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Rent Implications as COVID-19 Fast-Tracks the Future of Work (Exclusive)

Rent Implications as COVID-19 Fast-Tracks the Future of Work

COVID-19 is forcing the world of work to move online. As homes become offices, questions are asked: is part of this shift permanent, and what is the repercussions on commercial offices? Victor Yeung, the Chief Investment Officer of Admiral Investment, discusses how Hong Kong businesses have moved online and the implications for rents in suburban and city offices.

Hong Kong, along with Taiwan, was the first society alerted to the spread of Covid-19 outside of Mainland China.  Protocols, from both the government and corporates, were quickly implemented.  Scholars have attributed the relatively low infection rates to the thoroughness in the government’s actions to prevent its spread. 

For Hong Kong, the 2003 SARS epidemic and the subsequent containment measures are well remembered. 

SARS’s protocols click into gear

The SARS epidemic was a defining moment for Hong Kong. The city spent roughly three months in heightened mode to stop the spread of the virus. Habits, such as wearing masks when one is under the weather and using serving chopsticks, originated during the SARS, became ingrained in Hong Kong’s culture. 

Covid-19 has brought back many of those protocols. With the benefit of IT developments 17 years later, working and learning from home has become more efficient. Even after Covid-19 abates, we expect this campaign to bring permanent changes to the real estate markets. 

A home with office efficiency

Since the Lunar New Year, the Hong Kong government has announced that all civil servants will work from home. Many corporates have made similar arrangements.  Granted, some companies need to maintain physical presence at the office, while others have split teams taking turns to work in the office and from home on a rotation schedule.  

While there are no precise data, the number of people who have switched to home-office is probably in the hundreds of thousands—perhaps reaching as many as half a million.  As of early March, many of these measures remain in place, meaning that the work-from-home protocol has already been active for six weeks and could last for another month.

However, the arrangement took some time to take root. In the first week, a group of high-flying management trainees from a major bank was caught hiking during work hours. But as soon as society understands that the protocol could last for weeks, work productivity gradually picks up.  Modern IT systems allow staff members to access work information remotely.  Many calls took place via the internet, allowing employees to stay in touch with both internal and external contacts. 

Working from home can benefit staff, from reduced or eliminated travelling time to a healthier diet by eating at home.  In many other societies, working from home is already part of a work-life balance programme.  

Companies, especially those on flexible workstation arrangements, should embrace a more permanent scheme to reduce office use.  For example, a one-day-per-week protocol could cut office space requirement by 20%.  Incrementally, productivity will rise while rent expenses ease.

Video calls become a norm

All Hong Kong schools from primary schools to universities have been suspended to reduce cross infections.  Many schools maintained their teaching through online means.  My 8-year-old son currently attends up to five school lessons per day via online video chats with his teacher, and many of his friends are taking extra-curricular activities through video calls. Even my lectures for a masters-degree programme have moved online.   

As a lecturer, I invested about US$50 on new equipment, including a light stand and a microphone. Similar to the work-from-home situation, once society realised that the protocol could last for weeks, people started to look into video communication set-ups.  In March, I have conducted online webinars and competitions for two industry organisations, and the format has received favourable feedback.

In the past, the finance and real estate sector often saw video conferencing with clients as less desirable than in-person meet-ups.  However, as video conferencing becomes the norm, more meetings could take place via the internet.  This will further reduce the apparent distance between office nodes and even provide an incentive to investigate alternative markets.  

Levelling of rent

Over the past several years, Island East and, to a lesser extent, Kowloon East have both seen large banks, law firms, and other corporates moving in. Still, the demand in Hong Kong Central has been strong enough to maintain a respected rental premium.  More widespread use of online meeting tools can reduce yet another barrier to relocate.  Over time, this may contribute to a smaller rental gap between Central and the other hubs. 

As activities gradually move online, IT-related assets, such as data centres and cell phone towers in the U.S., will see an expansion in demand.  These assets are now available as REITs, and we expect more capital to be deployed to these asset types.  

Also, as societies get comfortable with teammates being in a variety of locations, the traditional clustering effect will weaken.  Secondary office nodes may become incrementally more appealing, as the company pays less rent, and the staff enjoy more accessible amenities.  This could level out rental rates between city centres and the suburbs for many countries around the world.

 

Story was posted on April 24, 2020. (Image courtesy of the Hong Kong Society of Financial Analysts)