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Emerging Trends

in Real Estate

The global outlook for 2017


Emerging Trends in Real Estate The global outlook for 2017
Contents
2 Executive Summary

5 Real estate de-risks

12 Real assets

19 Trends and top cities in 2017

26 Sponsoring organisations

Emerging Trends in Real Estate The global outlook for 2017 1


Executive Summary
We looked across the three regional reports in the Emerging If protectionism does
Trends in Real Estate series1 and asked ourselves if geopolitical come through it will take
uncertainty and caution are the watchwords for 2017 what are
some time to work its
the new rules for the real estate industry?
way through. It wont
be a 2017 phenomena,
It is striking that while concerns around Risk off the new normal but the impact will be felt
geopolitics are at unprecedented levels
in recent times, confidence in the ongoing In the recent 20th PwC Global CEO survey,
over the next few years.
flows of capital to real estate remain high. one UK CEO commented businesses
Interviewee, Global Emerging Trends
over the last 10 or 20 years have ridden
in Real Estate 2017
When we canvassed the views of 21 global the wave of certainty. With recent events
real estate leaders they spoke positively that trend is either being challenged or
about the prospects for real estate in 2017 reversing. Looking at figure 1-1 there
and beyond. These leaders represent is much to concern real estate leaders
global asset managers, institutional Yet, if anything, it could drive capital to
in 2017.
investors, sovereign investment funds diversify. In a de-globalised world there is
and the largest real estate operators who more benefit in being diverse. If countries
The current macro-environment
together we estimate control over $1trn are less in sync you need to build a
of geopolitical uncertainty and fragile
of real estate assets under management. portfolio that is diverse says a global
economic growth is set to remain a
asset manager. Genuine concerns remain
strong feature and real estate will remain
In a risk-off market where will investors as one interviewee noted the thing that
in risk-off mode. Global cross border
find yield? This report revisits common worries me most: the flow of human
investment into real estate is holding up
trends from across the Emerging Trends in capital, which is very identifiable globally
given the chase for yield and real estates
Real Estate series and identifies how real in terms of ideas and talent. If that flow
position as a safe haven, and there will
estate is responding to these challenges. changes, the outlook for the economy
continue to be a flight to quality by the
is fundamentally different.
majority of institutional investors.
The Emerging Trends in Real Estate
series has also shown in recent years A global drift back to domestic agendas
that what we mean by real estate was seen both as having the potential
is evolving and becoming harder to to kick start stalled economies but
define. The boundaries between real also risks upsetting finely balanced
estate and infrastructure are becoming interdependencies between countries
increasingly blurred. Our interviews with and regions. As one global interviewee
industry leaders explored the dynamics pointed out, the political world changes
driving the real assets phenomenon the idea that the entire world is moving
and where this is heading. in one direction, so youre seeing
different markets in different ways.

1) Emerging Trends in Real Estate Europe 2017, Emerging Trends in Real Estate Asia Pacific 2017 and Emerging Trends in Real Estate United States and Canada 2017
(www.pwc.com/emergingtrends).

2 Emerging Trends in Real Estate The global outlook for 2017


Executive Summary

The volume of capital seeking a limited Either way, finding the right risk/return Never in my career have
supply of core properties is forcing balance will be a key challenge that will
investors to consider new strategies, be felt throughout the real estate value I had so many risks from
lowering return expectations or accessing chain. And to add another further a political perspective
higher yields by exposing themselves complication into the mix, this challenge in so many places at
to more operational risk and emerging will be played out against a backdrop of an
alternative real estate sectors. industry whos centre of gravity is shifting the same time.
from a financial asset to an operational
Participant, Emerging Trends in Real Estate
business where the customer is king.
Europe 2017

Figure 1-1 Threats to business in 2017

Uncertain econmic growth

Land costs / availability Availability of key skills

High

Construction costs Geopolitical uncertainty


Moderate

Low

Access to affordable capital Taxes and regulation

Unemployment Speed of technological change

Exchange rate volatility


Climate change & environmental damage

Terrorism Social instability

PwC 20th Global CEO survey European Real Estate US & Canada Real Estate Asia Pacific Real Estate

Source: This chart combines data from the PwC 20th Global CEO survey 2017, Emerging Trends in Real Estate Europe 2017,
Emerging Trends in Real Estate Asia Pacific 2017 and Emerging Trends in Real Estate United States and Canada 2017.

Emerging Trends in Real Estate The global outlook for 2017 3


Investing into the real The jury appears to be out on the driving
assets continuum forces behind these changes, but the
direction of travel is evident. We expect
Urbanisation, demographics, social to see a continuing expansion of new,
change, and resource scarcity will continue alternative asset classes with specific
to drive the real estate product and value. operational risk and income profiles.
Customer needs are changing, industry And as the list grows longer there will
boundaries are being redrawn and be practical reasons to tap into the
the spectrum of investible real asset synergies between them.
opportunities keeps on growing.
This expanding range of investment Looking at the overlap between real
opportunities including infrastructure, estate and infrastructure in another way;
mirrors the emergence of new, alternative Infrastructure is often defined by its
sub-sectors in the real estate sector. clear value to the economic health and
productivity of communities. But in todays
There are many differences in the current connected worlds of rapid urbanisation,
approaches to infrastructure and real resource constraints, rising inequality
estate investing, but there are clear benefits and a housing crisis, is it appropriate to
to understanding the intersection between view any form of real estate the built
them. As one interviewee predicts if you environment in which we live, work,
cross over both sectors you can pick up study and play, as anything other than
those opportunities, and that is an part of infrastructure?
approach I think you will see more people
taking. But even if you do that, the two It is clear real estate leaders are getting
teams will still be run by specialists. used to the idea of constant uncertainty
and change, and thinking carefully about
Is the marriage of real estate and their next move.
infrastructure and the emergence of new
alternative sectors across the real asset
spectrum a natural evolution of a more
mature and sophisticated industry?
Or simply a response by asset managers
to entice the wall of capital desperately
looking for original investment strategies?

