Emerging Trends in Real Estate® The global outlook for 2018 Emerging Trends in Real Estate® The global outlook for 2018 Contents

2 Executive summary

4 Maintaining balance

16 Top cities for real estate investment in 2018

18 New models for a changing world

30 Sponsoring organisations

31 Interview participants

32 Authors and Editorial Oversight Committee

“ Real estate has always evolved. It serves a need in society for people to occupy space, and of course those needs change. In some sectors, the requirements are shrinking and in others they’re growing. Anticipating those changes and staying ahead of them is really what good investors can do.”

European investment manager, Global Emerging Trends in Real Estate 2018

Emerging Trends in Real Estate® The global outlook for 2018 1 Executive summary

Real estate has rewarded investors with strong returns in a “ One of the interesting world of falling interest rates and established business models. things – it’s a challenge, The positive outlook for the global economy is an encouraging sign that the rewards will continue for some time to come. it’s an opportunity, but it’s happening – is how real estate as a productive Yet there is an undercurrent of caution The last financial crisis has had a lasting in the three regional Emerging Trends in effect on the industry, including lower part of the economic Real Estate® reports, and more so from leverage and less apparent risk of over- equation is changing. the 24 senior professionals interviewed supply. But there is a new “over-supply” for this Global Emerging Trends edition. challenge, which comes from the vast And what is it going to These industry leaders all acknowledge legacy stock of assets and fast-changing look like in the future, that this is a late-cycle property market use of real estate. The time-frame for whether that’s ten years influenced by a gradual reversal of building obsolescence has become monetary policy. There remains a squeezed as a result of changing or beyond?” disconnect between the sheer volume occupier needs and a greater information of capital raised and the opportunities transparency. In effect, new supply is being Global asset manager, in the market to deploy it effectively in created by technological developments in Global Emerging Trends in Real Estate 2018 assets that can withstand a downturn. areas such as co-working and hospitality.

As a consequence, risk management Real estate is continuing to evolve into has become increasingly important, something that is less about ownership while at the same time changing human and more about access – or services behaviour and new technology are and outcomes. In simple terms, this transforming the nature of real estate, means that we are seeing a relative not just as an investment class but value-shift from the passive “bricks and as a product or service we all use as mortar” component to a more dynamic, consumers. These are the conclusions operational business. This is important of PwC/Urban Land Institute’s recent for investors – who either need to find Emerging Trends in Real Estate 2018 innovative and cost-effective ways of surveys, conducted across Asia Pacific, accessing operational expertise and Europe and the Americas. innovation, or face diminishing returns.

2 Emerging Trends in Real Estate® The global outlook for 2018 Executive summary

These forces are informing the current At the same time, there is a need for “ Operating skills and round of consolidation among property- more diverse skills and expertise in the owning companies, particularly in the retail real estate industry. The more progressive complexity are becoming sector. Scale is important at this stage in businesses are hiring new specialists more important for the cycle, but there is far more to it than in technology, customer relationships, stock market M&A among companies and strategy/disruption. It is easy to most if not all sectors. of similar heritage. The lines between see why, given the risks for investors Of course, it’s still all traditional real estate companies and of getting some of these calls wrong. about location, but the new entrants, mainly from the tech field, And there are numerous, game-changing are becoming blurred. There is plenty of disruptions with timescales that extend operational management opportunity for new entrants to disrupt the beyond conventional property cycles. is more and more sector and steal value and market share, which is why many of those interviewed The emergence of driverless cars – important in driving believe that now is a crucial point in the no longer a fantasy scenario – is just one values. That’s much the sector’s evolution. Those companies example of disruptive technology that has same thing in how you unwilling or unable to embrace change polarised opinion in the real estate industry risk being left behind permanently. as to its impact. As the interviewees for operate retail and how Global Emerging Trends all agree, these you operate a residential There are two main reasons cited for this. are challenging times for an industry that Huge amounts of capital are flowing into must somehow strike the right balance platform. Having the the sector, and it will flow to the companies between risk management, innovation right operating platform that can use technology to give themselves and entrepreneurship. even the smallest edge. With real estate is crucial to creating late in the cycle, investors and owners value, which is why we will need to utilise any means necessary don’t just invest in the to improve performance of assets – or maintain performance during a downturn. assets, but also typically The greater the sophistication, the easier try to buy into the it will be to raise money and make money in a crowded field. One related theme here operating companies.” is the increased capex costs as owner- operators seek to keep their real estate European pension fund investor, Global Emerging Trends in Real Estate 2018 relevant to occupiers – whether that’s retail, office, logistics, or residential.

Emerging Trends in Real Estate® The global outlook for 2018 3 Maintaining balance

4 Emerging Trends in Real Estate® The global outlook for 2018 Maintaining balance

Real estate continues to attract capital, demonstrating its appeal “Prices are very high, over other asset classes in an otherwise uncertain investment and in some markets, world that is starting to betray signs of nervousness over inflation and rising interest rates. they are above pre- crisis levels. What’s in place for a prolonged According to Real Capital Analytics (RCA), At this stage in the cycle, pricing of core global volumes for completed sales of assets remains an issue around the world high level is the fact that commercial properties totalled $873 billion although not necessarily something to operational performance last year, matching the total registered cause alarm just yet, according to one in 2016. A 6 percent rise in Asia Pacific global player. “If Paris is trading at sub-3 is still very strong.” and an 8 percent increase in Europe offset percent, the fact that it is so low has been a decline in the US, the world’s largest viewed by some investors that we are in Global investor, Global Emerging Trends in Real Estate 2018 commercial real estate investment market. bubble territory. I don’t think we’re in bubble territory at all. Assets are expensive, Though the past two years rank behind and they may or may not correct, but it’s 2015 as the decade’s most active for entirely possible that we’re in a low bond investment, the rising deal flow in Europe yield environment and the returns available and record levels of activity in Asian markets, going forward are simply going to be lower such as Hong Kong and Singapore, are than we’ve been used to in the past.” nonetheless remarkable at a time when real estate is universally acknowledged to be late in its cycle. Figure 1-1 Global capital flows 2017 ($ bn) This late cycle period undoubtedly informs the caution expressed by the industry 1,100 leaders canvassed for this global edition 1,000 of Emerging Trends. But they are also reassured by the relatively strong macro- 900 economic outlook for most major markets 800 around the world, which is underpinning 700 occupier demand. If anything, the talk is of real estate being in a prolonged late cycle. 600 500 “Real estate still offers a comparatively 400 attractive spread to bond yields across the globe right now. But it’s more fundamental 300 than that,” says one global institutional 200 investor. “For the first time in a long time, there is increasing economic growth in 100 virtually all major markets. That’s self- 0 reinforcing, and certainly bodes well 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 for real estate as an asset class.” EMEA Asia Paci c Americas

