Big changes in how the world runs tend to happen relatively slowly. Even wars have usually been preceded by rising tensions where the potential risks were obvious. In the same way, most of the trends that may be propelling us into a much less stable era than the last 40 years have been evident for some time. US-China disputes, inequality, money printing or climate change – these have been building for a decade or more.
Covid-19 is an obvious exception to this: it has upended the world more abruptly than any event in modern history. And in doing so, it has single-handedly created one major immediate question: whether people have shifted to working from home permanently, and whether the centres of big cities – which have been huge beneficiaries of globalisation – will be hollowed out as a result.
It’s all about demand
Lots of investors clearly believe this. The shares of many major companies and real-estate investment trusts (Reits) that own prime office space remain 35-45% below their pre-pandemic prices in the UK, the US and Europe. Given that the risk of interest rates rising must be almost zero for several years, there isn’t much rate-related threat to their valuations – you’d expect them to trade on lower yields in future, to reflect lower yields available elsewhere. So the risk for financially solid firms is almost entirely in future demand – a bet on whether the world has changed for good.
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How realistic is this? At the moment, we have more anecdote than data, but after six months, there are signs that firms are starting to find the problems in permanently working from home. JPMorgan has seen a decline in productivity, the bank’s chief executive Jamie Dimon told analysts last week, and also fears that younger employees miss out on the opportunity to learn from experienced ones. It’s now encouraging staff in the US to begin returning to offices. Meanwhile, surveys of employees typically suggest that people want the flexibility to work from home, but not to do so all the time. In many countries in Europe, the process of returning to the office is already more advanced than in London or New York (whose density – including crowded public transport – may delay it until there is a vaccine or treatment).
If Covid has changed where we work for good, office owners are a weak play on recovery. If people will return much of the time, they are very cheap. I’m slowly adding Land Securities (LSE: LAND) and British Land (LSE: BLND) despite the Brexit risk, and also hold Aroundtown (Xetra: AT1) in Germany. But there are many other options to consider if, like me, you are inclined to take this bet: Boston Properties (NYSE: BXP) and Vornado Realty Trust (NYSE: VNO) are two that are worth a close look in the US.
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