Occupational markets: Financial resilience and the pause button come into play
6 minutes to read
• The great global workplace experiment as a source of demand
Following lock-down in many global markets, the acronym WFH has entered the office workers’ lexicon. The rapid and widespread adoption of technology to enable remote working may fuel demand from the tech sector, and extend the dominance of the tech titans.
• As sentiment turns downwards…
This week has provided some evidence of declining corporate sentiment. This is likely to lead to occupiers reaching for the pause button in many global markets.
• … focus turns further towards financial resilience…
As sentiment has fallen, attention has turned towards corporate financial resilience, with a range of financial plays in evidence as the dash to cash begins in earnest.
The great global workplace experiment continues. Encouragingly, offices are now re-opening in China and South Korea, albeit with extraordinary levels of testing, but for the majority of office workers in Europe, and now the United States, lock-down is a reality, as is the acronym WFH. As with any change management process, it is important to review the effects of working from home over the longer-term, but there is no-doubt that the mobilisation of entire workforces towards remote working has tested business leaders and brought sharp focus to implementing and leveraging the technology platforms so essential to ensuring operational resilience.
Under the weight of such enormous global demand, there were numerous reports this week of technology companies encountering cloud capacity constraints. This forced Microsoft to prioritise access to its cloud product suite to those at the front-line of the COVID crisis and make temporary changes to some of its offerings. If global demand for increasingly familiar products such as Zoom, Skype for Business and Teams, and emerging remote working tools continues to rise, this may generate new expansionary demand from the tech sector. For example, several start-ups that could capitalise on social distancing have successfully raised VC funding recently. UserTesting, which helps companies conduct virtual focus groups to gain customer feedback, banked $100m. Honorlock, a developer of on-line test-proctoring software, inked $11.5m for its Series A funding, and Around gathered $5.2m for its Zoom-style software for workplace video calls.
While the rise of these start-ups is encouraging, a potential outcome of the current crisis is that big tech will continue to get bigger. Some analysts are suggesting that there will be a renewed acquisition spree by the titans – such as Amazon, Microsoft and Google – who, buoyed by growing revenues from their remote working technologies, can pick up start-up businesses with great ideas or underlying business models but who are facing financial meltdown amid evaporating consumer demand.
On this point of falling demand and challenges in corporate finance, this week has brought some early indications of the impact of the crisis on business sentiment. Outside of rising unemployment levels across many global markets, business sentiment indicators have also turned downwards as COVID-19 takes hold. The latest IHS purchasing managers index for the Eurozone, which essentially tracks business activity in services and manufacturing– fell to 31.4 in March from 51.6 in the previous month, its lowest level since the series began in 1990. The same index for the UK fell to 35.7 compared to 53.2 – again the lowest level since the series began. Although these figures are worrisome, there may be some room for optimism from manufacturing PMI data released from China today, which saw a return from similar lows to a figure above 50.
In a similar vein, the latest data release on UK M&A activity reported a significant drop, although some mega deals were in evidence. Figures for March point to only 131 deals involving UK-based companies, compared with 447 over the same month a year ago. It is likely that outside of the tech sector M&A activity will be muted, particularly as Government’s seek to tighten regulation around foreign direct investment to limit predatory acquisitions of companies providing critical infrastructure in sectors such as healthcare.
Numerous press articles over the last week have recited the Warren Buffett quote that “It is only when the tide goes out that you get to see who has been swimming naked” as concerns about corporate indebtedness rise. A report issued this week by the China Economic Review, suggests that COVID-19 threatens some $32tn of Asian corporate debt and could induce a wave of bankruptcies across a full spectrum of industries. This follows a sustained period of low interest rates, which have encouraged Asian corporates to take on increasing levels of debt. Estimates indicate that total corporate debt in the APAC region has doubled in the 12 years following the global financial crisis.
In addition, there has been an increase in corporate profit warnings. Accounting firm EY maintain that there were 25 profit warnings related to Coronavirus during the last week, with 87 per cent of all profit warnings issued by UK listed companies in the last three weeks citing the virus. While many of these will emerge from businesses in the hardest hit sectors of tourism, leisure and retail, there is potential for a broader church of sectors to be impacted, owing to falling demand or challenges to business as usual (despite the adoption of technology).
It is clear that business leaders, having dealt with short-term operational challenges, are now starting to focus on building financial resilience, and in particular are racing to preserve cash to underpin their businesses over the course of what is an indefinite crisis. A number of energy companies including Shell and Total announced plans to reduce capital expenditure. Softbank announced a $41bn asset sale to reduce debt, while Santander and a number other companies scrapped plans for dividend-pay-outs. Some of the highest rated companies are bolstering cash through the corporate bond markets with some $244bn in March, while others have drawn down from emergency credit lines.
The need to preserve cash and hence reduce capital expenditure will inevitably have consequences for corporate real estate strategies. In Asian markets, which were first exposed to the crisis, we have seen strategic relocation or fit-out projects that require significant capital outlay being placed on hold. However, given the paucity of supply in Asia and beyond, we expect occupiers to pause rather than cancel activities. Such behaviour is likely to ripple across global occupational markets, with occupiers continuing to strategize and plan, whilst taking more time to transact unless lease structures force activity. We are also witnessing a growing volume of occupiers seeking rental concessions from landlords, although some of this may be opportunistic rather than forced by underlying business performance.
Finally, in terms of mid to longer-term implications on business, a nuanced picture is emerging at an industry sector level. The immediate hit to demand has negatively impacted sectors like hospitality but, as noted, the tech sector appears more resilient. Indeed, European tech firms bucked the downward trend and reported nearly $500mn worth of deals on Monday as VC funds continued to invest.
Another positive example is life sciences. Gilead shares rose as they moved forward with regulatory approval for a promising COVID-19 drug and Governments are ploughing money into R&D investment. Medtech companies in particular are increasing production and using collaboration and technology to fast-track R&D and clinical trials. Ventilator manufacturer, Medtronic, headquartered in Dublin, has increased production by some 40% and will double its capacity to manufacture and supply ventilators, while late this week Dyson announced the large-scale production of a new ventilator following a sizable order from the UK Government.
From a real estate perspective, the rise of the life sciences is fuelling activity. Manchester Science Partnerships, for example, has gained consent for the 125,000 sq ft fourth phase of its £150m Citylabs life science campus and remains “determined to complete” the second phase currently on site and fully-let to an occupier actively involved in COVID-19 testing.