Steve Jude’s latest column in Property Week talks about how the property industry needs to get on board with yield management06/04/2018
In Citibase CEO Steve Jude’s latest column in Property Week, he discusses how ritual humiliation taught him everything about yield management.
With the sunny beaches of Cannes and MIPIM 2018 still fresh in the mind, I was recently reminded of an earlier memory of another beautiful Mediterranean resort. With seagulls overhead, my mind wandered back to my time in the travel industry, and the lessons it holds for the office market.
As I write, we are only one more MIPIM and one year away from leaving the EU. During these uncertain times, the property industry is closely managing its assets more than ever to ensure the maximisation of the yields that are available to us. The MIPIMs of recent years have demonstrated the lessons that property has taken from the travel industry around the management and efficiencies driving such yield management – a principle whose importance I recognised from an early stage of my career.
When I left business school, I was delighted to join the graduate training scheme at package holiday giant TUI Travel. My first assignment was in sunny Majorca and imagine my surprise on learning that the traditional humiliation for the new boy from head office was to masquerade as the official mascot of the company….Tommy the Seagull.
Whilst this initially ruffled my feathers, as someone who searches for opportunity in adversity, I spent my summer as a seagull contemplating the economics of the travel business.
Whilst encased in my rather warm, feathery regalia, it struck me that profitability in the travel sector was mostly about yield management, something that the office market hadn’t yet clocked onto. With a combination of high fixed costs but variable revenues, the travel business is forced to specialise in yield management.
Like rotting fruit on a stall, airline seats and hotel beds are perishable goods. If they are not occupied today, they lose all the potential revenue for today but retain all of the costs. The key principle of yield management is that if capacity is fixed, price is used to regulate demand. If demand is strong, then price goes up and if demand is weak, vice versa.
With around three million holidaymakers having passed through my yield engine, I decided to spread my wings for the flexible officing sector – and to this day I still see office buildings as airlines. The exterior walls are the fuselage and the workstations inside are the seats. If any of the workstations have not attracted the maximum revenue possible, then an opportunity is lost forever.
As with an airline, most of the money in offices is derived from the best seats in the best buildings. Airlines spend a fortune plying first class passengers with fine wine and Belgian chocolates. Although profitable, these first-class passengers usually only contribute a quarter of total airline revenue. Likewise, in the office market, Grade A stock gets much of the attention, but 95% of the market turns right when boarding. Long-term leases are the preserve of first-class passengers, while flexible offices suit the requirements of the majority.
The world of work has changed forever, with the shift towards agile workplaces boosted by a number of practical considerations including the liabilities caused by IFRS 16 as well as uncertainty caused by Brexit and fraught geopolitical tensions.
In any market which is buffeted by short-term uncertainty and a longer term radical shift in how the world of work is changing, less demand than supply means prices will come down. And with the biggest source of office demand in London last year being from the serviced office operators (effectively the wholesalers of the property industry), the downside risk to pricing is increased. All commentators agree that the flexible officing trend is forecasted to accelerate. As flexible officing is based on variable revenue, property professionals urgently need to add a working knowledge of yield management techniques to their office toolkit.
Luckily, seagull costumes are no longer required!
Read the full column on Property Week here