4 Emerging Trends in Real Estate The global outlook for 2017


Real estate de-risks

Emerging Trends in Real Estate The global outlook for 2017 5


The political and economic uncertainty of the past year is People were wrong
destined to persist throughout 2017 and beyond, but real estate on Brexit and wrong on
continues to attract capital and demonstrate its resilience as an
Trump, but it is also hard
investment asset class.
to predict the reaction
people got that wrong
According to Real Capital Analytics (RCA), Emerging Trends reports have become
global investments in income-producing more pronounced over time.
as well
assets totalled $825.7 billion in 2016,
Global investor, Global Emerging Trends
a remarkable figure in the era of Trump And so, though real estate is profiting in Real Estate 2017
and the Brexit vote, given the drip-feed from the geopolitical uncertainty and
of anti-globalisation rhetoric in the US risks in the market there is a clear flight
and across Europe. to quality when it comes to investment.

The 2016 total represents a decline of As one investment manager observes:


just 15 percent on the record-breaking Weve seen a lot more capital going
2015, it was still 25 percent up on the into core and core-plus than into
10 year average for global deal volume. opportunistic and value-add. I think
Whats more, consensus forecasts its probably reflective of the market
indicate a similar volume this year as [generally] that people are trying to
investors allocate capital to real estate de-risk things in the face of all the
for the security of income it offers against uncertainty around Brexit and Trump
other asset classes. It is far from business lets batten down the hatches and be
as usual, however. a little more conservative.

Interviews conducted with real estate Another global investor concludes:


leaders for this Global edition of Were starting to see some inflation
Emerging Trends indicate that this is we have crossed the threshold into rising
an industry firmly in risk-off mode. interest rates, and therefore from a
If anything, the concerns and caution long-term investment perspective if you
evident in each of the three regional look at how capital will be allocated, its
being done on the basis of diminished
expectations as to returns. And the
prevailing sentiment is risk-off.

6 Emerging Trends in Real Estate The global outlook for 2017


Real estate de-risks

The US the Trump effect Much depends on whether the Trump So far, Trumps embryonic economic
administration is able to fulfil its pledge policies have had little discernible
While global investors have had time to cut taxes and spend heavily on influence on capital flows into or out of
to come to terms with Brexit and its departments and programs favoured the US. At $402.3 billion2, the US was the
ramifications across Europe, the election by the administration without adding to most active investment market in 2016.
of President Trump in the US has taken the USs near $20 trillion debt. According That volume was down 10 percent on
populist politics and the debate around to another US-based interviewee, 2015 but was simply following a broad
de-globalisation to a new level. by using executive powers the President global decline. New York, however,
has essentially turned to regulatory rather claimed Londons crown as the top
This has triggered a tremor underneath than monetary relief as an economic destination for cross-border capital.
everybodys assumption that globalisation stimulus, and I think thats very positive
is beneficial, says one US-based for the US and probably for the world It depends how much the US benefits
interviewee. I dont think were going because the US will become the engine from being part of the global economy,
to see a return to Smoot-Hawley [Tariff] of growth all over again. concludes one global investor. If the view
but I certainly think youre going to see is that the US doesnt need anybody,
a much more realistic assessment of Most American interviewees, however, and everybody else will follow, I just think
globalisation and its benefits and burdens. are cautious about the economic outlook its a misplaced understanding of how
for a nationalistic US and its impact the US economy works, and the degree
domestically and overseas. On the supply to which foreign capital plays a role.
side, there is some risk, says one. You change the variables in that equation
If Trump really loosens up the banks and you fundamentally alter the flow
Real estate cycles and dismantles a lot of the disciplines, of not just capital but human capital.
normally end because of there is a risk that the banks will go nuts Thats the thing that worries me most:
debt, supply or demand and start over-funding developers. the flow of human capital, which is
very identifiable globally in terms of
shocks, and we dont Another observes: The Trump election ideas and talent. If that flow changes,
foresee any of those victory is clearly changing sentiment, the outlook for the economy is
particularly vis a vis deficit spending fundamentally different.
Global investor, Global Emerging Trends in the US and what that might mean for
in Real Estate 2017 interest rates. About 12-18 months ago,
people were talking about deflation and
negative interest rates as being a real
risk, and you just dont hear that
conversation anymore. Theres a general
consensus now that interest rates are
only going one way up and probably
a lot sooner than we thought.

2) Real Capital Analytics, February 2017

Emerging Trends in Real Estate The global outlook for 2017 7


Europe the Brexit effect Interviewees say investors remain The smaller and
uncertain of the ramifications of the UK
The Brexit vote alone has increased the leaving the EU, while potential vendors peripheral markets,
possibility of a European Union break-up, are unsure whether or not to sell assets there is more
given the fact that one of the cornerstone at the current level of slightly softer pricing. nervousness
economies has fallen out, says one
global investor. By contrast, Germany has taken over around those now
from the UK as Europes investment
Pension fund investor, Global Emerging
With the upcoming elections in the haven, as forecast in Emerging Trends
Trends in Real Estate 2017
Netherlands, France and Germany the Europe, despite annual inflation reaching
idea of other countries following the UK's 1.68 percent. RCA says 60.2 billion
lead has reinforced the mood of uncertainty of commercial property was traded in
that still hangs over European real estate Germany last year, compared with
despite better economic conditions than 59.9 billion in the UK.
anyone had anticipated in the immediate
aftermath of the UKs shock EU referendum With Brexit, a large factor that any
result last June. investment strategy has to address
one that is possibly much greater than
A Brexit-induced fall in the value of in the past - which is, does the Eurozone
Sterling has fuelled inflation in the UK hold? You have to consider what happens
and lingering economic uncertainty. if it doesnt, concludes one global investor.
Deal volume slumped by 41 percent in I think thats partly whats driving interest
2016 compared with 20153, while in Germany today. Its the one market to
there was less capital for developers, invest in if Europe falls apart. Certainly,
especially those exposed to leasing risk. Germany would be badly hit but the
underlying dynamics and the size and
strength of the German economy mean
you can take comfort on the downside.
Your capital would be safe.

