Moderator of this session was Mike Phillips, Editor, Biznow with Panellists:
- François Trausch, CEO Allianz Real Estate
- Rolf Buch, CEO of Vonovia
- Lisette Van Doorn, Chief Executive Europe, ULI
- Gareth Lewis, PwC Director
Complacency in the market seemed to be the theme today as our speakers discussed emerging trends in global real estate. PwC Director, Gareth Lewis, started the breakout session with a high-level overview of the global real estate capital market and then it transitioned into a three-person panel discussion moderated by Mike Phillips of Biznow. All four speakers concurred that there is a sense of cautious optimism for real estate in 2018, but warned that investor complacency could leave owners vulnerable should the market enter a correctional period. Here is a brief summary of the discussion:
Gareth Lewis, PwC: Global Outlook for 2018
PricewaterhouseCoopers publishes their annual Emerging Trends in Real Estate series based on data analytics and various surveys and interviews with global industry leaders. Gareth Lewis was here to summarize this year’s outlook in a brief segment that lasted approximately 10 minutes.
Lewis noted that the global real estate market continues to attract capital, emphasizing its “attractiveness to investors” even this late in the cycle. He highlighted that investors have been shifting capital into second-tier markets, such as Copenhagen and Raleigh/Durham (US), as opportunities in major markets are hindered by high prices and aggressive cap rates. Investors have learned a great deal from the financial crisis as many maintain low leverage on their assets and have redefined their view of real estate as being about access and services for its users, rather than ownership of property. He finished by stressing the importance of investor’s need to adopt new technologies to satisfy tenant demands. Complacent investors, who fail to evolve through technology disruptions, leave their portfolios susceptible to market shifts.
In summary, Lewis reviewed several trends by region:
- “New US tax law is being watched closely”
- 61% of survey respondents have a positive outlook on the tax reform in regards to real estate investment
- “Cautious but positive” outlook for 2018
- Economy is growing at the fastest rate in decade, which is highlighted by increasing owner-user demand
- Each of Europe’s 5 major markets experienced increases in volumes in 2016 and 2017
- Increased competition for assets in Asia is driving investors to increase risk levels to meet returns
PwC’s Emerging Trends in Real Estate Series can be downloaded here.
When asked about the forecasted economic downturn, each of the panellists had a variety of ways to hedge against portfolio risk. Lisette Van Doorn believes this “prolonged late cycle” will end relatively soon; with a decline on the near horizon. Although professionals are fairly optimistic about the future, it is expected that interest rates will rise and access to capital will contract.
François Trausch stated that Allianz will have two key areas of focus during this period: diversification and data collection. He affirms it is essential for companies to “stop buying the same thing”. The core asset classes (i.e. office and retail) will see less investment, while specialized sectors (i.e. student and senior housing) will see an uptick. In addition, market sector decisions will need to be backed by quantitative data. This numerical information will project the method to marry risk management, entrepreneurship, and innovation.
Rolf Buch believes the best way to stay afloat during tough times is to focus on customers through reinvestment. He postulates that the value of a company is seen not in their buildings, but through their contracts.
Panelists were asked “How will the real estate industry fare with operational complacency?”. A common belief among real estate professionals is that “implementing cultural change takes investment and many CEOs don’t want to spend the money”. As well, the real estate industry is not known for fast adaptation when introduced to technology. Surveys conducted by ULI and PWC suggest that only 10% of CEOs are concerned by threats to growth prospective. When asked about sensitivity to disruption, one CEO stated, “the real estate market is not as vulnerable as other sections”. François Trausch affirmed that “there is generally no sense of urgency because times are good…. adaptation is seen as a result of a crisis”.
Another key trend changing the face of the real estate industry, which the panel identified, is the need to have a consumer facing operational focus. As urbanization transforms the asset classes from an ownership to a rental market, the demand for well-rounded landlord-tenant relationships increases, says Rolf Buch. Although Rolf initially stated he did not think “names” (brands) were important, the panel eventually came to the consensus that branding would become essential for investors to maintain success. Lisette Van Doorn ascertained that “flexibility” and the ability to receive quality services, are a high priority for tenants. This new business model component can be exemplified through WeWork’s achievements in the industry. “Creating a brand and providing good customer service is something WeWork has done well, and a move that other companies will need to follow” said Lisette.
Final question to Panellists: What excites/worries you most about in 2018?
Rolf Buch: Intrigued by the mega trend of migration to the city, but worries that players on the internet may build business models between landlords and tenants.
François Trausch: Excited to continue diversification; by working with the best to build a global portfolio. However, he is concerned the race against time, prior to the economic downturn, will not be sufficient to implement short term objectives.
Lisette Van Doorn: Enthusiastic that social issues (such as sustainability and affordable/available housing) are becoming more important to investors and decision makers. She believes this is essential and is worried of the consequences if companies aren’t able to make these issues a key focus.