Real estate as an asset class has boomed in recent decades….that said, there is an inadequate supply to meet investor appetite amid a changing real estate environment. While large amounts of capital are available, there remains a significant institutional under-allocation in real estate.
Despite global uncertainty arising from macroeconomics and geopolitics, the real estate industry is going strong as a USD 1 trillion industry of transactions, with stocks of dry powder having reached record levels. The average real estate fund launched in 2019 tallied an oversubscription of USD 150 million for every tranche. In Asia, the market for real estate transactions is still increasing by double-digit percentages. Real estate investors around the world are staying attentive as they broaden their assets against the backdrop of commercial real estate investment exceeding USD 700 billion globally.
By any measure, real estate as an asset class has boomed in recent decades. Momentum is holding steady as most private equity firms continue to allot sizeable investments in their pursuit of diversification. Besides, the percentage of real estate investment is growing. In H1 2018, for example, dry powder totaled USD 2.1 trillion – up from USD 1.8 trillion in 2017. That said, there is an inadequate supply to meet investor appetite amid a changing real estate environment. While large amounts of capital are available, there remains a significant institutional under-allocation in real estate.
This is where opportunity surfaces, particularly for organizations that are agile, flexible and resilient in an altered landscape. Investment criteria are tightening. People are willing to sit out rather than agree to a bad deal. In addition, those who seek a diverse tenant mix or varied use stand to gain.
What to watch
More than ever, investors are looking beyond the traditional real estate asset classes, such as residential or office, favoring alternatives like student housing and data centres. Specialist sector investments might at first glance appear niche, but they can in fact prove lucrative, and are increasingly mainstream.
In China, for instance, a rapidly ageing population and mounting demand for adequate resources make elderly care facilities particularly appealing. With the needs of this large demographic group becoming acute over time, real estate investments in this sector are poised to remain desirable.
The rise of digital retail and e-commerce and their effect on conventional brick-and-mortar space offer further evidence that real estate is transforming. An ability to respond to the different kinds of shopping experiences that customer seek makes both logistics and warehousing a substantial growth area as well.
Coupled with these sector developments, a continuing trend of urbanization means fast-growing cities and mega-cities will become a major element of real estate investment plans for years to come. The movement and relocation of peoples both within countries and across borders, especially among emerging economies, will influence investment decisions to a greater extent than before. With urbanization comes a high concentration of facilities in prime locations.
Furthermore, infrastructure is evolving in new directions. Governments are asking how to partner with the private sector to help underwrite developments that address social needs such as housing. Successes such as land-value capture models and the plans associated with the Belt and Road Initiative illustrate the need to avoid a narrow mentality of thinking solely within sector walls.
Data, data, data
Underpinning these changes, both the wider availability and deeper reliance on data make real estate a commodity class whose value should not be underestimated. No discussion of the future of real estate is complete without a consideration of data, data engagement platforms and how they can be valued. This raises the question: are companies making the most of their data?
Our 2019 PropTech survey reveals that companies’ digital strategies rarely incorporate data management or data strategy. Only 25 percent of respondents describe their data strategy as well-established and enabling the capture and analysis of the right datasets. One third of respondents have no strategy at all. Asset managers have long focused on traditional forms of managing real estate, suggesting that there is room for boosting knowhow in leveraging the predictive tools and potential of data analytics.
Technology solutions sought
The power of technology has made proptech surge in demand as its scope expands. From specially-built sensors detecting and adjusting room temperatures to AI-designed floor plans to drones monitoring for building failures, the usefulness of technology in real estate is beyond question. Thoughtfully utilized, proptech improves user efficiencies, reduces operational outlays and enhances the overall quality of decision-making for all stakeholders.
Trailblazing technologies and approaches extend far beyond investors as well. Tenants are constantly searching for innovation, seeking flexible solutions that save costs and advance sustainability. The vast majority of companies around the world – whether invested in real estate or not – want to be seen to be doing the right thing, especially when it comes to the pressing issues of climate change and the environment. As ‘green building practices’ and certifications rise in prominence, so too will demand for their holistic systems.
Strategy for success
For all these reasons, an increasingly attractive path when investing in real estate is to build alliances and collaborate. Such a strategy offers resilience in the face of various risk-laden scenarios, financial or otherwise. Equipped with a plan of action, investors can navigate the uncertainty and seize the opportunities that exist in the dynamic universe of real estate.