Ilse French and Pierre de Villiers have looked into the likely changes in the real estate landscape over the coming years and identified the key trends which, they believe, will have profound implications for real estate investment and development
As confidence returns to real estate, the industry faces a number of fundamental shifts that will shape its future.
REAL ESTATE’S CHANGING LANDSCAPE
Global megatrends will change the real estate landscape considerably over the next six years and beyond. While many of the trends highlighted are already evident, there’s a natural tendency to underestimate how much the real estate world will have changed by 2020.
- Huge expansion in cities, with mixed results. By 2020, the 21st century’s great migration to the cities will be well under way. Cities will be swelling across the fast-growing countries of Asia, Africa, the Middle East and Latin America. Even the developed Western countries will be urbanising, albeit at a slower pace. Come 2020, cities will be competing fiercely with each other. But while some cities will become centres of wealth creation in a multipolar world, others are likely to fail. Those that emerge as their region’s leading cities are likely to provide opportunities for attractive returns.
- Unprecedented shifts in population drive changes in demand for real estate. Shifting demographic trends will create a huge need for new and different real estate by 2020 and beyond. Population growth and ageing will lead to several real estate subsectors emerging. While office, industrial, retail and residential will remain the main sectors, affordable housing, agriculture, healthcare and retirement will become significant subsectors in their own right.
- Emerging markets’ growth ratchets up competition for assets. Real estate is an integral part of the emerging markets’ growth phenomenon. As emerging markets mature, they’re creating powerful real estate investors, as well as new regional and local asset management companies with real estate arms. As a result, there’s both growing competition for real estate assets and growing competition within real estate asset management.
- ‘Sustainability’ transforms design of buildings and developments. By 2020, it’s likely that all buildings in advanced economies will need to have sustainability ratings. What’s more, the concept of sustainability will have broadened to mean creating “places” where people enjoy living and working. For real estate asset managers, the move towards greater sustainability in building design presents opportunities and risks. New developments will be designed with green spaces, good air quality, and so on, but who will pay for retrofitting existing buildings to improve performance, and what will happen to a building’s value if this is not done?
- Technology disrupts real estate economics. Technology is finally coming to real estate. By 2020, it will have both altered the economics of entire subsectors of the industry and changed the way that real estate developers and the investment community operate. Looking forward to 2020, real estate players really need to understand how technology is affecting their sector.
- Real estate capital takes financial centre stage. Private capital will play a critical role in funding the growing and changing need for real estate and its supporting infrastructure. Just as asset managers, real estate funds and sovereign wealth funds find the assets under their control swell, so there will be a growing need to finance urbanisation. Private real estate capital will become an important partner of governments. Real estate managers will need to leverage the full range of financing possibilities to take on new types of risk, often with long-term investment horizons.
IMPLICATIONS FOR REAL ESTATE STRATEGIES
- The changing landscape will have major implications for real estate investment and development. It will increase the size of the asset pool, yet change the nature of investment opportunities. Real estate organisations will need to adapt early to survive and prosper.
- Think globally. The global investable real estate universe will expand substantially, especially in emerging economies. World population growth and increasing GDP per capita will propel this expansion. By 2020, investable real estate will have grown by more than 55% compared to 2012, according to PwC forecasts, and then will expand by a similar proportion in the following decade.
- Understand the underlying economics of cities. Fast-growing cities will present a wider range of risk and reward, ranging from low risk / low yield in advanced economy core real estate to high risk / high reward in emerging economies. The greatest social migration of all time – chiefly in emerging economies – will drive the biggest ever construction surge. The real estate investment community can deploy urbanisation strategies ranging from higher risk opportunistic development to lower risk prime investment. But no matter which approach they choose, they’ll need a clear strategic view of why a city will be successful.
- Factor technology and sustainability into asset valuations. Sustainability issues will transform the design of buildings and places in advanced economies. Some buildings without competitive sustainability ratings will suffer a “brown discount”. Technology will disrupt real estate economics, increasing the danger of obsolescence.
- Collaborate with governments to enable economic and social progress. Real estate managers, investors and developers will need to partner with government to mitigate risks of schemes that might otherwise be uneconomic. In many emerging economies, governments will take the lead in developing urban real estate and infrastructure.
- Decide where and how to compete. Competition for prime assets will intensify further. New wealth from the emerging economies will intensify competition for prime assets. Real estate organisations will need to think laterally, while concentrating more than ever on the basics of local knowledge and tenant demand.
- Assess opportunities to reflect a broader range of risks. As the nature of real estate investment changes, becoming more global and specialist, more risks will emerge. New risks will include those of partnering with local developers or governments in emerging economies, as well as risks associated with regulation and tax in an ever more globalised industry.
In order to prosper in real estate’s new world, leading industry players such as managers, developers and the investment community need to make sure they have the right capabilities and qualities.
- A global network with local knowledge and good government relations. Do you have sufficient local knowledge in your target markets? Do you have a network with good local real estate connections and government relations? If you need to form partnerships or joint ventures with local real estate firms, do you have appropriate expertise in structuring agreements?
- Specialist expertise and innovation. Do you have the specialist expertise needed to take advantage of emerging opportunities? Do you have the right skills you may need in specialist subsectors? In urban economic analysis? Deal structuring? Asset value management? Risk and reporting? Regulation and tax?
- Cost management and scale. Does your operating model have sufficient scale to assume increasing costs? If you’re moving into new markets, do you have local partners to mitigate cost? Have you evaluated the cost benefits of new technology solutions or outsourcing?
- The right people. Do you have the right incentives in place to attract and retain talented real estate professionals? Do your remuneration models incentivise staff for customer satisfaction, quality of service, team pursuit of opportunities and innovative thinking? ❐
Author: Ilse French is Africa Asset Management Leader at PwC and Pierre de Villiers is South Africa Real Estate Leader, also at PwC