In 21 Lessons for the 21st Century, bestselling author Yuval Noah Harari writes that the “ability to deal with change” is the most important skill to keep up with the world of 2050.
Even some of the most perceptive commentators have underestimated the speed of change in the age of the internet. At MIPIM 2019, Gareth Lewis, Director, PwC, quoted the CEO of a REIT in the 2017 edition of Emerging Trends in Real Estate ®: “Twenty years ago we had tenants. Today we have customers. In 20 years, we will have guests.”
That 20 years has been, in fact, no more than a couple of years, with the word ‘guest’ already on the lips of market players around the world as real estate pivots towards being a consumer-led industry.
“Property owners who recognise that they are now in a consumer-driven business … put themselves in a position to be the winners in the future high-value world of real estate” – Gareth Lewis, PwC
As Lewis told the audience at the MIPIM 2019 session What’s next for the real estate industry: “Those property owners who recognise that they are now in a consumer-driven business, and act on it, will at the very least protect income but also put themselves in a position to be the winners in the future high-value world of real estate.”
Emerging Trends in Real Estate ® – a PwC/Urban Land Institute report
Referring to the global findings of Emerging Trends in Real Estate ® 2019 by PwC and the Urban Land Institute, Lewis described 2019 as “a test of nerves”.
Real estate leaders canvassed for the report felt increased concern about economic uncertainty.
They also felt the pressure to “allocate capital, source opportunities, demonstrate growth, embrace operational risk and get closer to an ever more demanding and empowered customer”.
Global investment markets since MIPIM
Six months on from MIPIM, the concerns of industry leaders shown in the PwC/ULI report, are still very much present. The difference is that we are now beginning to see signs of a market ‘correction’ seeping into the figures.
Global acquisitions of commercial property slipped 5% in the first half of 2019, compared with the same period in 2018, with activity in Europe and Asia Pacific sagging, quotes Real Capital Analytics in its latest Global Capital Trends report.
The flow of capital between continents has dropped to the lowest proportion of global volume since 2013 – Real Capital Analytics
The flow of capital between continents has dropped to the lowest proportion of global volume since 2013, said the report. Capital into the Americas — predominantly the US market — dropped by almost a half compared with a year earlier.
In the report, Real Capital Analytics says: “Investors appear keen to deploy capital, but their activity in the second half of 2019 may continue to be checked by macroeconomic and political headwinds including international trade wars and Brexit’s impact on the UK and Europe.”
A “gentler” correction than the last global financial crisis
Addressing MIPIM 2019, Lewis said he expected any correction to be “gentler” for the real estate sector than the global financial crisis of 2007-2008. This was given that:
- Economic uncertainty has put interest rate rises on hold.
- A ‘lower for longer’ monetary policy usually benefits real estate over other asset classes.
- Supply is at relatively low levels in most markets around the world.
He saw real estate as remaining a favoured asset class. But, he added, “the criteria for deployment at this late stage of the cycle are more stringent than ever”.
Strategies for market cycle slowdowns
Peter Ballon, MD & Global Head of Real Estate Investments, Canada Pension Plan Investment Board (CPPIB), emphasised that you cannot generalise about markets. He cited Brazil and India as two markets where the label “late in the cycle” did not apply. “There’s still a lot to be done in these markets,” he said. “Our job is to differentiate which real estate will succeed in a downturn and which won’t.”
“Our job is to differentiate which real estate will succeed in a downturn and which won’t” – Peter Ballon, CPPIB
Ballon mentioned the “huge success” of CPPIB’s office projects in the UK city of Leeds, where they are working as a joint venture partner with Hermes Real Estate. Generally, CPPIB invests only in prime markets, but in this case his investment team on the ground managed to persuade him otherwise.
‘Soundbites’ are dangerous, said Ballon. A member of the panel gave the example of Lisbon, which five years ago was cold-shouldered as a market, and now ranks as the top city in Europe for real estate investment in this year’s Emerging Trends in Real Estate ®.
“Investors who allocate based on short-term trends run the risk of overpaying” – Japp Tonckens, Unibail-Rodamco-Westfield
High-quality assets will continue to do well in a market downturn, said Japp Tonckens, Group CFO, Unibail-Rodamco-Westfield (URW).
“The discussion about cycles is less relevant for real estate as real estate is about generating cash flows, and cash flow growth depends on factors such as asset class, quality within a particular asset class and the right location, in a high-growth, population-dense area.”
Above all, it is about investing for the long term, said Tonckens. Flagship assets in URW’s portfolio including Westfield London, the largest retail destination in Europe.
“Investors who allocate based on short-term trends run the risk of overpaying and not being able to trade out when they think they will,” he added.
Seeing inside the logistics box – or not
The logistics market is hard to fathom in terms of future trends, the panel said. “Logistics is just a box and I don’t know what’s happening in that box,” said Ballon.
“A lot of logistics tenants are very good at efficiency; they drive efficiency. Today they might take a 100,000 square meter facility because it gives them that efficiency.
“If in ten years, they can get ten times the efficiency, I’m not sure what that means for all the sheds they have. This is not around the corner. I don’t think it’s tomorrow. So, we will keep building for a while.”
Structural changes are the greater challenge – and opportunity
The structural impact of technological, social and demographic trends on the built environment is a greater challenge – and opportunity – than the cyclical rise and fall of returns, concludes Emerging Trends in Real Estate ®.
“Technology has put much more power in the hands of the consumer. This is driving change across the retail, hospitality, office and industrial sectors,” said Lewis at MIPIM.
The consequences are, Lewis continued:
- “Property owners who don’t respond to structural changes in the real estate industry will see their assets permanently rerated and a potential destruction of value.”
“New entrants from other sectors … are starting to exploit the opportunities arising from a value shift … towards the service aspects of real estate” – Gareth Lewis, PwC
- “New entrants from other sectors, unencumbered by the constraints of outdated real estate systems, are starting to exploit the opportunities arising from a value shift away from bricks and mortar and towards the service aspects of real estate.”
“To ignore what is happening in the market is completely wrong. Our view is to stay knowledgeable about it” – Peter Ballon, CPPIB
- The market is fast changing in a way that it has never been before. Peter Ballon of CPPIB added: “To ignore what is happening in the market is completely wrong. Our view is to stay knowledgeable about it.”
Sustainability changing the way we define values
Companies are increasingly looking to measure not only the value of their assets but also the impact they have on the environment and on local communities, pointed out Lisette Van Doorn, Chief Executive Europe, ULI. “We see things happening. Even though for the moment it’s trial and error.”
The real estate industry is being driven away from the “comfortable world of long leases and red book valuations”, added Wilson.
“As large users of square metres of real estate, we need to be seen as leaders in sustainability” – Japp Tonckens, Unibail-Rodamco-Westfield
Sustainability is good for cash flow, said Tonckens. He gave the example of URW generating their own solar energy in Europe. It’s also about risk mitigation. “As large users of square metres of real estate, we need to be seen as leaders in sustainability,” he added.
This is when I wonder, has ‘quality, quality, quality’ replaced the real estate mantra ‘location, location, location’?