PIERRE KREEMER: Thanks Rachel, and thanks Sven for being our guest, I really look forward to this interesting exchange and also to benefit from your expertise in the real estate field. So, the future of the office, is a very current and hot topic, so my first question would be the following.
According to a survey conducted by the Civey Opinion Research Institute on behalf of SPIEGEL, 3⁄4 of the working population envisions working from home more often in the future. How will this impact the value of commercial real estate, or is it too soon to tell?
SVEN ANDERSEN: Well, we have now about nine months of the Coronavirus epidemic and we see some impacts in the commercial real estate market. What we definitely see is that it has a price impact in the short term, but it varies considering the market, considering the country, considering the region and of course which office you are talking about. What we have seen in the market in the last couple of months or even weeks because we are still in the market and we continue to invest that we have seen discounts of about up to 15-20% in the maximum versus prices pre-covid. As you know, we are investing in Western Europe, so we see the largest discounts in Southern Europe, and we see the lowest, or the smallest discount in Germany, Switzerland and Austria, so they are called the safe countries, but it is not only a kind of measurement in terms of the volatility in the market, so the price discounts, it also of course factors in the future demand of office space. We think there will be in the future a changing environment in office space demand and we think coming later, I think a little bit more intensively, but in the mid and long-term the decrease of demand will be off-set by job growth, meeting space growth and change to space per worker, so bigger space for more workers.
PIERRE KREEMER: Thank you Sven, that’s quite interesting. Going on perhaps with some other survey results… one of which being from the IFO Institute Survey for Randstad. They discovered that 73% of the 800 participating firms would like to continue work home measures after the pandemic. So, with less people heading into the office, how do you believe this will change the way office space is used?
SVEN ANDERSEN: So, what we see also I think at KPMG but also in FREO and other companies, a lot of people have now gotten used to working from home. So, it’s not more a kind of black hole something you don’t know,
so everyone has his laptop, his computer at home, so it is getting much more flexible in that regard. But, having said that, one or two days at the home does not mean automatically we are having a dramatic decline for demand of office space. And what we believe is that offices will always be a place where employees can be creative and innovative, exchange and collaborate with colleagues and have face to face meetings. And we think that is very, very important, so you can see it, and I’ll give you one example. All the restaurants over Europe and cinemas have closed. So, people have a lot of needs and you see a lot of appetite to go again, to see other people, to have a collaboration, to meet people face to face. So, we think that yes it will be more flexible in the future but that does not mean that office space is totally out. So, what it’s changing is the way, how you’re using the office space, you should not be only a desk anymore and working there, that you can do at home. It should be a collaborative space, a place for communication and a space where you can have more than only a desk, that is very important. So, what we think is that the post-pandemic office must offer less but better space, that is for us, very important. And now that the vaccine is found of course, is that we return to a kind of, not normal life, but a life that will also encourage the people to go back in the office at least for, I don’t know, three or four times a week, something like this. Now, coming from an investor point of view, and this is a very interesting question, we have a lot of talks with our investors, as you know we are raising funds, so there we will look at how important it is to have the right location. We are looking of course at the major European cities where we have historically low vacancy rates, a diversified economy with innovation and government components. So, it is now much more important than ever before to create a space which is smart, which is modern, which is flexible, that is very suited to collaboration, learning and productivity, that is very important.
PIERRE KREEMER: Thank you Sven. Following up on this conversation, we see certainly big office properties where you have large headquarters almost empty at the moment. So, in your view what do you think will happen to these more or less empty headquarters? Will there be a need to modify the way they are organized? And all of this will certainly present a cost for the landlord etc. and also the tenants, so I would like to get your views on this.
SVEN ANDERSEN: This can’t be said in general terms, it really depends on the case by case basis. The way we would approach this situation at FREO is first to analyze the asset and determine the highest and best use and then make the decision whatever it makes sense to redevelop the office to fulfill the needs. For an institutional investor or change of type of use into residential or micro apartments or something like that it really depends on the location, and the market, sometimes what we see is very interesting that you have in this type of big headquarters, big buildings. We see that more and more coming, that you have different kind of uses in the same building. So for example, to put some We Work or in the gathering together in the ground floor or the first floor you have some space and the upper floors maybe you have some residential in the more quiet zones and you have some retail, some restaurants, some shops and stuff like that. So, you have always, that is maybe also the future you are gathering much more uses together in the same building, and not have a pure office building you use much more of this kind. And we believe we will see much more kinds of this type of buildings.
PIERRE KREEMER: So, heading much more towards mixed use type of usage.
SVEN ANDERSEN: Absolutely.
