester of Amsterdam headquartered Booking.com’s ground transportation division is the kind of eye-catching deal that attracts Aviva to the city. Booking will open a new 222,000 sq ft global headquarters building at Allied London’s 726,000 sq ft Enterprise City scheme in Manchester’s new St John’s Quarter. Construction is due to complete in 2020.
“We need buildings that can facilitate collaboration and staff cohesion – so that means breakout spaces, cafés and activated reception areas, things that generate life and character”
‘These are all markets where lots of investors take an interest. Manchester and Birmingham arenow emerging on international investors’ radars because they can see a wide occupier base there and the knowledge industries that will underpin occupier demand. And that’s true in Cambridge, too, where US based investors are very keen because they get the life-science angle that underpins the city’s growth – it reminds them of US examples like MIT and Harvard.’
For the same set of reasons, Aviva is busy disinvesting in other UK cities about which they feel less optimistic: Nottingham and Glasgow are on their sell-list, as are any locations with a low skilled call-centre based office market.
So what kind of buildings do Aviva want in their chosen cities? In the past, institutional investors like Aviva would have spent money only on the safest, most conservative office buildings. Indeed, ‘institutional grade property’ was a byword for boring and conventional. No more, says Jonathan.
‘They want funky buildings – but not just any funky buildings.’
‘Look, the emerging trend in the world of work is remote and flexible working – people simply visit the office less often. That trend is already very evident in London and growing in Manchester and Birmingham. So we are looking to invest in buildings that people want to visit, places with strong amenity offers. Not the stale institutional buildings of 20 years ago,’ he says.
Above: Allied London, has scooped pre-lets including Booking.com
In practice, this means best-in-class buildings that can meet changing trends because they are flexible and re-useable. But it also means buildings with some personality.
‘What matters to us is the physical flexibility and adaptability of the building, so it can change as the world of work changes. Perhaps some older buildings are a problem there, maybe with compromised floor heights, or problems with natural light. But that might be off-set by some other really interesting point of difference. It might be historic, for instance. And these days we balance the criteria of flexibility against other softer factors,’ Jonathan says.
Does this mean investors like Aviva are madkeen on coworking platforms like WeWork? The answer is surprisingly equivocal. In the month that WeWork finally unveiled plans for a public listing on the New York Stock Exchange – but also revealed its latest $900 million first-half loss – Jonathan reveals a nuanced horses-for-courses approach with big implications for office design.
‘We’ve been doing quite a lot of thinking about it. JLL say that 30% of the global office market could be flexible in the long-run, which would include coworking, and we are paying great attention. But we wonder if there might be some more cost-effective solutions like, for instance, fitting out offices to Cat B standards, rather than Cat A, and comparing the outcomes, because maybe occupiers like the transparency of knowing how much these things cost,’ he says.
Aviva have begun trialling this approach, offering occupiers Cat B fit-outs, and are trialling different approaches in different markets.
Meanwhile, they are experimenting with the coworking giants, including WeWork. ‘We have them in our Cambridge offices, and we agreed a revenue-sharing deal with them, because this is a great location and it gives us confidence,’ Jonathan explains. ‘Operators like WeWork bring more life and vibrancy to an office building, and we’ve heard occupiers in London say they will only take floorspace in office buildings with coworking as a tenant, so they can shrink or expand their own footprint.’
In other words, coworking may or may not make money for its operators (Aviva certainly hopes it will in Cambridge) but it might nonetheless serve a useful function for landlords and the investors who stand behind them.
Above: Nottingham Unity Square
“On the face of it, a running track was a good idea – but actually people prefer to run in the park”
Understood like this, coworking is an amenity like the gym and the bike store; it is just one of the things that make people want to visit that office block, and a source of activation.
Activation is going to be big in the future of office blocks, says Jonathan. ‘We want to see buildings with strong amenities, but really amenity isn’t enough. We need buildings that can facilitate collaboration and staff cohesion – so that means breakout spaces, cafés and activated reception areas, things that generate life and character,’ he says.
Amenity and activation extends way beyond the building’s boundary into pedestrianised streets, good local restaurants, a lively street scene with historic and heritage buildings, suggests Jonathan.
What it probably doesn’t involve is silly gimmicks inside the building – dog grooming, floristry or (an example he expected to like but in fact didn’t) indoor running tracks.
‘On the face of it, a running track was a good idea,’ he says of one London building. ‘But actually people prefer to run in the park.’ Jonathan hints that the developers think too much about their building, and not about the city it is in – and that means they sometimes miss the point about amenity. The next stage for Aviva is to buy more heavily in their chosen regional markets. ‘We are already the biggest private sector landlord in Cambridge, we’re number two in Manchester, and we are still making big splashes in the regional cities,’ he tells us.
Aviva have the resources – and the clearheaded thinking – to make a big difference. If you want to be part of the new world they are fashioning, then getting design and amenity Aviva-right is going to be vital.
The seven take-aways from Aviva’s strategy guru you have to know
1. Aviva are focusing on London, Manchester, Birmingham, and Cambridge.
2. Aviva are disinvesting in other cities, eg. Nottingham, Glasgow.
3. The high growth cities are all about knowledge, clusters and connections.
4. Cat B fit-outs are OK!
5. Amenity outside the building matters as much, or more, than amenity inside.
6. Think ‘activiation’ – it’s the concept that really matters.
7. Older buildings are fine if they can be made flexible.
Based on the findings of its proprietary ‘Future City’ methodology, Aviva Investors expects London and Paris to be the best-performing European office markets. With a city’s prospects defined more than ever by knowledge exchange and information sharing, London and Paris are expected be the strongest magnets for global talent; relative to peers, both cities also benefit from superior scale and their status as international hubs, alongside strong governance credentials.
Other cities that scored highly overall include Munich, Dublin, Frankfurt, Lyon, Stuttgart and Hamburg. Aviva Investors also used its analysis to identify four tech cities – Copenhagen, Berlin, Amsterdam and Stockholm – that it is strategically committed to within its real estate investment strategy.
In the UK they are also targeting Cambridge, Manchester and Birmingham.
What are Legal & General up to?
Whilst Aviva is picking its four regional hubs, UK institutional rivals Legal & General are spreading their investment over a much wider pool of regional office markets.
At the same time that Aviva pulls back in Nottingham, L&G is advancing.
Legal & General has agreed to forward-fund the development of Unity Square in Nottingham as HM Revenue and Customs’ latest regional hub, helping to facilitate significant economic growth in the city and putting Nottingham back on the occupier map.
The Development is being undertaken by Peveril Securities and its joint venture partner, Sladen Estates.
This is one of 10 deals agreed between Legal & General and the anonymously-named (but seriously important) Government Property Unit.
The latest, agreed just before the August bank holiday, sees L&G forward fund a 377,700 sq ft office development at Wellington Place, Leeds. The sale was agreed back-to-back with a lease to HMRC and NHS Digital, and is said to be the biggest regional pre-let in a decade.
The buildings have been purchased for £211 million from joint venture partners, Canada Pension Plan Investment Board (CPPIB) and Hermes Investment Management.
The other deals include 240,000 sq ft at 3 Arena Central, Birmingham, forward-funding Salmon Harvester Properties’ 3 Glass Wharf, Bristol, where HM Revenue and Customs signed up for 110,000 sq ft, a partnership with Rightacres and Cardiff City Council on a 300,000 sq ft for HMRC, and letting 270,000 sq ft to HMRC at Liverpool’s India Buildings.
Mix approached L&G to discuss their regional investment strategy, but they declined to comment.