Will ‘working from home’ change how we invest in property?

working from home

If many employees continue to work from home, then perhaps demand for property in close proximity to capital city CBD’s will fall. And conversely, perhaps demand for property in regional centres that are well serviced by pubic transport (trains) will increase. This encourages us to consider whether the work-from-home movement will change the way we invest in property.  

Covid forced us to work from home

Most employees have been required to work from home over the past few months due to the COVID shutdown. Of course, for most businesses, mobilising their entire workforce at short notice created a number of teething issues. But most businesses have adjusted to the ‘new normal’. They have resolved most operational issues and staff, in the main, are enjoying the flexibility that working from home provides.

Of course, this is not true for all businesses and employees. Working from home suits some roles, employees and industries better than others.

Some of the benefits of working from home include improved productivity due to fewer distractions. The elimination of travel time means employees can spend more time with family and/or complete more work. Therefore, it seems to provide benefits for both the employer and the employee.

In fact, Twitter is the first global businesses to confirm it will now allow employees to work from home permanently. Senior public service leaders in Canberra and many states and territories around Australia are also contemplating more permanent work-from-home policies too.

But it has its downsides

Of course, it’s not all positive. There are some downsides to working from home. These include not having a suitable workspace and limited face-to-face contact with clients and co-workers.

Research conducted by Dutch social psychologist, Geert Hofstede highlighted that human connection and relationships in the workplace are big contributors to job satisfaction. We have all come across people that dislike their job/employer but stay because they enjoy the people they work with. The reverse is also true i.e. people have left a role because they disliked the people, they worked with even though they make have loved the job.

Impact on demand resulting from working from home

Of course, if more employees work from home permanently – either on a full-time or part-time basis, demand for office space will fall, which will likely have negative consequences for commercial real estate. But what about the residential property market?

If people choose to work from home, then they no longer have to commute to their workplace. This gives them more options in terms of where to buy a home. For example, a greater share of the population may be more attracted to regional cities and towns, particularly as housing is more affordable in these locations. If that is the case, demand for housing in capital cities might fall, creating downward pressure on prices.

There are many important factors that determine where we want to live  

It is important to remind ourselves that our choice of where to live is influenced by many factors, and proximity to one’s workplace is only one of those factors.

Perhaps the most compelling consideration for families with children is education. Living in a regional town might otherwise be attractive but if that means kids have a 1.5 hour each-way commute to school, it’s probably not going to work.

Proximity to family is also a persuasive factor when determining your home’s location. This is particularly the case if you need to look after your unwell parents or if parents provide pro bono babysitting services.

Other considerations can include proximity to health services such as hospitals and amenities such as entertainment, shops, restaurants and so on.

You must invest in a location that benefits from diversified demand

When investing in property, selecting the right asset is paramount. You must only invest in locations and properties that benefit from a sustainable and diversified level of demand.

I explain this concept to my clients by using the following theoretical example: we want to invest in a property and location that notionally has 20 potential buyers for ever one seller i.e. demand outstrips supply. Those 20 buyers will be from various demographic and socioeconomic segments such as investors, first home buyers, upgraders, empty-nesters, retirees and so on. These buyers could include executives on above-average incomes, self-employed persons, young professionals, self-funded retirees and so on – essentially you want a diverse array of financial circumstances.

Therefore, in this situation, if working from home becomes more common and fewer people desire to live in a capital city, then notionally, the pool of potential buyers might reduce from 20 to say 17. Irrespective, as long as demand is perpetually higher than supply (supply is fixed in blue-chip suburbs), it is likely you will experience price appreciation.

Of course, the work from home tend could have some implications  

Naturally, there will be some geographical locations that will be adversely impacted to a greater extent as result of an increase in work-from-home activity. For example, families with limited earning potential and financial resources will probably benefit to a greater extent by moving to a regional centre because their purchasing power is greatly improved.

Future proof your investment methodology

There are a few possible changes on the horizon that could have a material impact on how and where we work and live, working from home is one. Another is self-driving cars as they may lessen the burden of commuting to work. Property investors must incorporate the risk of these factors changing the future demand for property in their investment decisions.

The best way to mitigate many of these risks is to level up on quality. That is, invest in the highest quality asset and location your budget will permit. Just like with any asset class, your investment’s quality will directly determine its investment returns. That is, you cannot expect above average returns if you invest in a below-average quality property.

Do not compromise on asset selection

To use an analogy, when it comes to property selection, we are not just searching for a diamond, we want a pink diamond. Something that is in such short supply (scarcity) and perpetually high demand. Remember the three factors being scarcity in terms of location and property type, high land value component and a history of strong growth (see here).  Do that, and your investment portfolio will weather most storms.

This article appeared in The Australian newspaper on 19 May 2020 (here – paywall).