PIERRE KREEMER: And on the theme, working from home, because all of us, we made our own experiences. From feeling less stressed and more satisfied, to also saving time, many benefits have emerged from long-term home working. Are there any changes that could be made to the use of office space that could make working from the office as desirable as staying at home? Or is it a losing battle?
SVEN ANDERSEN: Well, we think it is important to offer the employees room for social interaction with your colleagues, with your clients, with your competitors, with a lot of other groups. At home you might be able to focus better, right, if you have a separate office and your children are at school. However, we believe that the creativity and innovation that leads directly to an exchange or collaboration is a face to face meeting at least once, twice, three times a week with your colleagues. Furthermore, and that is very important also what we have learned in the last couple of months, you can’t neglect the fact that a lot of employees, in particular the juniors, the trainees, starters, they need training and supervision and that is very tough if you are only working from home. Also, if you want to be promoted, and you are always at home, I think it is hard to get the attention from the relevant people who are promoting you. So, I think after Covid is over, it will be a new kind of normal in a way, but it will definitely not, as we believe, only working from home.
PIERRE KREEMER: I would definitely agree with your comments and we should all be more centered on the human. The thing is really to play the devil’s advocate and just to rebound on your latest comments. So, as we briefly mentioned working from home would remove crucial opportunities for collaboration and creativity and we absolutely need that face to face interaction to succeed as human beings. So, as the dust settles do you think there’s a chance that office life could return to what was viewed as “normal” before the pandemic?
SVEN ANDERSEN: Well, whatever was normal, I think will be changing, it will definitely be changing as outlined. It will be that the office has to change to be of a more flexible use, that is very very important. To have the humans needs in the focus, in the mindset also of the developers, investors and stuff like that. So, it will be a normal way of doing business in the office, but it has to be much more flexible in that regard, and of course you have to innovate more in the office space. This means new hardware, better materials, cleaning processes, data analytics, and stuff like that, that is very crucial for the next couple of decades. And don’t forget green, so all the ESG things, it is no longer a nice to have, it is a must now.
PIERRE KREEMER: So, you would see kind of a mix between partly working from home and being partly in the office or something like this?
SVEN ANDERSEN: Well of course it depends on the sector, if you are an advisor or something you may work from home more than an account or stuff like that, it depends of course on the sector. But yes, generally speaking it will be more from home than before the pandemic, but it will not be 100%.
PIERRE KREEMER: Moving on, we briefly touched base on this, but I think it is an important aspect to this human dimension of the real estate business. So the desire for face to face interaction is certainly not the only reason people may want to return to the office because pre pandemic, if I take the example of a 100 m2 apartment, it was sufficient for lets say two adults and two children, but having to factor in working space within these measurements has left a majority of the population feeling cramped. So, in the long-term, is the home office only useful for high earners?
SVEN ANDERSEN: So, this is a very interesting question and I think there will be a lot more studies and reports coming out in the next couple of years. What is the impact of the pandemic on our social life? It’s not only what you have said it is also schooling, what about the children and stuff like that. So I think, as already outlined, of course you save the way to the office, of course you save the time not in a traffic jam or something like that but on the other hand if you’re having a 100 m2 apartment as you outlined, it is difficult to really have in your home a kind of environment where you can easily work for eight hours with no kind of hiccups or something like that. So especially if you have no office space meaning an extra room for it or you’re only having a desk in your dining room or something in the kitchen, it works for two or three months but on the longer run I think its very hard. And we see from our experience that these people want to get back at least to normal, meaning at least four times a week to the office. So, in the long run, we do not see a dramatic change in that, that the people will get a bigger apartment or something like that, because this is also quite expensive, especially in the big cities. So, we will have a mix, of course there will be a kind of people who are looking now for an extra room or something if they are now looking for a new home or apartment or new house, but it is a mix of both.
PIERRE KREEMER: Okay, I have a friend who is a real estate broker and we were discussing this topic recently and he was saying to me that he was well, acknowledging the fact that there is an increased demand for residential housing with either a garden or terrace or balcony, to help more often being at home than before, so that’s an interesting trend that we will see if it continues or not and what could be the impact on pricing as well.
SVEN ANDERSEN: Yeah, I totally understand that, but you have to see that a lot of people are living in big cities where it is, first of all, quite expensive to get this and secondly you have also to build first this. There is of course a lack, but I see a trend that it is also a little bit that some people are moving out of the cities to more the suburbs or to extend their space.