Source: Real Capital Analytics

Emerging Trends in Real Estate® The global outlook for 2018 5 Another interviewee comments: “We’re still Rising interest rates and However, one European interviewee not seeing the uptick in supply that you ‘no more easy money’ observes: “My first guess was that the would expect. And that has to do with raising of interest rates would take longer, banks being much stricter in what they’re With growing economies come rising but it has happened more strongly and asking for when it comes to speculative interest rates as a check on inflation, and globally than expected. This is going to development loans. In fact, in many the expectation of more to come, at least be the caveat to the solid growth we countries they are still not really available this year in the US and the UK. Continental are experiencing here.” at reasonable margins, and that helps Europe is further behind although the the market to stay in sync.” European Central Bank has signalled There is another caveat, and that’s the end of its asset purchase programme politics. Brexit casts a long shadow, Not surprisingly, however, investors are by the end of 2018, and rate rises are still, but national elections in the US, diverting their search for secure, long-term The Netherlands, France and Germany income into alternative real estate sectors. expected to follow in 2019. “No more easy money,” says one interviewee. have come and gone, leaving property Debt is increasingly seen as a safe means markets unscathed and economies of exposure to the sector – nearly four growing. Notwithstanding the outcome fifths of respondents to the Emerging Rising interest rates – and inflation – of the Italian election in March this year, Trends Europe survey expect non-bank are now on the agenda for real estate. there is a sense of the industry taking a lenders to increase their activity in 2018. There is nothing like the anxiety that prompted a huge sell-off in global deep breath after all the political noise of 2016 and 2017. There is another dimension to the relative stock markets in January this year. attraction of debt finance, and that comes The expectation among European Even so, with the major global investors from the recent tightening up of the capital interviewees for Global Emerging Trends is increasingly thinking long-term – and well requirements for banks, known as Basel that it will be one to two years before rising beyond the current property cycle – the IV. The reaction from the banking sector rates exert a major influence on real estate has been positive although that is partly markets. It would be hard to describe political backdrop to real estate is still at to do with the long phase-in period for the interviewees for this report as the back of their minds. “For most of my the new regulations – they will not take complacent, however. career in Europe, we’ve not spent a lot of full effect until 2027. Much will depend time worrying about politics. That’s one on the interpretation of Basel IV by “Over a ten-year view, we expect yields of the things that is so different,” says one national regulators. to move out, but they could very easily global investor. “We’re now in a scenario go down further before they go up,” where something like 1 percent of the In both Europe and the US, meanwhile, says a global investor. “It really depends world’s population are controlling there is a shift by some investors to on what happens with regard to monetary an enormous proportion of the wealth. second-tier cities away from the expensive policy. At the moment the US is tightening, With that imbalance, politics is going major markets. There is a clear distinction, the UK is clearly likely to do so in May, and to become more and more important though, between second-tier and there are signs that Europe might follow.” going forward, and that will bring secondary. Rising stars – such as potential volatility.” Copenhagen and Raleigh/Durham – As for Asia Pacific, another global player are lauded for their diverse economies and suggests that inflation pressures across skilled workforces as much as affordability. the region are not as strong as in the US and Europe. “And in [Asia Pacific] real “You certainly get the sense that when estate markets generally there’s a good capital starts to move laterally to less spread between yield and cost of money, traditional asset classes to find value, so there’s a built-in shock absorber or when it starts to move laterally offsetting the impact of potential interest geographically, these are usually the rate increases.” symptoms of a late cycle,” observes one global investor. “The big difference from a financing point of view is that funding costs are still quite low, and that’s what makes it easier for investors to wait it out a bit longer.”

6 Emerging Trends in Real Estate® The global outlook for 2018 Maintaining balance

US – smaller cities rising, Such a focus is not new – it is reminiscent “ The tax changes have taxes falling of the shift in investor interest in the 2005–2007 period – but the staying power helped create some Investors completed a total of $375.6 billion of secondary markets may be, not least clear momentum. of transactions greater than $10 million in because they have avoided the level of There are good reasons the US during 2017, an 8 percent decline overbuilding seen in previous cycles. from 2016 and the second successive year to be optimistic on the of falling investment, according to RCA. As one Emerging Trends Global interviewee US despite the political cautions, though, investors must resist noise, although large The slowdown in activity reflected a “a broad brush” approach to how they reassessment of pricing throughout the assess the smaller cities. “We’re working chunks of that are year in the major cities following the US very hard not to make the mistake of the already in the price in Federal Reserve raising interest rates past and go to secondary and tertiary three times, with the expectation of cities simply to chase yield at the wrong equity and real estate further increases in 2018. point in the cycle. But instead we’re very markets. But a degree focused on what I’d call second tier cities of caution is warranted Investment tumbled by 32 percent in that demonstrate really strong economic New York City during 2017. Of the 14 US growth prospects and include well- given the fact that we established institutions, whether medical, metro areas ranked in the top 30 global are in the eighth or investment destinations, RCA says only educational, or governmental, which Washington, D.C., and Houston registered stabilise those markets. We’re trying to be ninth inning, to use stronger activity. very tactical and chase markets that exhibit strong fundamentals, which should make a baseball expression, The investment numbers also indicate them more attractive places to invest.” of the cycle.” an ongoing investor appetite for smaller markets, as highlighted in Emerging In any case, major and second tier Global investor, Global Emerging Trends in Real Estate 2018 Trends US and Canada. More selective real estate markets alike are destined than before, investors are increasingly to prosper from what has been heralded drawn to cities such as Salt Lake City as the most sweeping US tax reform in and Raleigh/Durham for their relative decades. President Trump’s long-awaited affordability and skilled workforce. Tax Cuts and Jobs Act was finally approved by Congress in December 2017, and many US property players believe the market could feel the benefit, possibly as early as this year.

Emerging Trends in Real Estate® The global outlook for 2018 7 Figure 1-2 Do you think the new tax law will be good for real estate? Figure 1-3 The new tax law will be good for… 70 24.7% 61.0% 25.8% 60

50 3.4%

40

% 32.2% 30

46.1% 20 Space demand Operating costs 10 6.9% Investment economics Investor demand 0 Yes No Unsure Source: Emerging Trends in Real Estate 2018 Mid-Year Survey

Source: Emerging Trends in Real Estate 2018 Mid-Year Survey

“ Rising interest rates have According to the Emerging Trends 2018 “In 2017, there was a lot of talk about mid-year survey conducted in the US, the late cycle and pricing bubbles, been well telegraphed 61 percent of respondents believe the and concern that the end had to be by central bankers, and new tax law will be good for real estate near,” adds another interviewee. we’ve been looking at although nearly a third are unsure. “What’s shifted over the last six months Around a quarter of respondents say is the boost provided by the tax cuts, spreads since late 2016. the tax reform will boost investor demand, the continued strength of the US The only difference now and a similar number say it will improve economy, the continued strength of is that we’ve had three occupier demand. the global economy. The conclusion is indeed we are at a late point in the rate rises in the US, so The full impact on commercial real estate cycle, but it’s certainly being extended we’re in that process, but remains to be seen but the three main by those factors.” it’s not something that fiscal levers are: foreign investors will be able to invest and repatriate profits more spooks us. Given where easily than before; US companies that yields are now relative to until now parked some of their profits the cost of money, we overseas at lower corporate tax rates can repatriate those earnings into the US; have the ability to absorb and a reduced corporate tax rate in the modest increases.” US. As one Emerging Trends Global interviewee observes of the latter two Global investor, reforms: “You would presume some of Global Emerging Trends in Real Estate 2018 those accumulated earnings and tax savings will lead to the expansion of corporate America, which will spill over into increased demand and take-up of offices and industrial space.”

8 Emerging Trends in Real Estate® The global outlook for 2018 Maintaining balance

Europe – renewed optimism Led by Germany, each of Europe’s five “There is still quite a bit in the core economies largest markets for commercial real estate investment reported higher volumes than of capital that will be Europe’s property industry is “cautious 2016, RCA data show, with the Netherlands allocated to Europe. but positive”, drawing comfort from and Spain setting new records. I don’t get the sense the fact that the European Union (EU) economy is growing at its fastest pace For European property professionals, that Europe is going to in a decade, which in turn is supporting it is hard to dissociate London from the be capital-starved any occupier demand as well as investment. continuing uncertainty around Brexit, which is why the UK capital languishes time soon.” Figures from the EU statistics office at the lower end of the Emerging Trends Europe city rankings for investment Pension fund manager, Eurostat show that the EU grew by 2.5 Global Emerging Trends in Real Estate 2018 percent in 2017 – its strongest performance and development prospects in 2018. since 2007 when it grew by 2.7 percent. But the report also suggests that Asian In the final quarter, both the EU and the investors – less bothered by Brexit than 19-nation Eurozone grew by 0.6 percent their European peers – are looking Another interviewee concludes: “Global compared with the previous quarter. to the long-term by deploying capital interest in Europe is quite high at the in London. And according to RCA data, moment. It’s due to economic growth, Much of the growth has been driven by London saw the highest volume of but if you think back to early 2017, the core economies of Germany, France, international capital in 2017, particularly we were all worried about the French Italy, and Spain, which has reassured the from Hong Kong. and Dutch elections and about populism, industry leaders interviewed for Global the disintegration of Europe following Emerging Trends. “The demand side is “There is more activity on the Continent,” Brexit. Now we have much, much improving, and we’re seeing rent increases says one global investor interviewed for stronger pro-European sentiment on the in most product types,” says one. “We don’t Global Emerging Trends. “It feels like Continent. Money still wants to come into have retail rents going up, but we do have there’s more optimism on the back of real estate and still wants to come into office rents rising in most markets in Europe, economic growth, but the returns would be Europe, so there’s no immediate concern and you certainly see logistics rents rising. relatively low because prices are still high. over the next couple of years of yields We think that’s going to continue.” That’s been the case for the last year.” de-compressing.”