3) Real Capital Analytics February 2017

8 Emerging Trends in Real Estate The global outlook for 2017


Real estate de-risks

Asia Pacific too much Investors are also casting their nets wider The smart money
capital, too few assets geographically. In gateway cities, this
means a migration towards assets in is looking at
Transaction volumes in the Asia Pacific suburban or greater metropolitan areas, emerging markets
region registered a 14 percent drop a trend that has been particularly strong
to $132.5bn in 2016, according to RCA, in Australia. In addition, there is growing Pension fund investor, Global Emerging
interest in emerging-market deals. Trends in Real Estate 2017
with slowdowns in Japan and Australia
offset by stronger performances in Both India which has attracted a
China and most other Asian markets. significant number of large institutional
investors and Vietnam have recently
Investors noted in particular more emerged as promising long-term plays,
big-ticket purchases by institutional although shortage of institutional grade
investors, together with a decline in stock ensures that most opportunities
the overall number of transactions as remain on the development side.
buyers balk at rising prices and owners
especially in Japan opt to hold rather China, meanwhile, continues to be a
than sell. difficult market to navigate. While it still
offers opportunities for experienced
Core continues to be the favoured asset investors, deals there are increasingly
class, although as product becomes harder to find. This is partly due to a slowing
scarce, many core investors are now economy and partly to competition from
also willing to adopt development risk. enormous amounts of domestic capital
Growing numbers looking at build-to-core now seeking a home in real estate assets.
strategies, especially where institutional
buyers are likely to be long-term holders As one global investor observes:
of the end product. China wont grow at 10 percent
anymore, it will drop to 3-4 percent a
At the same time, investors moving up year. You started with a country of 1-2bn
the risk curve in search of yield are peasants and 100m urban dwellers,
diversifying into alternative asset classes now you only have 300m peasants
that range from data centres to sub-logistics and that has an extraordinary effect on
facilities to senior housing. productivity, but that change has stopped.
Chinas infrastructure and real estate has
been part of that, and it is going through
the same process. Our holdings there
are very significant, and if we are looking
at new opportunities there, we are
very selective.

Emerging Trends in Real Estate The global outlook for 2017 9


Capital flows winners I think there will be more money coming Resources and partners
and losers in to real estate but it's going to come from
different places. A lot of the US pension become more important
There continues to be excess liquidity funds are getting closer to meeting their than ever in a market
for core real estate, says one global allocations, says a global investor. like this
investor. Theres just not enough of it in
the world. Whichever geography youre But counter-balancing that, there are Pension fund investor, Global Emerging
in, you will find that pricing for true core vast amounts of capital from China and Trends in Real Estate 2017
has held, if not increased. more importantly Japan Japan is a
huge net saver there is a lot of capital
There is certainly no shortage of capital piling up there that used to go into
allocated to real estate as investors of all pedestrian, bond-type investments. Other American industry leaders believe
stripes continue in their search for yield. But those guys are beginning to look Europe is ex-growth. Explains one:
The raising of capital continues apace around the globe to try and build I look at the demographics, I look at
because of the inherent attractions of real multi-asset portfolios, and they have the politics, and I find it a pretty
estate, not least the positive yield gap zero real estate allocation. unattractive environment.
over bonds. Commercial property debt
funds, for instance, have drawn in new As to where best to deploy the capital, And yet a European interviewee describes
capital from fixed-income investors largely opinion is divided and there is much a kind of gold-rush mood in Berlin
because inflation-adjusted net yields on that remains open to interpretation although the current shift of capital into
corporate bonds are close to zero. or preference. German cities is essentially a regional
European story. Few if any German cities
As for debt finance, generally, one The strong investment numbers for China feature in the top 20 Global cities.
interviewee comments: For the European and other Asian markets reflect how, An explanation could be that the
banks, the margins are much better than as one interviewee suggests, the smart dynamics of the European market are
other asset classes corporate lending, money is looking at emerging markets. not necessarily city-based whereas in
even project finance have lower margins than Indeed, RCAs figures show that in 2016 an urbanising world, capital is likely to
real estate. So, we have seen even more overseas buyers were net buyers in favour those cities with higher critical
lenders going into that space in Europe. Asia Pacific for the third year running. mass and a well established global
There is also the growing presence of What is more, the share of cross-border brand. For all Londons perceived issues
mezzanine / debt funds moving in to capital climbed to 31 percent in 2016, and diminished volumes in the current
fill the gap left by banks constrained which is the highest level since 2009 climate, it still features prominently in
by regulation. when it was less than 20 percent. most top 5 city rankings for real estate
transactions alongside New York,
In the US, allocations to real estate were By contrast, the big institutional, Los Angeles, Paris and Shanghai.
typically 6-8 percent during the last cycle large-cap money is continuing to invest
but the top institutions are now around 10 in places where they believe there is now From a capital market perspective,
percent. You can see bread and butter the least amount of uncertainty, which the large German cities will be winners
local pension funds continue to raise their has got to be the US, says one US- but I dont see London as a loser,
target allocations commensurate with the based interviewee before adding: says one interviewee.
leading investors, says one interviewee.
The volume of dollars will probably
continue to go into the big economies
but I see hesitation from some of these
big global players concerns over
whether theyve missed the market.