PIERRE KREEMER: You mention big cities, and frankly it is a whole topic in itself, but I always learned that real estate means “location, location, location”, this is driving price, this is driving demand, investor appetite, fund manager interest, etc. etc. Question would be that, I mean, we are used to consider, at least this is my experience and you also commented on this, there is a big appetite to go to big cities when investing in properties, now with the pandemic and this working from home trend do you think we would also need to consider the cities where the offices are located? Which might not always completely match where people live, so the pandemic has caused people to leave major cities sometimes, if they have a second place in the country side etc. to enjoy a more relaxed atmosphere and this might have been also causing rent prices to plummet in some major hubs. So, how can cities reinvent themselves in light of this?
SVEN ANDERSEN: This is a very interesting because we at least can a little, as you outlined from your broker dealer there is a little trend that the people are looking for more greener areas, where the garden is, or more space in their private apartments or private houses so they can better work from home and they can have more space but at the same time as you see not only in the major cities in Western Europe the prices are increasing heavily in these suburbs. So yes, there will be a kind of moving out, but I think we have to wait until the pandemic is over. There is still a big trend to this, I really doubt that it is a really big trend because cities themselves are also positive and with the vaccine leads to a new normal, what the city is all about, so to have everything inside, cultural, a lot of people will look for this again. We will see what the future brings but I think there will be a trade off between both.
PIERRE KREEMER: Thanks, and again to work on this kind of balance between private life and working from home and professional life and social interaction in the office, do you think satellite offices and co-working spaces could be the answer to this mass exodus from major cities, or to avoid these traffic jams and time lost, etc.?
SVEN ANDERSEN: Well, the concept of co-working is now booming and for example Germany has quadrupled
to almost 1,300 since the beginning of 2018, so it is a huge increase. So, I think we see that as a useful edition
to additional workspace, but it will not offset the traditional, it will be a complimentary additional working space. And we see especially Luxembourg already has in place for some of the Big 4’s, they have satellite offices for their people who are working in other countries and we will see it also in other countries can have both, so the opportunity to talk to people from other industries, also events, but not having the way to the office is not as far as the normal office or the headquarters. So, it is a complimentary addition to the traditional workspace.
PIERRE KREEMER: Now, a question which I love to ask, if you had money to invest and your investment strategy was commercial real estate, what would be your project?
SVEN ANDERSEN: I would focus on offices in European smart cities with historically low vacancy which we could, or I can be acquired for a discount. I think offices will have a good future as outlined, but you have to invest into the right space and into the right cities, and I would invest into this kind of strategy.
PIERRE KREEMER: And do you want to be a bit more precise, or not?
SVEN ANDERSEN: Well, this should be fine for this time.
PIERRE KREEMER: Okay, and just to come back to these latest comments, from a geographic point of view, do you have preferred countries and for which reason?
SVEN ANDERSEN: Well, I would focus on Western Europe because I think in the next couple of years it is safe and on the other hand it also has the perspective of growing especially if you look to France or to Spain, so I think now of course Spain is heavily affected by the pandemic but I think it will come back in a couple of years. So now you can make sure that you participate in the upcoming again of the market.
PIERRE KREEMER: Interesting, thank you very much for sharing your views. Now, before we finish could you describe the state of the real estate industry in five words.
SVEN ANDERSEN: I would say the following, we can manage the change.
PIERRE KREEMER: Okay, that’s an interesting one, for sure what my takeaway from this conversation is that the world of tomorrow will be different to what it was before the pandemic and this is particularly true and relevant for office space. Well, there are still some certain adaptations to be made in the market and in the economy, but this is also leading to many new opportunities I would say, and a new way of considering real estate investment. I would like to thank you Sven for your views for sharing your visions, your forward-looking ideas for what the real estate market will be in relation to commercial real estate. And I would like to thank you for your time and also for being with us this afternoon. Anything else you would like to add from your side?
SVEN ANDERSEN: No, and I would like to also thank you and KPMG for being able to share the views, my views, or FREO’s views on this so thank you very much for the invitation.
PIERRE KREEMER: You are most welcome Sven, it was a pleasure, thank you again.
SVEN ANDERSEN: Thank you.
PIERRE KREEMER: To conclude, I would say there are lots of encouraging signs for the economy to recover with the vaccines and the Covid crisis hopefully coming in a few months to an end, and the economy expects to be again very active and real estate will for sure continue to be a very appealing, very looked after asset class in the center of many investors strategies. So, I really look forward to seeing how the market will react, having in mind there is still so much cash being available and investors willing to take risks. This asset class, real estate and office buildings in particular, perhaps in the revised shape we have seen in this discussion with Sven, from FREO, we will see how this interesting dynamic will evolve in the coming months. Thank you again to everyone for listening to our podcast and I look forward to your feedbacks. Thank you! Bye bye.