Against that backdrop, Europe registered In fact, as with the US and Asia Pacific, $314 billion of investment sales in 2017, pricing of core assets across mainland according to RCA, and the transactions Europe is an issue for most investors, were many and varied, from major and too high a hurdle for some. “We feel portfolio deals to corporate mergers there are still opportunities, but you have and acquisitions, as well as large single to move more into value-add and the property sales – particularly in London. opportunistic space,” says one pan- European fund manager. “If you look at core, or prime, assets, the prices are too high for us. We’re not willing to pay 3 percent cap rates. That’s not a product of interest to us.”

Emerging Trends in Real Estate® The global outlook for 2018 9 Asia Pacific – excess liquidity Interviewees for Global Emerging Trends Another trend quickly gaining traction fuels competition for assets point out that “not only is there a lot across Asia is the boom in shared of dry powder but dry powder is being workplaces, with co-working operators The Asia Pacific region registered a record assembled”. Says one: “Globally, institutions now the biggest demand driver for new year for investment in income-producing are increasing allocations to real estate, and office space in many cities across the real estate in 2017, with transaction also increasing allocations to Asia Pacific. region. As one interviewee says: “We’ve volumes of $158 billion, according to RCA. And that’s just institutions. The rise of never seen change at the speed we’re high-net-worth individuals in the region is seeing now. So how do you respond to Singapore saw decade-high levels of more dramatic than anywhere else in the that, or how at least do you allow yourself activity on the back of recovering office world, and they are also players in the the margin to be able to respond? It’s as and residential sectors. Japan, meanwhile, real estate space, and so you’ve got if ultimate flexibility, whether it’s physical recorded a 3 percent upturn in activity, that capital also going into the market.” or financial, is the overriding theme.” reinforcing its status as a destination for yield investors due to the healthy spread The resulting competition for assets is changing the industry in fundamental and between current yields and the country’s “For all asset management super-low sovereign bond prices. often unexpected ways. Traditional risk/ return classifications are breaking down. firms, across their product When RCA factors in development land, Many core investors are moving up the risk lines, Asia is an area of then the standout performer in 2017 was curve in an effort to meet target returns. Hong Kong, which saw site sales jump Others are going down the risk curve to expansion. It has superior 78 percent to a record $21.4 billion, seek the type of steady but safe yield no overall growth to the rest longer available from sovereign bonds. partly in response to a tripling in the of the world … you want value of income-producing assets over the past decade. Core and opportunistic investors are to be positioned in Asia.” converging in the value-add space. If anything, says one global investor, Increasingly, therefore, investors are Global asset manager, the economic outlook for Asia Pacific looking to make money from working Global Emerging Trends in Real Estate 2018 is “better in 2018 than it was in 2017”, their assets rather than via leverage which in turn is boosting occupier or rental growth. demand in many cities. At the same time, rents have been supported in core office One by-product of this increased markets, such as Hong Kong, Singapore, competition for assets is the migration and Sydney. of investors into markets and asset classes that in the past did not attract The region – as well as global markets – much interest. In particular, fund managers is benefiting from its own sovereign and are now considering data centres, institutional funds bearing vast stockpiles healthcare assets, affordable housing of accumulated capital and investing it projects, build-to-rent facilities, student increasingly in property. As Emerging accommodation, and senior housing. Trends Asia Pacific points out, of all the various influences that have combined to shape recent investment flows into Asian real estate, one continues to stand out: excess liquidity.

10 Emerging Trends in Real Estate® The global outlook for 2018 Maintaining balance

Allocations are up and While the full impact of China’s recent “ The key thing for me capital continues to flow tightening of capital controls remains unclear, the consensus among industry is less about whether The continued strength of logistics real leaders canvassed for Global Emerging we prefer China over estate across the Americas, Asia Pacific Trends is that overall outflows are unlikely Korea or Germany over and Europe has been one of the key to decline significantly, given that sovereign trends in recent years. According to RCA, and state investors will probably be the Netherlands or one investment in the sector rose by as much unaffected. In addition, there is already region over another. a substantial body of Chinese-owned as 33 percent last year to $127 billion, It’s more the fact that reflecting the fact that investors are capital held outside mainland China, much targeting logistics warehousing as of it in Hong Kong, that is not subject to the there is a continued companies change their supply chain rules. And, of course, the narrative around build-up in dry powder. management, particularly where online Asian capital extends well beyond China. retailing is involved. Either capital gradually “If you look at what’s happening in Asia goes into private in terms of building up social security CIC’s acquisition of Logicor – Europe’s markets without largest deal last year – and the GLP/ systems with pension schemes and Gazeley transaction also underline the insurance companies, they will want to disturbing pricing have 5 to 10 percent allocations to real extraordinary volume of Asian capital levels, or it goes in still being deployed in global real estate. estate, then you’re talking big numbers,” Emerging Trends Asia Pacific reveals says one global player. “Real estate and a lot more rapidly, in “unprecedented growth” in capital infrastructure is on the agenda of all which case investors outflows from Asian markets in 2017 – pension schemes. And within Europe almost double the outflow seen in 2016 there are a lot of pension schemes that will bid marginal deals – with $45.2 billion in outbound capital have to build up a real estate portfolio, up, and there will be directed at global property assets. and so we will see more cross-border money in Europe.” underwriting errors.”

Another global investor concludes: Global investor, “Over the coming five years, I think there Global Emerging Trends in Real Estate 2018 will continue to be healthy interest for all three regions. Economic growth is quite evenly spread, so I can’t see why one region would attract more capital than another, and that consistency is reinforced by the fact there is an overall average increase in allocations to real estate.”

Emerging Trends in Real Estate® The global outlook for 2018 11 Retail inflection point – However, similar market conditions have “M&A activity is very much driven by the consolidating for scale led to retail consolidation elsewhere in the importance of specialisation, and also the world, and industry leaders interviewed for complexity that is related to managing All three regional Emerging Trends reports Global Emerging Trends anticipate further a shopping mall portfolio and company,” highlight the problems – and opportunities corporate transactions as a means of says another global institutional investor. – arising out of a retail sector undergoing building scale and shoring up value. “You need to have the scale to build in “a period of incredible flux” at this late e-shopping, to do the right marketing point in the property cycle. It is also One global institutional investor believes and to secure attractive debt finance. evident from interviews for this global the industry is complacent about the The scale will pay off in being able to edition that the perception of retail among robustness of so-called fortress malls run a company efficiently and build the investors in Europe and Asia Pacific is or high-quality retail locations simply operating skills that are needed. It’s not influenced by the flow of negative news because retail is changing from a low-tech easy to run a portfolio of, say, six malls. from the US. to a high-tech endeavour, and from a It starts to pay off more and more by transactional to a leisure focus. “What that creating further scale, and from that Emerging Trends US and Canada points means for investors at the high end is that perspective I think a lot of M&A activity out that while US retail sales continue at it is very easy to overstate rental growth. is now taking place.” a long-term annual growth rate of 4 to 4.5 There will be more power in the retailer percent, the retail and retail real estate going forward than the mall operator, particularly given the oversupply in the sectors are at an inflection point: major “I think there is a grave department stores are undergoing a US,” he says. “Customers’ footfall will process of deconstruction and smaller be harder to capture in individual malls. danger of complacency mid-price apparel brands are failing, Operators are not going to be able to at the top end and footfall at many shopping centres is push rents so much and they are going falling, and new retail brands are to have to pay more on the capex side. understating the amount emerging at a slower and slower pace. So, underwriting errors on both of these you’re going to have to could be quite substantial and expensive. At the same time, out-of-town shopping spend to maintain the centres come dead last in Emerging There is a grave danger as that unwinds Trends Europe’s sector rankings, investors like us could over-pay for the vibrancy of your mall better locations. That’s what we are giving with city centre shopping centres only and therefore maintain slightly higher, 16th out of 20 sectors. a lot of thought to.” the attraction to the best This retail malaise is routinely attributed As this investor suggests, such “massive retailers and ultimately to expansion of e-commerce sales, change” is evident “in the US in particular, but there are more and bigger factors: but it’s going to push through into Europe your customer footfall.” department store obsolescence, overall and elsewhere”. In many respects, retail sector maturity, evolution of the it already has in the form of consolidation Global investor, Global Emerging Trends in Real Estate 2018 apparel industry, and changes in the mix of among major shopping centre owners, consumer demographics and preferences. culminating late last year with Europe’s Unibail-Rodamco taking over Australia’s As the report suggests, a more nuanced Westfield Corp and Hammerson taking outlook for US retail emerges, given the over its UK competitor Intu (see table, p 14). abundant capital available to owners and investors at historically low cost. And while retail overcapacity is widely acknowledged, financial markets have largely priced this risk into individual asset valuations and investors are still widely attracted to well-conceived, well-positioned retail real estate assets.