10 Emerging Trends in Real Estate The global outlook for 2017


Real estate de-risks

Thats not necessarily the case for the Globalisation of capital You may see reduced
entire UK but I see London, still, as a very continues
strong investment market and as a strong transaction volumes,
city. Just because a couple of banks Cross border capital flows are telling
but that is not
leave the city doesnt mean that London you that the globalisation of capital de-globalisation.
will become less attractive and extremely remains quite strong, says one global
depressed because over the years the investment manager, summing up the Pension fund investor, Global Emerging
market in the UK, especially London, mood of many in real estate. Trends in Real Estate 2017
has become much more diverse and
less financially driven. According to most of the industry leaders
canvassed for this Global report, there
Whichever city or region finds favour, is unswerving faith in the virtues of
there is a cocktail of risks that has never globalisation involving financial and
been so diversified and therefore markets human capital despite the rhetoric
are reflecting a clear flight to quality. around protectionism.

Says one investor: There continues to Rolling back globalisation is like pushing
be appetite and inflows of capital to buy water up a hill, says one global investment
quality assets, but what youre seeing manager. Capital flows arent reducing
though is a distinction between any old and while it might be affected over the
real estate and prime. And thats a trend medium term, market forces will prevail
youve seen in the US for a longer period over government policy. I think its overly
of time, where the high-quality assets emotive at the moment, and at some
continue to command significant point, sense will prevail.
premiums because of their safety, how
established they are and the cash flows There is also faith in real estate as an
associated with them. asset class amid the prevailing economic
uncertainty. You may see reduced
Another interviewee says: Some who transaction volumes, but that is not
have taken a more aggressive approach de-globalisation, says one interviewee.
to investment more core-plus, value-add
are thinking aloud about whether they As another global player points out,
should continue with that or go down whoever is in power in Germany or the US,
the risk profile and accept lower yields and whether or not it is a soft or hard Brexit,
to be on the safe side because of all the people still need to eat, still need homes,
uncertainties not just Brexit and Trump still need places to work real assets
but elections in Netherlands, France will be something of a safe haven.
and Germany. They would rather take a
3 percent deal safe, well leased, good
location, low leverage than a 5 percent
core-plus investment with leasing risks.

Emerging Trends in Real Estate The global outlook for 2017 11


Real assets

12 Emerging Trends in Real Estate The global outlook for 2017


Real assets

In the world of money management, major investment managers We started to look at


and pension plans have created real asset groups, doing away it from a deal level. If
with distinctions between asset classes such as real estate,
you are investing in a
infrastructure, agriculture and timber. Below we examine what
is driving this growing interest in real assets.
port, shouldnt you be
investing around that
port as well?
A theme across the Emerging Trends Real returns
in Real Estate series in recent years has Pension fund investor, Global Emerging
been that real estate investors consistently This search for income is no doubt part Trends in Real Estate 2017
cite a dearth in availability of core assets of the reason we are seeing an increased
for purchase. Competition for these assets level of interest in real assets both in
is driving up prices and encouraging terms of an emerging spectrum of
investors to consider new strategies for alternative asset classes and in terms Client driven change
accessing long term yield including of the way in which investors and asset
venturing into alternative assets classes managers are organising themselves. So what is behind this trend towards
of development.
real assets strategies and businesses?
The global head of private equity at Is it a long-term change in the way
And the same trend is becoming Blackstone, the worlds biggest real estate investors are deploying capital and
increasingly evident in infrastructure. fund manager, recently told Bloomberg managing assets? How are the changes
In a report4 published in February 2017, that the investment manager was taking place in practice? And what can
Preqin the private capital research firm, considering setting up an infrastructure the different strands that constitute real
said that 54% of the managers it surveyed investment business, which it hoped assets learn from each other?
reported that it was becoming more could one day be as large as $40bn.
difficult to find attractive opportunities,
As has already been mentioned, there is
compared to just 2% who were finding And infrastructure, and real assets more a definite move among large global money
it easier. And 74% said they were seeing generally, are at the front and centre of managers to restructure their businesses
more competition for core assets. the political and financial world at the and create real assets divisions. This can
beginning of 2017. mean different things for different managers,
but in general it includes real estate
US president Donald Trump made a and infrastructure, and usually extends
When I started talking programme of infrastructure spending a to cover income producing assets such
to capital 15 years ago major pillar of his election campaign, and as timber and agriculture.
financial markets have reacted positively
you would normally be to the expected boost for the US economy Managers who have made this move report
talking to the head of that the programme could create. that it is very much client driven, and mirrors
real estate, now you are how clients organise themselves.
More generally across the globe, there is
talking to the head of an increasing acceptance that spending Today, pension funds and even sovereign
real assets or illiquids on infrastructure such as public transport wealth funds often have the same person
or alternatives. and renewable energy can boost GDP for covering real assets, or at least the same
cities or countries, and that the former in department, says the global chief
Global investor, Global Emerging Trends particular can help solve problems such investment officer at one such firm.
in Real Estate 2017 as access to affordable housing.

