How the sharing economy is disrupting the property sector

Summary

  • The sharing economy includes hundreds of online platforms that allow people to turn unproductive assets into income through a better management approach
  • New consumers’ trends and technologies in the sharing economy are likely to transform the property sector sooner than expected. Traditional leasing models and its management are likely to be redesigned
  • There will be growing demand for dynamically configurable spaces so traditional property owners, developers and lenders need to re-think their investment strategies

Introduction

New consumers’ needs, technology and mind-sets are changing how real estate is designed and managed, and how people live and work. These trends are also changing the way space is used in different sectors, and this will continue to evolve in the next few years. You can call it the ‘sharing economy’, ‘collaborative economy’ or ‘the democratisation of real estate’, but according to a recent PWC report, capital flowing in the UK through the sharing economy and collaborative finance platforms is likely to increase to £70bn per year by 2025 from a figure of around £3bn today.

What does ‘Sharing Economy’ refer to?

Sharing economy is an umbrella term used to describe economic and social activity involving online transactions. In practice, consumers serve each other directly rather than being served by companies and pay for the use or access of goods and services rather than own them. Technology advancements, consumption and lifestyle patterns, along with societal factors, are driving the rapid growth of the sharing economy. Examples in the hotel, office and retail sectors

Examples in the hotel, office and retail sectors

An excellent example of this digital disruption in the property sector is Airbnb, the online marketplace for renting accommodation. With over 1.5 million global listings across more than 190 countries, the San Francisco-based company is catering to more than 40m guests and has revolutionised the concept of renting a wide variety of accommodation for business and leisure travellers. Many consumers think that it is more convenient to use such a service rather than reserve hotel rooms, and at the same time enjoy the unique customised lodging experience they are able to create for themselves. As a result, in the 6 years since its foundation, Airbnb is managing more rooms thanHilton Worldwide, which has been in the business for more than 90 years (650.000 vs 610.000 circa).

The sharing economy is also leading new forms of collaboration between ‘unusual’ partners. For instance, a few years ago the international chain Marriot began a partnership with LiquidSpace (online marketplaces for short-term rentals) aiming to transform the conference rooms of 40 Marriott hotels situated in Washington DC and San Francisco into flexible offices when they were unoccupied. Given the success of that initiative, the collaboration has been gradually extended across the Marriot chain. For the hotels, there is a double benefit: they are improving their room profitability and are also attracting clients to their hotels who had not set foot in them before, thus generating new sales opportunities.

In the office sub-sector, WeWork, Regus, Desk Near Me and LiquidSpace, lease office spaces on demand, fostering flexibility. These online marketplaces offer a wide variety of short-term rentals, ranging from day offices, hourly use, to virtual offices and other uses. The so-called ‘corporate co-working’ is another great example of these emerging trends. For instance, Google is successfully enjoying the co-working formula, according to which freelance workers and companies share the same workspace in its London Campus. It includes three floors of offices devoted to co-working and open to local entrepreneurs and freelancers. Also, other firms such as PwC and AT&T are developing business collaboration with co-working spaces and offer their employees great work flexibility, including the choice of working from home, at the office or in a co-working space to carry out their daily tasks.

In the retail sector, online marketplaces such as Storefront in the US and Appear Here in the UK offer a platform to brands, designers, and artists to find physical retail space for a short duration, cutting intermediation costs and improving speed and flexibility. Rental periods often average between three to four weeks, providing a temporary brick and mortar space to firms. An online marketplace’s client base may include both e-commerce companies looking for temporary physical sales locations as well as offline firms like restaurants and fast-food chains (e.g. “pop-up restaurants”).

Avamore perspective

The sharing economy is likely to create opportunities for market participants to optimise rates on short-term space, creating more value while allowing tenants to obtain space that more closely meets their demand-based needs. The best asset managers will be able to enhance the yields of buildings through aggressive asset management, but this will come at a risk when demand drops in weaker economies versus the traditional “long lease” investment model.

However, investors, owners and asset managers will face many challenges in managing the use of existing real estate because they may not have the flexibility to accommodate tenants’ varying demand for, and use of, space. Many existing hotel, office and retail spaces may lose utility as new players in the sharing economy redefine space usage. Commercial real estate developers and lenders need to rethink their approach to designing, developing, refurbishing and financing new, and existing, spaces to accommodate the need for dynamically configurable spaces for the end-user. From a finance perspective, a bank’s valuers may need to rethink their appraisal methods. The 5, 10, 15-year lease duration is likely to become less prevalent. In addition, valuing long-term income versus an applied YP/initial yield will increasingly become less relevant for commercial properties, like offices and shops. It is, therefore, more likely that valuers will need to adopt a hospitality-based method (i.e. a multiple of forecast EBITDA) even for offices (similar to the Profit Method recognised by the RICS, already used for hotel and leisure valuations) in determining value.

From a finance perspective, a bank’s valuers may need to rethink their appraisal methods. The 5, 10, 15-year lease duration is likely to become less prevalent. In addition, valuing long-term income versus an applied YP/initial yield will increasingly become less relevant for commercial properties, like offices and shops. It is, therefore, more likely that valuers will need to adopt a hospitality-based method (i.e. a multiple of forecast EBITDA) even for offices (similar to the Profit Method recognised by the RICS, already used for hotel and leisure valuations) in determining value. Lenders and investors are going to need to take a more open-minded approach accordingly, particularly those focused on WAULT (weighted average unexpired lease term) as a measure of the income security of a property.

We, at Avamore, are able to look holistically at a commercial property and not be hung up on the traditional valuation methods. If you are looking to buy a commercial building and lease it in a non-traditional manner, we can form a sensible view for you and we would encourage other lenders and investors to act similarly.

Regardless of the sector, we believe all the traditional players will have to reinvent their leasing approach and lease administration process, as their existing models may not be attractive in the long-term. This may also imply an overall readjustment of their views on ‘asset value’ and its relative buying, selling or renting price.

About Avamore Capital:

Avamore Capital is a special situations lender that provides loans to property traders, property developers, property investors, and other property entrepreneurs. Loan sizes are between £0.5m and £5m with larger loans possible in conjunction with its partners. Avamore Capital provides a flexible approach, quick feedback and very fast drawdown, subject to due diligence.

For further information please visit www.avamorecapital.com or contact Rocco Versace at rv@avamorecapital.com

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