12 Emerging Trends in Real Estate® The global outlook for 2018 Maintaining balance

Not everyone is persuaded by the merits It may just be that the consolidation-for- “ We’re seeing structural of retail scale. “Particularly in the US scale narrative will be restricted to mature they’ve also gone too far [negative] on Western markets. But in those markets, changes across all of poorer-quality malls,” says one global there is a clear sense among industry the sectors: retail and player. “I always find it interesting when leaders interviewed for Global Emerging there is an apparently clear consensus … Trends that further consolidation among e-commerce; in offices that poorer-quality malls are dead and retail REITs is likely, leaving them stronger with WeWork and better-quality malls are very, very safe. and better equipped to deal with the WeWork-type formats; I think both of those things are wrong.” longer-term trends around technology and e-commerce. “I don’t think it’s over by and 2017 was a huge Another institutional investor observes: any stretch of the imagination,” says one year of activity in the “There’s no doubt rents are under global player. “Amazon and its competitors pressure from the internet, but I think are going to continue to invade the physical logistics space. All of these types of trends are cyclical. space, blurring distinctions between the that’s been happening It wouldn’t surprise me if in five, ten years’ physical and the online. That will put when we’ve seen the time, we suddenly decide secondary technology costs up for anybody from shops are great, there’s too many people our side wanting to compete, which in market hunting for strong in the larger centres and we’d rather turn will take our return on capital down.” cash-flows. You’ve got go to the neighbourhood place.” to stay relevant for the Indeed, as Emerging Trends Asia Pacific occupiers if you want to points out, neighbourhood malls are something of a haven in Australia, partly produce a stable cash- because of the big distances between flow. What we will see in warehouses and customers meaning that the future is more focus e-commerce deliveries will be both slow and expensive, slowing growth. The report on operating platforms.” also points out that elsewhere in the region the retail industry is modestly European investment manager, upbeat because it is relatively immature, Global Emerging Trends in Real Estate 2018 meaning there are inefficiencies in the way malls are built and managed and therefore the potential for savvier operators to differentiate their retail offer. Equally important, shopping centres in Asia do not generally use the department store anchor model that has been the downfall of so many centres in the US.

Emerging Trends in Real Estate® The global outlook for 2018 13 M&A activity continues “It’s a late-cycle type of move,” suggests “It’s not an objective to do M&A, but it across sectors one investor. “It can be seen both in a can answer some strategic ambitions,” positive way and as an indication that says one CEO interviewee. “If we are As data from Green Street Advisors show, we are near the top of the cycle.” talking about REITs as internally operated corporate consolidation in the listed REIT companies, you need to have market sectors in the US and Europe is by no Another interviewee observes that “M&A share because of all the trends which are means restricted to shopping centre transactions are all about opportunities”. changing all over the world and the fact owners. Residential, office, healthcare, In other words, the corporate deal can be that today, you need to be able to handle hotel, and multi-sector companies have a more expedient and cost-effective way all the big data. We are shifting globally all figured in real estate M&A over the for investors to gain market share than from ownership to usage, which means past two years (see tables). buying assets individually. This was true you need to understand what makes the of two massive deals in the European difference between one brand and another.” logistics sector last year: China Investment Corp (CIC) buying Logicor for €12.25 billion, and Asia’s biggest warehouse operator, Global Logistic Properties, acquiring Gazeley for $2.8 billion.

Table 1-1 Mergers and acquisitions in Europe’s listed real estate sector, 2016–17

Premium to Premium to Date Acquiror Target Sector Transaction Transaction share price NAV 18/12/17 Vonovia BUWOG Residential Public-to-public € 5,200 18% 33% 12/12/17 Unibail-Rodamco Westfield Corp Shopping Centres Public-to-public € 24,700 18% 22% 06/12/17 Hammerson Intu Properties Shopping Centres Public-to-public £3,400 28% –21% 13/11/17 Inmobiliaria Axiare Patrimonio Multi-sector Public-to-public € 1,100 13% 7% Colonial 21/06/17 Gecina Eurosic Office Public-to-public € 3,300 25% 16% 05/06/17 Blackstone Sponda Multi-sector Privatisation € 1,763 21% 2% 05/09/16 Vonovia Conwert Residential Public-to-public € 2,878 9% 7% 04/03/16 Eurosic Foncière de Paris Office Public-to-public € 2,505 23% 8%

Average 19% 9% Median 17% 8% Average (ex-German Resi) 21% 6% Median (ex-German Resi) 19% 8%

Source: Green Street Advisors

14 Emerging Trends in Real Estate® The global outlook for 2018 Maintaining balance

Table 1-2 Mergers and acquisitions in the US listed real estate sector, 2016–17

Premium to Premium to Date Acquiror Target Sector Transaction Transaction share price NAV 10/08/17 Invitation Homes Starwood Single-Family Public-to-public $7,835 1% –13% Waypoint Homes Rental 09/06/17 Digital Realty Trust Dupont Fabros Tech Public-to-public $7,727 16% 50% Tech 07/05/17 Sabra Health Care Care Capital Health Care Public-to-public $4,050 14% 20% REIT Properties 24/04/17 RLJ Lodging Trust Felcor Lodging Hotel Public-to-public $2,452 17% N/A Trust 14/11/16 Regency Centers Equity One Strip Center Public-to-public $5,938 13% 0% 15/08/16 Mid-America Post Properties Apartment Public-to-public $5,005 16% –1% Apartment Communities 29/04/16 Cousins Properties Parkway Office Public-to-public $3,604 13% N/A Properties Inc. 19/01/16 Brookfield Asset Rouse Properties Mall Privatisation $2,689 39% 10% Management

Average 18% 8% Median 16% 1%

Source: Green Street Advisors

Managers seek scale and credibility through consolidation

Investors clearly have a preference “There is a real advantage for Better performance or not, most for consolidation among fund and managers now who can offer a interviewees anticipate more mergers asset managers, according to senior broader spectrum of activities to the among managers. “As a general trend, property professionals canvassed by investor. And investors will go for that we will continue to see consolidation. Global Emerging Trends. if they trust the manager. If a manager Strategically, it offers more rapid performs well on offices, the investor penetration of markets and product The market has seen a clutch of would be more likely to give that same types versus organic growth. At the mergers and takeovers among manager more allocation on other same time, there will still be new managers serving ever-demanding product types rather than look for entrants, and that is what creates institutional investors in a low-return three other managers for residential, vibrancy in our industry,” says one market in which it is difficult to source logistics or student housing.” global manager. deals and deploy capital. Credibility counts among clients. Faced with a There is some scepticism in the As one institutional investor concludes: growing regulatory burden, too, for market, too. “I’m not sure bigger is “I can see more consolidation in many managers that means scaling up. better. I’d argue that better managed investment management. To be a and more effective is better,” says one global player, you have to be above “After the financial crisis, investors interviewee. “I think fund managers $100 billion assets under management. were often keener to work with niche run their own businesses and there’s I wouldn’t be surprised if the big get operators but because of the growth of probably an element of their fee bigger and the small remain niche the real estate investment universe, for income, their overhead, and maybe players. The ones in the middle will from their own point of view, bigger many that meant years later having to have to figure something out.” deal with 50 to 100 managers just in real is more efficient in their own capital allocation. Whether that translates estate, and they maybe found that to into better service and alignment with be inefficient,” says one interviewee. their investors, I think it’s for them to show it through their performance.”