4) Preqin 2017 Global Infrastructure Report

Emerging Trends in Real Estate The global outlook for 2017 13


What were seeing from clients and Pros and cons Its pretty difficult to see how you can
market trends point of view is that we be a specialist in every sort of real estate,
are stepping into meetings with investors There are areas where these things and so it is very hard to believe that you
who are no longer real estate experts or overlap and we can combine expertise, can also be an expert in real estate,
farmland experts but are experts in the for example people who liaise with the infrastructure, agriculture and private
entirety of real assets, adds the chief public sector can do so for both real estate equity, said the head of strategy at
operating officer of another. and infrastructure, says one pension fund one global pension fund.
investor. We had been doing housing
Managers report that as well as mirroring and social housing in both teams, and In general I dont think you would mix
the organisation of their investor clients, there was a partial overlap in skill set, the real estate and infrastructure strategies,
the change also reflects how these so it made sense to have one team. you need dedicated teams to grow them
clients view the different strands of real both, and by pooling things you dont
assets and their investment profiles. And some very large specialist real have the same knowledge base in each,
estate fund managers are now actively said another real estate head from a
Weve been talking to investors about it, considering building real assets businesses different part of the world.
and I dont think investors are that to meet changing client needs.
concerned about using terms like property Secondly, while a head of real assets can
or infrastructure they think about things in Before drilling into the characteristics argue that: the capital characteristics of
terms of yielding assets or income assets of the different branches of real assets, real estate and infrastructure are both long
says one head of real assets. They are it is worth mentioning that there was term, often related to economic growth,
less concerned by what it is physically less consensus among the investors illiquid and therefore need to be held for
than with its capital characteristics, interviewed for this piece that a move the long term, there is also dissension
its long term income stream. towards real assets teams and strategies about whether they are that similar.
reflected their objectives and the way they
organise their business. While some had A way of potentially squaring this circle
combined real estate and infrastructure is to consider the fact that investors from
We think this is just to create real assets teams, many could different parts of the world tend to have
not see the point of this move. very different ways of structuring their
the tip of the iceberg, teams, and there is a perception that
in terms of being In terms of the move to real assets there is a greater trend among US
mandated to look after strategies it is still not clear to me what's pension plans to combine their expertise
in that, said the head of real estate at one into a single person covering real assets.
that whole spectrum. global pension fund. For us it makes
sense not to mingle real assets. The Dutch or Australian funds wont do
Global Fund Manager, Global Emerging things like this because they have long
Trends in Real Estate 2017
I am not sure why people are creating histories, big teams, and some of the
real assets groups and that is not our most talented people in those countries
business, said another. We report to go and work for pension funds, said the
the same chief investment officer and head of research at one global money
the same investment committee and we're manager. But in the US they are more
not that far apart but the organisations public employees, with limited travel
are in separate boxes. and staff, so it makes sense for them.

The reason for this scepticism seems


to be twofold. First there is a desire
for specialisation due to the highly
individual nature of both real estate
and infrastructure assets.

14 Emerging Trends in Real Estate The global outlook for 2017


Real assets

I dont think the teams I think real estate will continue to be a Efficiency gains
winner and real assets will continue to see or structural change?
or the allocations will investment flows coming in from equities
be mixed any time soon and bonds, said a chief operating officer. Even if investors or fund managers do
the risk and return The typical institutional investor will have not formally merge real estate, infrastructure
85 to 90% in fixed income and equities
profile are perceived and 15% in alternatives, some of which
and agriculture teams, all who contributed
to the report outlined how real estate and
as being different. will be real assets. We think in the next infrastructure in particular were becoming
10 to 15 years that's going to go to a increasingly blurred.
Pension fund investor, Global Emerging 60/40 split. Given how equities markets
Trends in Real Estate 2017 have performed, real estate and real Partly this is a result of the fact that the
assets will be a beneficiary of the definition of what can be constituted
denominator effect but also be a in real estate estate is broadening to
beneficiary of investors looking to include a wide range of alternative
Everyones a winner increase their exposure to that sector. assets, and that having real estate and
infrastructure teams work together can
One area of consensus seems to be that And the difference in characteristics allow investors to access opportunities
infrastructure or agriculture will not muscle between different types of real assets will that otherwise might have passed you by.
in on capital allocated to real estate or also help the sector to grow, particularly
vice versa instead, the allocation to both outside of real estate, they add. Something that will change is that the
will increase at the expense of other asset boundaries between these categories of
classes like bonds or equities. Real estate is the main block, but real estate and infrastructure on some of
investors are looking to diversify their these assets is becoming increasingly
But in general I think allocations to real holdings away from real estate. It is a large blurred, says one global sovereign
assets will increase to perhaps up to market but it's crowded. Real estate has wealth fund investor. And if you do pool
25% of portfolios and we've been a bit been on quite a run recently recently and expertise then you have a chance to
ahead of the curve on that, said the investors are seeing how values are rising. access some of those investments that
head of strategy. But even within that They are asking how values can continue otherwise fall through the cracks of real
25% allocation you need some liquidity to rise and how they can achieve their estate and infrastructure. If you look at
in the portfolio. Real estate has been an returns. Real estate from an investor things like Centre Parcs [the UK holiday
asset class for decades already and has standpoint is liquid and large and is village company bought by Brookfield
a proven track record. more correlated with public markets. from Blackstone in 2015], that was being
And investors are asking, where can looked at by private equity firms that
It is also a much bigger universe we get some uncorrelated returns? were not real estate specialists who
global real estate investment in 2015, Whether it's farmland or infrastructure were seeing it more as a corporate which
was around $1trn5, whereas infrastructure or agriculture, this is less correlated. happened to own real estate. Things like
investment was $349bn, according to caravan parks and car parks also fall into
Preqin, with agriculture and timber small that camp, and even things like hospitals,
again. This hierarchy is expected to remain. and so in those less traditional real estate
sectors there are opportunities.

Also, there are huge opportunities and


overlaps in wide-scale urban infrastructure
and investment schemes.

