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Emerging Trends in Real Estate®: the Global Outlook 2018

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Emerging Trends in Real Estate®: the Global Outlook 2018 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 Pacic 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.
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