Emerging Trends in Real Estate® The global outlook for 2018 15 Top cities for real estate investment in 2018

Canada Europe Asia Pacific

Vancouver Berlin Bangalore Toronto Copenhagen Bangkok Montreal Frankfurt Guangzhou Munich Ho Chi Minh City United States Madrid Jakarta Seattle Hamburg Manila Austin Dublin Mumbai Salt Lake City Stockholm Shanghai Raleigh/Durham Luxembourg Shenzhen Dallas/Fort Worth Amsterdam Sydney Fort Lauderdale Los Angeles San Jose Nashville Boston

Table 1-3 Top 10 global and continental cross-border trade routes, 2017

Rank Rank Source Destination Volume YOY 2017 2016 country country ($m) % 1 2 Canada United States 14,347 24% 2 4 United States Germany 10,349 57% 3 3 United States United Kingdom 9,971 0% 4 41 United States Spain 8,855 414% 5 38 China United Kingdom 7,259 308% 6 14 Hong Kong United Kingdom 7,092 111% 7 15 Singapore United States 6,391 95% 8 6 Hong Kong China 5,578 –3% 9 1 China United States 5,368 –64% 10 18 United States Netherlands 5,328 74%

Source: Real Capital Analytics

Sources: Emerging Trends in Real Estate Europe 2018, Emerging Trends in Real Estate Asia Pacific 2018, Emerging Trends in Real Estate United States and Canada 2018

16 Emerging Trends in Real Estate® The global outlook for 2018 Top cities and cross-border trade routes

“ In Asia, Europe, and the US overall, I think there will be increasing allocations to real assets. That’s a reflection of what’s happening in the fixed-income market and the bond market. We’re coming to the end of what’s been a 30-year bull market in bonds.”

European investment manager, Global Emerging Trends in Real Estate 2018

“ The reality is that post the financial crisis, it’s become harder and harder to spot where you are in the cycle. In many ways, prudent investors have been quite defensive for the last couple of years. Investors around the world are looking for cash-flow that’s sustainable, as well as quality and location. The pricing of assets is strong everywhere, and so some of it is about not getting it wrong rather than getting it right.”

European investment manager, Global Emerging Trends in Real Estate 2018

Table 1-4 11–20 global and continental cross-border trade routes, 2017

Rank Rank Source Destination Volume YOY 2017 2016 country country ($m) % 11 168 United States Finland 4,879 2,093% 12 19 France Germany 4,229 44% 13 5 Germany United States 4,138 –32% 14 10 United Kingdom Germany 3,672 –7% 15 12 United States Japan 3,666 1% 16 21 Switzerland Germany 3,575 38% 17 31 Singapore Australia 3,266 64% 18 146 Netherlands United States 3,219 1,052% 19 40 Sweden Denmark 2,798 58% 20 81 Germany Austria 2,749 356%

Source: Real Capital Analytics

Emerging Trends in Real Estate® The global outlook for 2018 17 New models for a changing world

18 Emerging Trends in Real Estate® The global outlook for 2018 New models for a changing world

The real estate industry is gradually recognising the need to “Where value resides adapt to the disruptive change that technology is bringing about in the real estate sector, in the sector, and starting to come up with the strategies it thinks are the best way to address and profit from this change. it will shift to new or hybrid models of existing and new players Some still have their head in the sand. Embracing change matters But while many industry leaders do not now more than ever who manage to harness want to face up to the fact that their data as a competitive businesses need to alter radically, some The need to embrace disruptive operational advantage are setting up R&D facilities in Silicon Valley technology and business practices is to build and invest in the technology that more acute than ever, because real and create entirely new could change the sector. estate is at a liminal moment. revenue opportunities

The sector is starting to think about some Many of those interviewed believe that that leverage the scale of the challenges it will face from technology, now is a crucial point in the sector’s of their portfolios.” such as driverless cars and blockchain. evolution, and those companies unwilling It is starting to adapt properly to the or unable to embrace change risk being Real estate technology executive, biggest technological change of the past permanently left behind. Global Emerging Trends in Real Estate 2018 decade – the smart phone. The answers are not all there, but the right questions There are two main reasons cited for this. are starting to be asked. Huge amounts of capital are flowing into With that in mind, to raise money and the sector, and it will flow to the companies The human resources challenge is huge make money in an increasingly crowded that can use technology to give themselves field will require greater sophistication. − real estate is still not hiring enough even the smallest edge. of the right people, or putting the right And those that have this greater sophistication will be rewarded. people in positions of influence, according And with real estate late in the cycle, to many of the senior professionals investors and owners will need to “Being at the forefront of change and canvassed for Global Emerging Trends. utilise any means necessary to improve There is not enough leadership from the capturing some of this new inflow will performance of assets – and maintain give companies an outsize advantage,” front on these matters, with real estate performance during a downturn. chief executives in particular perceived one interviewee says. “If you look at Blackstone and Brookfield, they are to be reluctant to hire the right people On the first point, one investor cites the and undertake the change in business maybe 5 to 10 percent better than their sharply increased competition they are peers and they are hoovering up capital. models required to keep up with the currently facing, as record amounts of pace of change. Technology creates outsized winners capital move into the real estate sector. and that is what will happen in real estate, too.” “Increased liquidity, combined with improvements in data that bring greater This will be especially important as real transparency to the sector make it harder estate, inevitably, approaches the point to find alpha,” they say. “In the 1980s there when values start going down rather was very little competition, and institutional than up. investors were not sophisticated, so it was pretty easy to make money from them. Not any more.”

Emerging Trends in Real Estate® The global outlook for 2018 19 “Cap rates can’t go down any further, Table 2-1 How concerned are you about the following business threats to your the only way is up, so you have to organisation’s growth prospects?1 improve the efficiency of your property and your company,” one interviewee says. “Software is one way of doing this, Real estate Global (30) (1,293) as are things like energy efficiency and the internet of things, things that make Cyber threats 17% 40% buildings run more efficiently. On the Speed of technological change 10% 38% management side, anything replacing Changing consumer behaviour 7% 26% spread sheets and allowing greater New market entrants 7% 20% analytical capability has a big return on investment.” Source: PwC Global CEO Survey 2018

“If you do stick to working with spreadsheets, you are not going to PwC's survey is borne out to a great go bust over night, but it will be death People matter – is real estate degree by interviewees for this report, by a thousand cuts,” another adds. getting it right? from all parts of real estate. On why they Central to this change will be the people had set up a proptech investment firm, that real estate firms hire and the way they one interviewee points out that real “ If you do stick to working run their businesses, as much as the estate had the lowest spend on IT of any business sector. “The only way is up,” with spreadsheets, buildings that companies in the sector buy and build. And the evidence suggests that they say, adding that they believe only you are not going to the sector has not embraced change in around 25 percent of property companies the way necessary to flourish. are really thinking about how to adapt to go bust over night, the changing world. but it will be death Survey data compiled by PwC indicates by a thousand cuts.” that real estate chief executives are less Echoing this sentiment, one investor concerned with changing the way they run makes a similar comparison to other sectors. “If you look at Goldman Sachs, Proptech consultant, their businesses in the face of disruptions Global Emerging Trends in Real Estate 2018 of all kinds, but particularly in the face of about one third of its business today technological change. is tech related, and it spends about 25 percent of its earnings before interest, The survey reveals that just 10 percent tax, depreciation, and amortisation on of real estate chief executives are technology – the equivalent figure for concerned about the speed of techno- real estate would be 5 percent or less,” logical change, compared with a global they say. average of 38 percent. Similarly, just 43 percent are rethinking their human One or two interviewees have hired chief resources function compared with a technology officers or chief data officers, global average of 60 percent. or say they are looking to hire more people with science and engineering backgrounds. But there is certainly a feeling that on the whole real estate companies are not hiring people with the kind of backgrounds needed to help them adapt to the changing world.