5) CBRE Global Investor Intentions Survey 2016

Emerging Trends in Real Estate The global outlook for 2017 15


If you cross over both Best practices Real estate can learn how to move
beyond the typical private equity structure
sectors you can pick There is also plenty that the different we don't believe it is an asset that
up those opportunities, strands of real assets can learn from each you should have to flip every so often,
and that is an approach other. Real estate is the more mature it should be an asset to hold forever if
asset class, and therefore infrastructure you believe in the demographic situation
I think you will see more investors can look at it and avoid some and in the performance of your asset.
people taking. But even of the mistakes that the sector has made. Perpetual capital vehicles can be better
if you do that, the two for returns, there's no pressure to sell,
Real estate is a more mature market, you can improve an asset over decades
teams will still be run and real estate funds and JVs and club not a short time.
by specialists. deals have been around for decades,
says one pension fund investor. This long-term thinking can influence
Pension fund investor, Global Emerging Infrastructure is a new market and over investment philosophies as well as just
Trends in Real Estate 2017 fund structures.
the next five years, we will see exits from
the first infrastructure funds, and funds
needing to be restructured or sold. In that
sense the infrastructure world can learn
We started to look at it from a deal
level, says one pension fund investor.
from what's gone on in real estate in terms For example, there is a
of how those things are structured and
If you are investing in a port, shouldnt deals executed.
project to create a new
you be investing around that port as well? public transport system
Adds another: Real estate and
There is also a feeling that infrastructure which will transform the
investment would benefit from the creation
infrastructure are always two interlinked of more products and investments at the
way one city will live,
dimensions of a city, and so we need to lower end of the risk spectrum. which our infrastructure
look at what we do in a meaningful way.
Infrastructure will be key to taking places
team is funding.
The surprising thing about the
that are lagging behind and getting them infrastructure world is the proportion of
We are involved because
back to growth, and creating an outcome funds that are targeting pretty high returns, there is a residential and
that is good for the next generation.
It is not good to look at it in terms of
and thus are in private-equity type commercial element
structures, says one real estate investor
buildings on one side and cities on the who has looked at the infrastructure fund
that is part of the same
other, buildings need access to energy world. A high proportion of real estate project, and we are
and infrastructure. funds are core and low leverage, looking at how we
and that is a key difference.
can make the city
In return, real estate could benefit from a better place.
the long-term thinking that is more
common in infrastructure and agriculture. Pension fund investor, Global Emerging
Trends in Real Estate 2017
In terms of what the two sides can learn
from each other areas like agriculture
and timber have been very innovative
in developing permanent capital vehicles
so product structure is an area I think real
estate can learn from says a chief
operating officer.

16 Emerging Trends in Real Estate The global outlook for 2017


Real assets

Putting infrastructure alongside real estate One thing we see is that it is a lot of Putting infrastructure
has made us rethink how we view the farmland and timberland investments are
latter, says one pension fund investor. in places like South America or Eastern alongside real estate
Some infrastructure investments can be Europe, and when you invest in these has made us rethink
for up to 60 years, so it is making us think frontier countries that can mean a lot how we view the latter.
of real estate in terms of a much longer of different people and a lot of different
time frame, deals structured over 20 years. stakeholders are involved. When you It is making us think
It has also made us examine our conviction make a farm or timberland investment it of real estate in terms
levels more. If you are going into an is not just knowing about the megatrends of a much longer time
investment for that length of time, you have or the net operating income, it is knowing
to have a lot greater conviction that you will how to engage stakeholders in the asset frame, deals structure
see outperformance over the life of the deal in the longer term and engaging with the over 20 years.
than if you were just going in for five years. local community.
Investor, Global Emerging Trends
There are also key lessons real estate In terms of where the trend might go, in Real Estate 2017
can learn from other branches of real other natural resources such as water
assets in the vital world of sustainability. could become part of real assets, especially
as climate change continues and makes
Farmland and timber have been under far this vital resource more scarce.
greater scrutiny and pressure given they
are natural resources and there are a lot As for the trend of real assets investment,
of sustainability concerns around them, there is no consensus about how far it will
says one investor. These sectors have go, but significant changes are already
been making great headway in increasing under way, and even if businesses and
transparency and improving sustainability teams dont change structure, mindsets
and I think those lessons are highly have certainly changed.
transferable to real estate.

Emerging Trends in Real Estate The global outlook for 2017 17


Building a real assets team
Reconciling the different approaches to real assets.

What does the creation of a real assets There are areas where these things You now have a nice palette of options in
division mean in practice for major money overlap and we can combine expertise, debt, equity, public and private, and you
managers? In one sense, it is simply a for example people who liaise with the can structure portfolios up and down the
way of sales or client-facing staff to offer public sector can do so for both real risk spectrum and be more thoughtful in
a broader range of products. estate and infrastructure, says one your investment approach, says another
pension fund investor. We had been chief investment officer. We look to be
It is mainly the client facing people rather doing housing and social housing in both more thoughtful with our research and
than investment decision makers, says teams, and there was a partial overlap in analytics and attitude to benchmarking
one chief investment officer. Everyone skill set, so it made sense to have one and approach to investment performance.
who is client facing can go out and talk team. How do we extract synergies and We can be flexible according to a clients
about the whole real assets business, extract deal opportunities? I spend my needs, and if they say they want an 8%
and they see us as an adviser rather than time thinking about that part of it. There return with 6% from income we can
someone who is pushing product. It will were ways of doing research that is more built the right portfolio, different sectors,
come up at the first meeting with the CIO, broad and thoughtful and allow us to emerging markets versus developed,
where we are talking about client needs. find more deals. The scale created by advise them on things they might not
combining the businesses also meant that have considered like high yield debt,
But beyond this, it can be a way it was worth having a dedicated credit but also advise them of risks they might
of improving performance. team to really explore the underlying credit not have anticipated, like duration risk.
worthiness of the tenants in both sectors?

