As Covid continues into 2021 — it is now 20 months since Asians started wearing masks — a couple of research teams have found out that offices will still be needed.
Last year, Allianz Real Estate’s research team undertook a major global study across 50-plus cities, examining the impact of working from home (WFH) and the resilience of the office sector. They concluded that while working from home will change how companies use office space as they are balancing organisational connectivity and resilience, physical offices will remain a cornerstone of any corporate culture, despite the trend towards more remote working in the long term.
In that sense, office spaces will not disappear but rather will evolve to cater for new working patterns. Home-working will become a mainstream part of the working lives of many professionals, and organisations will use it to accelerate organisational change, raise productivity via technology, and retain talent through new working styles.
In Singapore and Malaysia, RHB Research’s real estate team recently carried out a survey to evaluate Covid’s impact on the office sectors in the region. The real estate team at RHB identified five key trends in the office sector in the coming years.
These are: potential downsizing of office space by 20%-30% in Malaysia and Singapore (mainly from the financial services sector); the adoption of a more formal hybrid model (both home and office) seems more viable over the long term; decentralisation of regional operations could support demand for office space; structural changes in Malaysia’s office sector, as tenants seek high-grade buildings; and Singapore should capture more international real estate investors as the city-state pursues more sustainable and integrated office developments.
Over at Allianz Real Estate, the study showed the younger generations will want to continue to work and live in the city to take advantage of professional opportunities but also diversity in social life. “This means that any prime office building located within a 5km range of the CBD will always be in demand, both as a place to work and as an investment opportunity,” Allianz’s research says.
Offices are still valuable spaces
The study also showed that offices will continue to be valuable spaces where people can share information, be creative, interact, share a culture and a spirit that allows a business to grow. The Allianz team found that central locations in cities with high population densities will continue to be successful in maintaining occupier demand in a post-Covid environment; quality assets in prime locations supported by compelling demographics have become more marked; new technologies will play a key role, to analyse space utilisation patterns or improve office quality for employees; and ESG (environmental, social and governance) will be a key legacy of the pandemic.
“We think, as a long-term institutional investor in real estate, office continues to be one of the most important sectors. And our view is that the offices are going to continue to remain relevant,” says Rushabh Desai, APAC CEO of Allianz Real Estate, in a recent interview.
In his view, office properties will be important spaces in global cities — London, Paris, New York, Singapore, Beijing and Shanghai — despite WFH trends. “Urban density is going to play an important role in determining the future of office. For institutional investors, the quality of the asset — that includes ESG — and the micro location will be important factors. But more importantly, is the office building able to offer flexibility?” Desai wonders.
According to him, a lot of the tenants are now looking for not just co-working space, but flexible space to exchange ideas and strategy.
“Flexibility is likely to become an annex to ESG and quality as we look at offices, going forward,” Desai says.
In 2018, Allianz Real Estate acquired a 20% stake in Ocean Financial Centre for $537.3 million from Keppel REIT, which holds 79% of the building. Then, in 2019, Allianz Real Estate and Gaw Capital acquired Duo Tower and Duo Galleria for $1.6 billion. Allianz owns a 60% interest and the remaining 40% is by Gaw Capital. The asset is jointly managed by Allianz Real Estate and Gaw Capital. The two partners also acquired 77 Robinson Road in 2019, for $730 million. Earlier this year, Allianz Real Estate acquired a 50% stake in OUE Bayfront for $634 million.
“We’ve been pleasantly surprised and very happy with our portfolio in Singapore,” Desai says, referring to the way Singapore managed Covid. “OUE Bayfront’s location is irreplaceable, facing the Marina.”
Uneven recovery
“None of us denies the fact that Covid has changed the way the world operates. In our view, what is important is the realisation that the recovery will be uneven, because there will be opening and closing of economies, lockdowns, third waves and fourth waves. I think we have all accepted that the economic recovery, while it will happen, will be uneven going forward. We realise that the world today is a much more complicated place than it used to be, with competition and tension between the major world powers now, which goes beyond politics into trade, technology and security,” Desai continues.