1) PwC Global CEO Survey: Respondents who stated ‘Extremely concerned’

20 Emerging Trends in Real Estate® The global outlook for 2018 New models for a changing world

“In terms of hiring, real estate companies The same interviewee argues that there Dealing with proptech – are not shaking up the org chart. Too often, are very few tangible examples that can buy, build, or bury your head they are doing things like making the be held up where a real estate company, head of IT the chief data officer or either a principal or a services firm, The interviewees for this report covered chief technology officer, and they has radically altered their business to the entire spectrum of views when it are fundamentally different roles.” take account of disruptive technology comes to proptech – technology utilised or business practices, and come out by real estate companies to enhance the But beyond this, there is the feeling that the other side able to prove that change running of their business. For some it a generational shift would be required has been beneficial. is just a buzzword, and they have not to instigate more meaningful change – changed how they run their business or a potentially slow process. “It is more Rather, there are examples where applied much in the way of new technology. important to be hiring lots of people companies have tried and failed and at the bottom of the organisation who serve as a warning about the pitfalls At the other end of the spectrum, four understand technology and its impact of changing too quickly or getting investors or developers interviewed have rather than one person at the top,” change wrong. set up their own divisions to invest in and one interviewee says. develop proptech. One investor has even set up their own dedicated proptech There is also a feeling that senior leaders “Implementing investment and R&D facility in Silicon are not doing enough to accelerate Valley to get access to the best talent the process of change in companies. cultural change takes and ideas that the technology sector But before they are judged, there are can offer. compelling human reasons why leaders investment, and many might prefer to maintain the status quo. CEOs don’t want to In the main, these are some of the largest spend the money.” investors in the world, with portfolios “Implementing cultural change takes running into the tens of billions of dollars. investment, and many CEOs don’t want Proptech consultant, But that is not always the case – one such to spend the money,” one interviewee Global Emerging Trends in Real Estate 2018 firm is a much more modest single-sector says. “But there is also the issue that investor and developer. many leaders are near the end of their careers and don’t want to implement As to why these companies have decided big expenditure and strategic shifts that to invest in and create their own proptech might be the last thing they do in their solutions, rather than buy them in from careers, but have no guarantee of external firms, the answer tends to be bearing fruit.” fairly harmonious.

Emerging Trends in Real Estate® The global outlook for 2018 21 “We are an operator as well as an owner “You also need a VC background as Table 2-2 Venture capital investment of real estate, so we need technology investing in companies is very different in proptech that helps us maximise our portfolio and to investing in real estate.” manage it efficiently,” one investor says. Amount “It is quite an expensive and labour- “But you also need to have them work Year raised ($m) Deals intensive thing to do, but we want to be very closely with your teams that 2011 186 40 at the forefront of the changes affecting understand real estate – asset managers, 2012 218 70 real estate. It is important to be an early etc. – to find what will be truly useful to 2013 446 105 participant in this,” another says. the real estate community.” 2014 1,142 170 There is, of course, another element to this There are, of course, pros and cons to 2015 1,714 191 – proptech companies or applications this strategy, and not every investment 2016 2,600 277 have the potential to turn a profit in and of will bear fruit. One of the investors with 2017 (estimate) 3,400 n/a themselves. “The theory is you can invest in a proptech focus outlines how one piece technology that will help your own portfolio, of artificial intelligence software now Source: CB Insights but also invest in companies that should allows it to sort through huge stores of make a good profit, too,” another says. documents from development projects and categorise them in minutes, a process How are investors going about this? that used to take a project manager a week “ Proptech is one small Some are taking a venture capital approach, or more. part of the wider digital investing in companies building particular transformation of the products. Some are hiring the people But on the downside, a project that to build those products. But in all cases attempted to standardise leases using property industry. there is consensus that being an investor blockchain technology has ultimately It describes a movement in this sector requires blending of the proved to be useless, wasting time and new skills of the tech world and more money. An answer might seem to be driving a mentality traditional real estate expertise. to ensure that companies have a good change within the real balance of staff with traditional real “We have hired people with a more estate skills and also knowledge of estate industry and its technology and venture capital back- newer technology and business models, consumers regarding ground. The companies in this world are to ensure that the technology being technology-driven almost all not from the real estate sector, developed is useful as well as innovative. so they have a different mindset and you innovation in the data need someone that understands that assembly, transacting, mindset,” one investor says. and design of buildings and cities.”

James Dearsley and Andy Baum, PropTech Consult

22 Emerging Trends in Real Estate® The global outlook for 2018 New models for a changing world

Disruption vs. stability: how While in general the consensus remains “ As an industry, we are various sectors are affected that fortress malls in the best locations would perform well, and that Asian not as vulnerable to In terms of specific sectors of real estate investors are furthest along the path of disruption as other that are facing disruption, there is little adapting malls to new technology and sectors of the economy. surprise that interviewees most commonly ways of living, some anticipate that even cite logistics and retail. The two sectors here the need to convert space from On the contrary, it is are two sides of the same coin, impacted retail use would eventually be felt. unlikely that apartments positively and negatively by e-commerce. will be replaced by digital Most interviewees believe more mature “The extension to Westfield London will markets like the US, China, and the UK have a John Lewis department store. products. But we can will see growth moderate but continue Will that still be a department store in 20 use digital products nonetheless, and the rest of the world years? I don’t think so,” one investor is catching up. says. “People are underestimating how ourselves and offer capex will impact the valuation of even them in addition to the the best centres, because they can hide One development in the retail sector is apartment to customers. the fact that shopping mall investors it below the line.” and developers are past the phase of And by building houses There were two sectors where the effect wondering what to do with empty space using modules that are in their properties. They are getting on of disruption was increasingly felt in 2017, and converting it to other uses, such as and which interviewees felt would continue produced in the factory co-working space, libraries, health care to see huge changes over the coming and only installed on site, centres, and even mini-golf courses, as is years, and that is offices and hotels. the case with a huge empty department we can quickly realise store on London’s Oxford Street2. In the office sector, WeWork – and cost-effective new co-working and flexible offices more generally – dominate almost every construction in existing conversation. One tech investor paints neighbourhoods.” a picture of the scale of the opportunity. According to CBRE estimates, revenue European investor, from global office rentals is a $600 billion Global Emerging Trends in Real Estate 2018 a year business. If flexible offices grow from 1 percent to 20 percent or more of that market, as the same broker estimates, that is $120 billion of revenue up for grabs.

2) https://europe.uli.org/trading-dining-leisure-amenities-new-shopping-centre/

Emerging Trends in Real Estate® The global outlook for 2018 23 The path to growth will not be smooth. Co-working and flexible space is also a “ The WeWorks of the As one investor in the sector says: threat to the business model of the advisory “This is an inherently volatile business firms that have thus-far benefited from world, the whole co- because of the short-term nature of the the outsourcing of corporate office working space, is cash flow, and there will be even greater management. “Only 5 percent of a volatility when the next recession hits.” company’s office is really personal, becoming a significant the thing that makes it a Google office part of the real estate But beyond the performance of individual or a McKinsey office. So co-working market. No one knows companies or even the sector itself is the companies can create office space for fact that co-working has changed the companies, and then work with human what the depth is to that. office real estate sector forever. Landlords resources (HR) to get that last 5 percent. But it is not just millennials are now obliged to treat tenants as And it is HR they are working with now, customers, rather than just pay lip service not the head of real estate, as the office who are flocking to that; to the idea, because of the plethora is an HR tool.” you have corporates that of alternatives available for even large are looking at that as a corporate occupiers. “If you are focused In the world of hotels, Airbnb is evolving. on cash-flow rather than service then you So far, business travel has been fairly cost-effective alternative will go out of business,” one investor says. impervious to Airbnb, but platforms like for space usage. I think Parallel Travel are looking to provide the Office space is being designed to offer benefits of Airbnb – lower-cost apartments this is going to be a greater variety in ways of working, rather than hotel rooms – with none of the one of the interesting with forward-thinking owners now having downsides business travelers do not like, to incorporate and mix open-plan space, such as occasionally sketchy service challenges. Do you have quiet areas for when workers require from hosts. physical assets facing solitude, as well as break out areas for obsolescence because collaborative work. And the usage of all The areas of traditional real estate most of this space needs to be monitored and impervious to disruption is “anything to they are just not designed quantified to ensure maximum efficiency. do with beds”, according to one investor. to accommodate these More than one million people per year will As is the case with shopping centres, turn 18 in the US over the next few years, new uses?” the capital expenditure for the owners of making student accommodation resilient; offices that do not meet these criteria will while Airbnb has eaten some of the hotel Global asset manager, Global Emerging Trends in Real Estate 2018 be significant. A much-repeated mantra trade’s business, tourist numbers in relation to this is that there will be continue to rise year on year as people “winners and losers”. spend money on experience rather than possessions; and while luxury multifamily is oversupplied in some US markets, it is heavily undersupplied in most markets in Europe and many markets in Asia.

24 Emerging Trends in Real Estate® The global outlook for 2018 New models for a changing world

Disruption: from blockchain Figure 2-1 Area most likely to be affected by technology to driverless cars

In terms of specific technologies that will Design and construction have a significant impact on the operation and value of real estate, two areas are cited much more consistently than others: Big data driverless vehicles and blockchain.