18 Emerging Trends in Real Estate The global outlook for 2017


Trends and top cities in 2017

Emerging Trends in Real Estate The global outlook for 2017 19


What does a flight to quality mean for real estate in 2017? We have had to become
Below we examine in more detail the data and trends across experts in many more
the Emerging Trends in Real Estate series in 2017.
parts of the property
market than 10 years ago.
While the real estate sector adjusts to As one CEO states the biggest change
a prolonged period of uncertainty there that I see happening in the next 20 years Participant, Emerging Trends in Real Estate
will be new opportunities created from is that there is going to be big overlapping Europe 2017
this disruption. The pace of change is among the different industries. So, there is
accelerating and new technologies are going to be fierce competition among the
helping real estate to radically rethink mature industries for example, telecoms
its structure and products to adapt to will fight with energy companies, energy
the changing needs of the market. companies will fight with the automotive
companies, and so on.
PwC's recent The Future of Industries:
Bringing down the walls6 report found that It is critical real estate businesses
technological change is creating historic understand how industries are evolving
shifts in industry footprints. Over the and how they can best service future
next ten years, the report suggests this needs. Certainly real estate is not
process will accelerate and traditional immune to new competitive threats
industry classifications will need to currently from outside its sector as one
be rewritten. Emerging Trends in Real Estate Europe
interviewee noted wryly our biggest
competitor or threat is a company we
do not know yet, which could be two
friends working together in a garage.

Figure 4-1 The boundaries between industries will erode

62% 60% 56%

62% of CEOs 60% expect a tech- 56% predict a large


anticipate their based, non-traditional existing player from
customers purchasing competitor to enter another industry
their products or their industry will move into
services through their industry
a new provider

Source: PwC CEO Pulse 2016

6) www.pwc.com/futureinsight

20 Emerging Trends in Real Estate The global outlook for 2017


Trends and top cities in 2017

Trend alert
We identified three trends reshaping the real estate market in 2017 and beyond.

Optionality and flexible spaces Operating assets Focus on affordable housing

Optionality is a buzzword for real estate Across the emerging trends series this year Affordable housing scores highly in the
occupiers and investors. It allows users there continues to be a growing interest sector investment and development
to adjust their space needs in terms in alternative or niche sectors which offer rankings across the 2017 emerging trends
of size, location, and use as-needed. a measure of diversification and stability series while the associated costs and
It gives property owners the ability to of income returns when mainstream real availability are a common concern.
maximise highest value and best use estate looks expensive and vulnerable. As recently highlighted in ULI Europe
based on immediate tenant demand. While the yields may be attractive the asset Residential Council's Vision Statement
The opportunities are real, but the will require more active management on affordable housing, affordable housing
execution is complicated with so many and managers who can cope with the is an issue that is rising rapidly up the city
moving parts. In a more fluid market with operational aspects of real estate. authority agenda impacting quality of life,
ever decreasing lease lengths optionality social inequality and threatening
may no longer be optional. competitiveness nationally and globally.
As one US CEO put it were not paying
Investors have to enough attention to affordable housing,
and I dont mean low-income or
be careful because
The developer/financier government-subsidised. Just regular rents.
there is a propensity No new buildings are providing that kind
that understands
to underestimate of product. Time will tell if thats going to
optionality in their projects come back and haunt us. Not everybody
operational risk but
is the winner. Optionality makes $75,000 to $100,000 a year.
fall in love with yield.
will be of great value over In order to provide affordable products,
the next generation. Participant, Emerging Trends in Real Estate
home sizes are continuing to shrink.
Europe 2017 In Hong Kong, this trend has taken off
Participant, Emerging Trends in Real Estate
in a big way, with at least one major
Europe 2017 developer adopting the matchbox
model as a major plank of its development
strategy, focusing on apartments with
footprints of just over 160 square feet.
This is reflects the changing demands
Box 4-1 Successful real estate investors will need to take on more operational risk from younger (and some senior) occupiers
Successful real estate investors will need to take on more operational risk who are willing to accept less personal
space as long as they have access
to share social facilities such as gyms,
15%
Strongly
46% 23% 15% 1%

Strongly
kitchens, living areas, and even office
space within the same building.
Disagree disagree
agree Neither agree Modern methods of construction can
Agree nor disagree
also be part of the solution to affordable
Source: Emerging Trends in Real Estate Europe 2017 housing as modular construction
becomes the norm and robots join
workers on construction sites.

Affordable housing may be the real estate


industries vulnerable spot or an opportunity
to move creatively into a large and
growing market.

Emerging Trends in Real Estate The global outlook for 2017 21


Sector themes for 2017 How we work Talent is going to be the
How society is changing is shifting the 77% of CEOs in PwC's 20th CEO survey
driver for the 21st century.
focus of real estate investment from are concerned that key skills shortages
CEO, PwC 20th Global CEO survey
traditional sectors to a wider range of could impair their companies growth
more specialised assets. In particular and its the soft skills they value most
the idea of sharing space as a practical that are hardest to find. Working spaces
response to the megatrends including that nurture creativity and productivity
urbanisation, resource scarcity and rapid will play an important role in attracting
technological developments will shape that talent. As a respondent in our
our future culture and landscapes. Emerging Trends in Real Estate Europe
survey put it the reality is that traditional
While there continue to be distinct offices like the ones weve worked in
regional preferences for certain sectors for the last 20 or 30 years will change.
there are also strong structural themes The way younger people use real estate,
coming through in the Emerging Trends the way they work in it, its changing.
in Real Estate series in 2017.
We believe that low economic growth may
How we live be a catalyst for change as the pressure
to cut costs and get more from space
In Europe demographics, urbanisation intensifies. For both new and existing
and affordability are fuelling interest office space, functionality will be key
in the residential private rented sector with shorter, more flexible leases, more
(PRS). Similarly the retirement / assisted communal and break out areas, a focus
living and healthcare sectors will need on wellbeing and digital connectivity
to grow to meet the future needs of the moving from nice to have to must have.
aging population. Notably student
accommodation tops the sector lists How we play
where interest is broadening beyond the
UK and perhaps Germany to Portugal, Traditionally the most customer-focused
Spain, CEE and the Nordics. area of real estate, how we shop and
spend our leisure time is complex
In Canada a combination of demographic covering leisure, hospitality and the rapidly
factors and affordability concerns means evolving space that is at the intersection
that a growing number of Canadians will of retail, logistics and manufacturing.
continue to opt to become permanent Evidence of this rapidly evolving sector
renters. A trend that has already been is clear in the increasing amount of
seen in the US with rental apartments mixed use components in retail and
having a long run of success. Investors the distinction drawn between retail for
and developers in Asia are watching these convenience and retail as an experience.
structural trends closely with affordable
and senior housing topping investment Emerging technologies are changing how
and development sector lists in 2017. we live and the impact on retail is stark
with regional malls / suburban shopping
Common across the regions is a shift centres languishing at the bottom of
from homeownership to long term renters the sector lists. Yet the infrastructure
who in return will expect a high level of underpinning retail is thriving with
customer service and flexibility. logistics, warehousing and fulfilment
riding high. It is clear the battle over the
last mile delivery will be fierce in 2017.

