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Investing for the asset-light generation

Google’s keynote speech at the PERE Summit Europe this week underlined how private equity real estate firms need to be ready to accommodate changing worker and consumer habits.

Matt Brittin, who runs the Northern Europe business for Google, told delegates at the PERE Europe Summit this week how the ‘asset-light generation’ had arrived carrying smart phones, tablets and before long ‘Google Glass’, the search giant’s wearable computer with head mounted display prism.

According to Brittin, this “consumerisation of IT” and how it translates into people’s behavioral patterns is something property investors must get to grips with, and fast. The more things people can put in the cloud, the less stuff they need at home and also in the workplace. Just as the 20-somethings aren’t buying physical books or records anymore, so the availability of business software such as Google Docs is leading companies to invest in non-physical assets rather than filing office space with cabinets and storage areas.

The impact of the asset-light trend on occupiers is already global. Gunnar Branson, the chief executive officer of the US National Association of Real Estate Investment Managers, recently said the “most incredible changes” were taking place in property and warned that the real estate industry was selling the wrong thing (square footage), because companies and people were buying something different. “Less stuff, more living,” he said.

One example of that is law firms. The typical law firm is leasing one third less office space compared to ten years ago, Branson noted, because they don’t need libraries anymore and they want smaller floor plates and lots more windows.

In distribution property, e-commerce is also having a radical effect. As PERE recently reported, as the likes of Amazon and eBay continue to grow at staggering rates, so do their needs for global warehouse space. At the same time, however, this increase is coming at the expense of traditional retail property. The latter is far from dying out altogether, but it sure is diminishing and needs to redefine itself.

One interesting case study in how fast-growing companies want to be nowadays is Google itself. Its mantra is not that people should work at home. Instead, it wants office space where staff including the rock star engineers can swap ideas easily.

For that reason, Google’s brand-new £1 billion UK headquarters in Kings Cross will have a wide range of cleverly configured break-out areas where it believes many a Eureka moment can occur. The new pad will come with a top-notch BREEAM environmental rating, plenty of bicycle bays, allotments and a so-called ‘promenade’. It is all about “connecting people”, said Brittin, and he also made the telling revelation that the place will be pretty densely populated, with between 12 and 13 square meters per employee against the London average of 15 square meters per person. “We try to ram people together, and mix them up as much as possible to make ideas flow between them. We think it is really important to be physically together.”

These were some useful messages for the private equity real estate firms in the audience. Clearly Google – and other fast-expanding companies like it – still want to keep their workforce in one place. But there is no denying that the needs of commercial occupiers are also changing radically, as technology continues to transform the way people work. And, of course, how private equity funds capture the demand of their customers will ultimately affect the value of their investments and returns to their investors. Paying close attention to this, and drawing smart conclusions from it, could easily make your next fund a stand-out performer, as opposed to merely a mediocre one.