Real estate markets have enjoyed a long run of strong returns. Now, ten years after Lehman Brothers filed for bankruptcy protection, marking the start of the global financial crash, the markets are widely recognised as being ‘late cycle’.
Interest rates are inching up and central banks talking about ‘normalising’ monetary policy. Till now, record low interest rates and quantitative easing have held the pause button on any downturn and led to large amounts of capital flowing into real estate.
Economic history indicates that a correction will happen, although at best this could be a cooling. The World Bank, meanwhile, is forecasting global economic growth to reach 3.1% this year, with a gradual slowing over the next two years.
Managing risk in late cycle
As industry players look for safe havens for their returns, the market has now become about managing risk. Late-cycle periods often offer opportunities to acquire assets, portfolios and platforms that would not otherwise be available. There is a but here; it is about selecting the right market and the right asset – generic market overviews are hard to apply.
A shift from ownership to access
This time of stock-taking comes when the very nature of the real estate industry is changing to become less about ownership of ‘bricks and mortar’ and more about offering access – access to services and to outcomes.
New market drivers are leading to greater efficiencies, improved returns and new business models: fast-evolving digital technology; changing human behaviour; and the need to optimise the use of resources, especially with the rapid growth of urban populations.
Taking real estate into the digital era
The focus on property technology, or proptech, is on big data and the internet of things. New paths include the likes of blockchain, 3D printing and artificial intelligence.
The skilful use of proptech brings a long list of benefits, including: bringing greater transparency to valuations; identifying new market opportunities; and optimising the use of space through a greater understanding of the behaviours and expectations of users.
This emergence of proptech as a market driver calls for a more operational-based business model – one where new talent and skills are needed. Yet, in a global poll by PwC, only 43% of real estate CEOs say they are rethinking their human resources function to attract the digital talent they will need to succeed.
Yes, there is some understandable reticence, as users seeks confidence in the security of data-storing platforms and smart hubs, but what is clear are the efficiencies that such technology offers. Technology is an essential part of long-term strategy.
Changing behavioural needs
Human behaviour is also changing how occupiers use space, especially when such behaviour is linked to evolving technology. The older millennials, as they enter their late 30s, form an increasingly large proportion of leaders, while the younger millennials, the first generation brought up on smartphones and apps, has now arrived in the workplace.
In the office market, this is reflected in the rise of the co-working space, part of the wider sharing economy trend. Co-working provides occupiers with greater flexibility, a broader range of services and a sense of place with a community spirit – all important for the millennial worker.
Meanwhile, the number of people aged over 60 is expected to more than double by 2050, according to the UN. An ageing population has their own particular property needs, in terms of where they live, how they live and the healthcare they need.
Optimising the use of resources
The real estate sector is one of the world’s biggest polluters in terms of energy and materials used; residential, commercial and public buildings account for 30% of global energy consumption. How the industry uses and recycles resources – energy, water and materials – and their choice of resources can no longer be ignored.
The setting of carbon-reduction targets by the real estate industry has become the new norm. Government targets are the mere base line. Green buildings also make business sense. According to Morgan Stanley Research’s Building Energy Efficiency report, energy-efficient buildings can lower operational costs by up to 50% in commercial buildings, while at the same time attract more tenants.
Engaging the future
As we potentially enter a new cycle, the challenge for the real estate industry over the coming decades is not only to manage risk, and seek out new markets and asset types; it is also to create long-term growth for the benefit of all. We all need places to live, work and play. It is the property industry that can make the difference.
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