“Covid, we need to realise, is not a financial crisis. It is a health crisis and a social crisis, and it cannot be treated the same way we treated the global financial crisis. So what we do what we did last time to fix the crisis or coming out of the crisis cannot be done this time,” Desai muses.
Therein lies the problem of co-working space and hot-desking. “If you have an office today sharing co-working space with someone, employees may feel uncomfortable sharing a space with unknown people, because they don’t know if the people are vaccinated or not vaccinated, and what is the level of testing. So we are now operating in a very different world,” he says. The health and social aspects of workspace are likely to be as important as the economics of workspace.
Desai believes that one megatrend Covid has accelerated — not the well-known digital megatrend — is urbanisation. “In Asia Pacific, more people want to move into bigger cities with better jobs, better education and more importantly, better healthcare,” Desai indicates.
Matching assets and liabilities
In early 2016, Allianz decided to revamp its efforts in Asia Pacific to mirror its insurance portfolio in Asia. Allianz wanted to invest in Asia Pacific for diversification, growth, and to match is assets and liabilities in APAC as the insurance business grew here.
Hence, in terms of the real estate portfolio, it is likely to be 80% yield and 20% opportunistic. “Roughly 80:20 is our long-term goal. We always have long-term objectives, as they allow us to build a book when going through a crisis, which is a lot more opportunistic in value. Over the long term, we aspire to be roughly 80% core strategies of investments and about 20% in valueadd and opportunistic,” Desai says.
Allianz Real Estate has three investment strategies. It can take and has taken direct investments in buildings, such as OUE Bayfront, Duo Tower and Ocean Financial Centre, and including joint ventures and club deals.
Secondly, Allianz can indirectly invest in properties through a fund. “We have indirect equity where we put money in other people’s funds, for example, a Blackstone fund or Brookfield fund,” Desai indicates.
The third line of business is lending, which is predominantly in the US and Europe where it provides credit to real estate investors. “We are a lender to owners of real estate,” he points out.
Asset-liability management would require Allianz Real Estate to hold on to its property investments for a decade or more. “When we buy something, we have an initial business plan underwriting, whatever that may be, for 10 to 12 years. Then every quarter, we evaluate how our asset or investment (if it’s a private equity fund) is performing. We recommend dispositions when it makes sense. Sometimes we exit an asset if we think that’s the best time to to exit and then recycle the capital into newer opportunities,” Desai explains. “But obviously, the intention is to hold longer.”
Hence for properties such as Duo Tower and OUE Bayfront, the intention is to hold for around a decade.
‘Beds, meds and sheds’
Despite Desai’s affinity for office, he is cognisant of the so-called “New Economy” assets. Allianz Real Estate has taken part in some bailouts on the credit side, but a systemic dislocation has not quite materialised in developed markets, he indicates.
“What we are seeing is core is getting repriced upwards, not downwards, so core valuation keeps on going up; there’s a lot of liquidity because interest rates are lowered and people are moving up the risk curve in order to deploy money and get some returns,” Desai observes.
In terms of sectors, money is chasing “beds, meds and sheds”, he reckons — that is, residential such as multi-family, life science assets and healthcare, and warehouses (sheds). “These three sectors have now become mainstream. Now people talk about residential, logistics, life sciences as mainstream real estate investment sectors, and investors are moving up the risk curve to get access or deploy capital into these sectors,” Desai cautions.
“I think retail assets present opportunity for repositioning. There is a lot of things you can do with the retail asset reposition. A lot of innovative ways of using properties are coming about. But the fundamentals of investing have remained intact,” he says.
As at March 31, 2021, Allianz Real Estate had EUR7.1 billion ($11.3 billion) in assets under management: 31% office, 7% retail, 7% residential, 30% logistics, 10% student housing, and 15% others.
