The property company of the future..?
If you wanted to imagine the market-leading property company of the next few decades, what would it look like? What would it do, and how would it do it?
Answering the same question 25 years ago in 1998 would, with the benefit of hindsight, have led many to the name Unibail, later Unibail-Rodamco, later Unibail-Rodamco-Westfield. It’s still a big company, but not many would now choose to recreate a world-class business founded on shopping centres.
URW (for short) was formed from two separate shopping centre operators, Unibail (founded in France in 1968) and Rodamco Europe (founded in the Netherlands in 1999), which merged in 2007. The company then acquired Australian/US shopping centre operator Westfield Corporation in June 2018. This was a huge deal which catapulted the new URW to the top of the European commercial real estate company rankings. The group now owns more than 80 shopping centres.
In 2015 Unibail was so golden that in April of that year it issued a convertible bond at a coupon of minus 0.07% — meaning that if the bond failed to convert to equity investors would be paid back less than they invested. The conversion price was at a premium of 37% to the then current share price, and the then current share price stood at a premium of 50% to the end 2014 net asset value (NAV). Unibail-Rodamco’s property values — shopping centre values — needed to more than double in order to deliver a net asset value sufficiently high to justify conversion. Amazon was hardly new to the block at the time, so this looked optimistic. Yet the 2015 convertible was 6 times over-subscribed!
The share price, which had peaked at €220 in 2007, hit a new high of €255 in 2015 and the convertible was beautifully timed. However, the Westfield acquisition was regarded by the market as better for Westfield shareholders than Unibail-Rodamco’s and the share price started sliding. It now stands at €45 and URW’s reputation is not what it was. Not many would now choose to create a world-class business founded on shopping centres.
So what would you create? 25 years ago in 1998, 85% of institutional real estate investment went into retail and office. Now, by contrast, all the talk is of beds (residential), sheds (logistics), eds and meds (educational and medical oriented property). Of these beds, increasingly known as living, has the biggest potential (residential property, according to Savills, comprises around 75% of the $380 trillion of global real estate).
Rental residential is management-intensive. Senior living is an extreme example of the day to day management burden and ultimate responsibility that overnight stays — especially of infirm people — brings. Student housing is another, and both affordable and higher-end rental housing (or single family rental) brings an ongoing opex and capex burden. Someone has to operate these assets — and provide customer service to retail customers.
And it’s not just residential that is operationally intensive. The typical office investor delegates a lot of its operational burden to the facilities managers of its tenants, but leases are shorter than they used to be, co-working is on the rise and hotel-like space as a service is an increasingly essential model. All office and residential landlords are under pressure to deliver operational excellence, including energy efficiency.
Technology will be increasingly valuable in servicing these property types, helping to streamline operations and replace humans. This will support more B2C models. Think also of robots providing nursing care and repainting the walls, as well as apps delivering the vital communication medium that tenants will demand. But it will be quite a while before humans are not required in this delivery of service.
Unibail-Rodamco-Westfield currently employs around 2,000 people; Hilton employs 159,000. The future is probably about the delivery of customer service, but real estate asset managers are not yet keen to build such big teams. So who will build the huge category-killer living business in Europe? And how many people will it have to employ? Maybe this is just too much of a challenge.
Shopping centre managers delegate a lot of B2C customer care to their B2B tenants. More critically, technology (irony of ironies), is about to ride to the rescue of the sector. AI-driven apps are already helping to merge the best of physical retailing and the online shopping experience. Do you want a blue shirt, male, size M? Your phone will point you in the right direction to get one right now from the shopping centre or town centre, and if it is not available it will order one for you.
Maybe the market-leading property company of the next few decades will be Unibail-Rodamco-Westfield. Who knows?
Professor Andrew Baum is Research and Strategy Partner at Pi Labs. You can view the Pi Labs research team’s work at pilabs.vc/insights
