The link between rail pricing policy and working from home

As the UK vaccination rollout unfolds at pace and the economic recovery gathers momentum, the debate over the impact of working from home on office demand continues. A key influence on the outcome for London will be the extent to which flexible rail pricing is introduced in response to commuter demand. Pre-pandemic some 1.1 million commuters travelled into London daily. Today this has fallen by more than half.

As with many other structural changes, COVID-19 has merely accelerated a pre-existing trend as commuting was already in decline before the pandemic. The outlook for commuting isn’t just an issue for London. National Department of Transport data shows that pre Covid 3 million commuters travelled more than 2 hours per day with 180,000 travelling 3 hours or more. London does however have the longest and most costly commuter routes meaning that it is most exposed to shifting commuter habits.

Changes in work life balance are already evident in the residential sector. Locations within an hour’s commute of London are witnessing strong rental and sales markets reflective of heightened household demand for space. PwC forecasts that London’s population will fall by 300,000 to 8.5m in 2021, which if it occurs would be the first drop since 1988. Employees are clearly expecting to take advantage of a better work life balance through flexible working.

Turning to offices, KPMG’s CEO Outlook survey in March last year indicated that 69% planned to shrink their space. This year’s survey shows that had reduced to 17% as business start planning for a post-pandemic world. The future of the office is unlikely to be as bleak as some suggest.

The purpose of the office will change with employers needing to provide more engaging working environments in which wellness is prioritised. The office must be a place employees want to visit and where they can collaborative, creative, socialise whilst also being a meeting place for clients and a space which promotes corporate culture. Attending the office simply to perform tasks which can be done at home will lose its appeal.

However, the willingness of employees to commute regularly will partly depend on rail pricing. Covid-19 has reshaped UK rail’s financial model. With the collapse of passenger numbers in 2020, the Government was forced to bail the industry out to the tune of £11 billion. Crucially too, the revenue model has changed from private firms bidding to operate sections of the network to one where firms are paid a flat fee to run services. The commercial risks and viability of rail travel have been transferred to Government and with it, ticket pricing.

Historically, season ticket pricing discounts assumed daily commuting with season ticket holders needing to commute at least three days per week to break even relative to the cost of a daily ticket. The Government has asked rail companies to propose new pricing models but initial reports suggest that pricing will still be based on a three day travel basis. This is likely to be a financial deterrent to many given that employees will be empowered to choose where to work when and many will not choose four or five days a week in the office. Passenger lobby groups favour the introduction of “carnet” style ticketing with discounts for daily journeys when purchased in bulk. The Transport Secretary, Grant Shapps looks set to announce a carnet arrangement where passengers purchase 8 tickets for 8 return journeys per month with the option to buy more at the same discount.

Whatever happens, pricing is set to become a political issue and the outcome will be important for property given its significant impact on working from home behaviour and ultimately office demand. Workers will opt to stay at home more often if the cost of commuting  is seen as uneconomic and expensive.

We are monitoring these developments closely in the context of our thematic investment research.

James Thornton - Non-Executive Chairman