It would seem as if the real estate sector Tenant requirements now has an intense focus on how the implementation of driverless cars and Property management Heavy Goods Vehicles (HGVs) will impact its world: virtually every interviewee, when asked about big technological Leasing disruptions in the sector, mentions autonomous vehicles. Sales Some of the potential effects are tangible: for instance, what happens to the space currently given over to parking when Valuation people no longer own cars and need to park? In Los Angeles alone, for instance, Financing there are 17m sq m devoted to parking, according to German visualisation software 010203040506070 company Moovel. Shopping malls will % suddenly have huge amounts of parking space that need to be reconfigured. Source: Emerging Trends in Real Estate 2018 Mid-Year Survey “When we are building retail now, we make sure that the parking space can easily be converted to other uses,” And beyond this even, there is the social Blockchain is a technology that the one developer says. impact caused by the fact that driving as real estate industry knows will have big a profession would essentially become implications, but currently finds somewhat Beyond this, however, there is the obsolete – and more than 3 million difficult to get its head around. There is potential to reconfigure totally some Americans are employed as drivers. consensus that the technology will have sectors of real estate. Logistics is currently the capability to create a new system of the darling of investors, but if HGVs can One interviewee points out that driverless property title documentation and transfer, drive almost continuously, less logistics cars provide a good example as to why and that governments across the world space might be needed – HGVs would some investors need to think more closely are likely to adopt this to complement essentially become moving warehouses about technological change than others. or replace land registries. – and it might not need to be as close The technology is perhaps ten to 20 years to urban centres. “Maybe everyone is away from becoming commonplace. currently overpaying for these last-mile That means that an opportunistic investor logistics assets,” one investor muses. can to some degree discount it from their evaluations right now. But core investors that want to hold assets long-term need to be thinking about this right now.

Emerging Trends in Real Estate® The global outlook for 2018 25 “ Exogenous technology Rather than a specific technology, there Blurred lines – the merging of is also great interest in the impact of old business models with new is a threat to many technology on the construction industry. businesses, and Off-site modular construction, construction We have reached a moment when knowing about them robotics, building information management the lines between traditional real estate and embracing them systems, drones, and artificial intelligence companies and new entrants from the are seen as having the potential to improve technology, services, and hospitality is important as you hugely the construction process, with the sectors are becoming blurred. It is a could find yourself in benefits being reaped by developers. cliché, but this represents both a threat a Blockbuster situation “As that industry becomes more efficient and an opportunity for the traditional and standardised and costs come down, real estate sector. and becoming extinct.” that will have a major impact on developers. Construction times could be halved,” The threat is clear: it is conceivable that Proptech consultant, one developer says. Such technology technology companies or new entrants Global Emerging Trends in Real Estate 2018 could significantly aid the delivery of come to dominate entire sections of real more affordable housing – a major focus estate, with a level of change even greater of Emerging Trends US and Canada. than that seen so far in the retail sector. In terms of its impact on the value and This would be possible because of operation of real estate, there is less An exemplar in the construction field cited technology companies’ better access focus on the idea that blockchain might several times is Katerra, the start-up to and analysis of the new oil: data. be used to buy and sell property construction technology firm in which instantaneously, or the idea that it could giant Japanese investor Softbank recently One example is logistics. What is to stop, be a method to syndicate the equity invested £865m, valuing the company hypothesises one interviewee, Amazon of a property. The big impact on values at nearly $3bn. Rather than trying to bolt coming to dominate the entire logistics could come from its interaction with big these newer technologies on to existing sector and becoming many times data and the fact that as blockchain is working practices, the company was larger than even the biggest incumbent increasingly used to document information set up to build in technology from the companies? “Amazon is already setting about a property or company, the due very start of the company, and try up its own delivery company; why would it diligence process becomes a lot cheaper to change fundamentally the way not set up its own developer of logistics, and quicker. construction firms work. and not only develop for itself but for others?” they argue. “Who knows better One investor explains that in a recent “It is answering the question of what the where to build and how to deliver than corporate transaction, due diligence took construction company of the future looks Amazon, given its access to data?” more than six months and accounted like,” one interviewee says. “Not many for 10 percent of the total deal cost. developers or investors are answering Reducing both of these elements using that question in their field.” blockchain could affect the value of assets and companies. “A 10 percent change is meaningful,” they say.

26 Emerging Trends in Real Estate® The global outlook for 2018 New models for a changing world

Table 2-3 Real estate into tech

Company name: Investment/collabaration with: Business product/service: Brookfield Airbnb/Niido Multifamily properties that can be rented out on Airbnb Brookfield Convene Flexible conference, meeting space, and range of services for office tenants Tishman Speyer Zo Branded platform for tenant amenities Westfield Onemarket Services/capabilities platform that empowers retailers to digitise their sales and fulfilment process Sansari Hostmaker Upmarket Airbnb Platform Greystar Amazon Install locker systems – consolidating deliveries Lennar Opendoor Home Trade-Up Program revolutionises the way consumers purchase and sell homes. Colliers LiquidSpace Real-time network for office space. Connecting growing teams and professionals looking for space, directly with venue partners, space providers, real estate professionals and service providers. Durst Organisation Convene Flexible conference, meeting space, and range of services for office tenants Moda Living Uber Aims to reduce need for tenants to have private cars WeWork MeetUp Creates communities, gatherings based around the ideas, activities, common interest, goal, or cause. Hines Fifthwall Real estate tech VC fund Equity Office Fifthwall Real estate tech VC fund Varde Partners Pi Labs Real estate tech VC fund Prologis Fifthwall Real estate tech VC fund Starwood Capital Concrete VC fund focused on innovations that impact the real estate industry Westfield Westfields Labs VC fund and tech accelerator Simon Property Group Simon Ventures VC fund and tech accelerator Unibail Rodamco UR Labs VC fund and tech accelerator JLL SeedCamp/Starwood Concrete real estate VC fund Blackstone Entic Tech company that optimises energy usage in large buildings Blackstone VTS Tech-based leasing/management platform Brookfield Honest Buildings Cloud-based platform allows landlords to track repair projects/ vendors across entire portfolio PGGM Geophy Alternative data: maps real estate portfolios on sustainability

and CO2 footprint Oxford Properties Honest Buildings Cloud-based platform allows landlords to track repair projects/vendors across entire portfolio K11 ObEN AI startup seeking to create new experiences for consumers Union Invest Architrave Proptech strategic partnership to develop industry-wide real estate data platform Durst Organisation Honest Buildings Cloud-based platform allows landlords to track repair projects/vendors across entire portfolio CBRE Floored 3D visualisation software for the commercial real estate industry Blackstone TOG Co-working Gaw Capital Naked Hub Co-working Carlyle Uncommon Co-working LeFrak Common Co-living Brockton Capital Fora Spaces Co-working Aviva Ollie Co-living

Services Proptech Funds Tech/Data Co-working/Co-living

Source: PwC Research

Emerging Trends in Real Estate® The global outlook for 2018 27 Table 2-4 Tech into real estate

Company name: Investment/collabaration with: Business product/service: Fifthwall LimeBike Shared bike – smart mobility. First/last-mile transportation. Expand accessibilty to buildings. Seen as a way to make properties more valuable. Fifthwall Industrious Partners with managers to provide co-working space/ workplace services Facebook Real estate Plans to create mixed-use campus town Softbank WeWork (co-working), Katerra Tech fund invests in ‘real estate’ business (modular housing) Airbnb Newguard Enables long-term tenants to sublease apartments Google Real estate Development of city region in Toronto Amazon Wholefoods Acquisition opens up access to physical retail/distribution

Services Proptech Funds Tech/Data Co-working/Co-living

Source: PwC Research

Another example is Google’s smart The counter argument is that real estate The likelihood is that the two worlds will city project in Toronto, or WeWork’s is too large and fragmented an industry increasingly collide and complement encroachment in the office sector. to see true consolidation. Blackstone and each other, and that being successful in “Given that the ultimate end goal of Brookfield own more than $200 billion of real estate over the coming decades will buildings is to attract talent and retain real estate, but in an industry of more than be about being best positioned to profit loyalty, tech companies will be able to $2 trillion, that is still small. “The value of from these collision points. As a sign do this better than existing real estate real estate goes into trillions, think about of things to come, two global giants of companies,” an interviewee argues. the net worth of a city like London. e-commerce, Amazon and Alibaba, have So, this will not change hands quickly.” both made big moves into the world of WeWork is clearly following the tech physical real estate. The former paid company playbook of trying to become $24 billion for the US grocery chain Whole so big that it dominates the office sector Foods, and the latter has spent more than and has greater leverage than any single “ Given that the ultimate $10 billion on shopping centres and other traditional office landlord. It remains to end goal of buildings retail assets in the past couple of years. be seen how this plays out. But with a is to attract talent and valuation of $20 billion from its last funding round, it is already theoretically retain loyalty, tech valued at more than the world’s largest companies will be able office REIT, Boston Properties, which has to do this better than a market capitalisation of $19 billion. existing real estate companies.”

Real estate tech executive, Global Emerging Trends in Real Estate 2018

28 Emerging Trends in Real Estate® The global outlook for 2018 New models for a changing world

“ The traditional real “The traditional real estate sector will The answer, in short, will be both. There not sit just there and wait to have its is plenty of opportunity for new entrants estate sector will not sit lunch eaten by new digital companies, to disrupt the sector and steal value just there and wait to they will respond.” and market share. But there is enough willingness to adapt from incumbent have its lunch eaten by An example is in the world of multifamily businesses to ensure that they are also new digital companies, housing, where some developers are able to profit from change. they will respond.” building schemes that contain units specifically designed for use on Airbnb – “The ideal solution would be older or in some cases even entire schemes. businesses recognising the change Global investor, Global Emerging Trends in Real Estate 2018 “It provides Airbnb with supply, which and bringing about new profit pools is the company’s biggest constraint,” in business they didn’t have previously,” one interviewee points out, “and in the one interviewee says. “Digitising the past multifamily sector, it is a good way of will not help them evolve and move forward. Indeed, many interviewees point to finding demand in a market that has been However, digitising the past may help them Alibaba as an interesting example of how oversupplied in some areas, particularly realise their market position and how subtle physical and online retail can be profitably at the luxury end.” In a similar way, in the changes to operations can develop new merged. As well as its investment in hospitality sector big companies like areas to monetise in their sector and department stores and shopping centres, Accor have created multiple brands and safeguard their future.” which complement its delivery network, styles of property to appeal to different the company has equipped more than kinds of consumer and try to see off the 600,000 small stores across China with threat of Airbnb. computer software that allows them to be linked to a wider network, helping And companies like Vonovia have pivoted customers find goods in networked stores from being traditional institutional owners nearby, and giving store owners information of real estate to being much more on what goods they could profitably sell. consumer-facing. “It is now a consumer The challenge for real estate will be to do company that touches the lives of 700,000 the same thing but from the position of Germans where its product just happens the owner of the physical assets. to be real estate,” one interviewee says.

All interviewees were asked the question: Where will the real future value reside in the real estate industry? Will it be captured by non-traditional business and new entrants or remain with the traditional businesses?

Emerging Trends in Real Estate® The global outlook for 2018 29 Sponsoring organisations

PwC’s real estate practice assists real estate investment advisers, The Urban Land Institute is a global, member-driven organization real estate investment trusts, public and private real estate investors, comprising more than 40,000 real estate and urban development corporations and real estate management funds in developing real professionals dedicated to advancing the Institute’s mission of estate strategies; evaluating acquisitions and dispositions; and providing leadership in the responsible use of land and in creating appraising and valuing real estate. Its global network of dedicated real and sustaining thriving communities worldwide. estate professionals enables it to assemble for its clients the most qualified and appropriate team of specialists in the areas of capital ULI’s interdisciplinary membership represents all aspects of the industry, markets, systems analysis and implementation, research, accounting, including developers, property owners, investors, architects, urban tax and legal. planners, public officials, real estate brokers, appraisers, attorneys, engineers, financiers, and academics. Established in 1936, the Institute has a presence in the Americas, Europe, and Asia Pacific regions, with members in 76 countries. Global Real Estate Leadership Team The extraordinary impact that ULI makes on land use decision making Craig Hughes is based on its members sharing expertise on a variety of factors Global Real Estate Leader affecting the built environment, including urbanization, demographic and PwC (UK) population changes, new economic drivers, technology advancements, and environmental concerns. Bart Kruijssen European, Middle East & Africa Real Estate Leader Peer-to-peer learning is achieved through the knowledge shared by PwC (Netherlands) members at thousands of convenings each year that reinforce ULI’s position as a global authority on land use and real estate. In 2017 alone, Byron Carlock more than 1,900 events were held in about 290 cities around the world. US Real Estate Practice Leader PwC (US) Drawing on the work of its members, the Institute recognizes and shares best practices in urban design and development for the benefit KK So of communities around the globe. Asia Pacific Real Estate Tax Leader PwC (China) More information is available at uli.org. Follow ULI on Twitter, Facebook, LinkedIn, and Instagram. Gareth Lewis Emerging Trends in Real Estate Global Project Director PwC (UK) Ralph Boyd Urban Land Institute www.pwc.com Chief Executive Officer 2001 L Street, NW Urban Land Institute (Americas) Suite 200 Washington, DC 20036-4948 Lisette van Doorn U.S.A. Chief Executive Officer 202-624-7000 Urban Land Institute (Europe) uli.org John Fitzgerald Chief Executive Officer Urban Land Institute (Asia Pacific)

Anita Kramer Senior Vice President ULI Center for Capital Markets and Real Estate

Elizabeth Rapoport Content Director Urban Land Institute (Europe)

30 Emerging Trends in Real Estate® The global outlook for 2018 Interview participants

Interview participants

AEW Innovation in Real Estate David Schaefer Antony Slumbers Allianz Real Estate Internos Global François Trausch Jos Short APG KKR Patrick Kanters Ralph Rosenberg AXA IM – Real Assets Patrizia Immobilien Stephen D McCarthy Anne Kavanagh Beos PGGM Investment Stephan Bone-Winkel Guido Verhoef Blackstone PropTech Consult James Seppala James Dearsley and Eddie Holmes Brookfield PSP Investments Niel Thassim Neil Cunningham Canada Pension Plan Investment Board QuadReal Property Andrea Orlandi Dennis Lopez Fifth Wall Ventures Signa Roelof Opperman Jürgen Fenk Gecina Vonovia Méka Brunel Rolf Buch Global Logistics Properties VTS Seek Ngee Huat Brandon Weber Hines Lars Huber

Emerging Trends in Real Estate® The global outlook for 2018 31 Authors and Editorial Oversight Committee

Authors Editorial Oversight Committee

Doug Morrison Allianz Real Estate Editor and Author Dr Alexandra Krystalogianni Mike Phillips AXA IM – Real Assets Author Nathalie Charles JLL Asia Pacific Megan Walters Kempen Capital Management Egbert Nijmeijer Urban Land Institute Americas Anita Kramer Urban Land Institute Asia Pacific Colin Galloway

32 Emerging Trends in Real Estate® The global outlook for 2018

Emerging Trends in Real Estate® The global outlook for 2018

Based on interviews with the most senior property professionals, the Emerging Trends in Real Estate© United States and Canada, Europe, and Asia Pacific reports, produced annually by the Urban Land Institute and PwC, are key indicators of sentiment in global real estate.

We have drawn together those regional insights with additional interviews to focus on the most relevant investment and development trends across the globe, the outlook for real estate finance and capital markets, and the long-term influence of megatrends over the industry. www.pwc.com/real-estate-trends-global www.uli.org

Emerging Trends Emerging Trends Emerging Trends in Real Estate® in Real Estate® in Real Estate® Reshaping the future United States and Canada 2018 Europe 2018 Asia Pacific 2018

The Emerging Trends in Real Estate 2018 series of reports are available at: www.pwc.com

Emerging Trends in Real Estate® is a registered trademark of PricewaterhouseCoopers LLP (US firm) and is registered in the United States and European Union.

© March 2018 by the Urban Land Institute and PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage and retrieval system, without written permission of the publisher.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and to the extent permitted by law, the Urban Land Institute and PwC do not accept or assume any liability, responsibility, or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Recommended bibliographic listing: PwC and the Urban Land Institute. Emerging Trends in Real Estate®: The Global Outlook for 2018. London: PwC and the Urban Land Institute, 2018.

ISBN: 978-0-87420-265-6

Emerging Trends in Real Estate®: The Global Outlook for 2018