22 Emerging Trends in Real Estate The global outlook for 2017


Trends and top cities in 2017

Figure 4-2 Real estate the 2030 view

Live | Residential

Key trends 2030 state? Well start seeing a different attitude to


size and space. Micro-living is coming.
The urban consumer Higher density
Changes to live/work balance More liveable and vibrant urban Shared ownership, equity release
environments, combining live, and retirement living are all ripe for
Reducing car ownership
work and play opportunity.
Ageing population
New growth: healthcare, assisted living

Work | Office

More people work from home. Key trends 2030 state?


Companies will need less space and
Connectivity On demand and use of space leasing
it will change the nature of offices
fundamentally. It will make a lot of More collaborative working practices Offices as high-spec imaginariums
the current office stock obsolete. Artificial intelligence, augmented Localised work-hubs/satellite offices
and virtual reality
The WeWork concept will not only be Fewer single-let buildings as corporate
requirements become more fluid
used by companies like WeWork but by
large employers that need more flexibility Domination of shared/serviced offices
to shift their staff back and forth.

Play | Retail and logistics

Key trends 2030 state? With ecommerce, we underestimate


the extent to which the retail footprint
Ecommerce Shopping centres as multi-faceted
will shrink. We are just in the first phase
communities that embrace broader
Technology-driven enhancement of that.
lifestyle needs of communities
of customer experience
New asset class: urban There is probably enough retail space
Drones, 3-D Printing
consolidation hubs in Europe. I doubt whether it is the
right retail space.

Source: Emerging Trends in Real Estate Europe 2017

Emerging Trends in Real Estate The global outlook for 2017 23


Top cities in 2017
Top cities for real estate investment in 2017

The biggest influence on real


estate will be demographics.
Global Emerging Trends in Real Estate 2017

In a knowledge-based economy,
I really like to stay in the brain
hub markets like Boston.
Emerging Trends in Real Estate United States
and Canada 2017

Strong markets include


Raleigh, Denver, Dallas,
south Florida, Charlotte,
Nashville and Seattle.
These locations have good
job and population growth.
Emerging Trends in Real Estate United States
and Canada 2017

Canada Europe Asia Pacific


Berlin is becoming a global Montreal Berlin Bangalore
city. People want to work there, Toronto Copenhagen Bangkok
there are multiple employment Vancouver Dublin Guangzhou
sectors active in the city, and
Frankfurt Ho Chi Minh City
tech is a very big thing there. United States Hamburg Jakarta
Emerging Trends in Real Estate Europe 2017 Austin Lisbon Manila
Charlotte Lyon Mumbai
Dallas/Fort Worth Madrid Shanghai
As long as the location is Los Angelos Munich Shenzhen
prime in a dynamic-enough Nashville Stockholm Sydney
market, why limit yourself Orange County
to Alpha cities? Portland (Or)
Emerging Trends in Real Estate Europe 2017 Raleigh/Durham
San Francisco
Seattle

Source: Emerging Trends in Real Estate Europe 2017, Emerging Trends in Real Estate Asia Pacific 2017,
Emerging Trends in Real Estate United States and Canada 2017

24 Emerging Trends in Real Estate The global outlook for 2017


Trends and top cities in 2017

Globalisation has had the


effect of seeing consolidation
of activity into the major cities
and it has driven our view
for the last 30 years. So, has
that turned? Is there going
to be renewed life in some of
the smaller cities if you start
to think nationally again, as
opposed to across Europe?
Global Emerging Trends in Real Estate 2017

In the last 12 months, theres


been a sea change among
potential institutional partners
in terms of the willingness
to take the types of risks
(emerging markets and
development risk) were
taking for the returns that
were generating.
Emerging Trends in Real Estate Asia
Pacific 2017

Still like the upside potential


of markets like Seattle and
Portland. They look like more
Figure 3-7 Creation of place is becoming the most important factor for affordable versions of San
real estate performance Francisco / San Jose to us.
Creation of place is becoming the most important factor for real estate performance
Emerging Trends in Real Estate United States
and Canada 2017

32% 41% 22% 5% 0%

Strongly
Strongly Disagree disagree
agree Neither agree
Agree nor disagree

Source: Emerging Trends in Real Estate Europe 2017

Emerging Trends in Real Estate The global outlook for 2017 25


Sponsoring organisations

PwCs 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 40,000 real estate and urban development professionals
corporations and real estate management funds in developing real dedicated to advancing the Institutes mission of providing leadership
estate strategies; evaluating acquisitions and dispositions; and in the responsible use of land and creating and sustaining thriving
appraising and valuing real estate. Its global network of dedicated real communities worldwide.
estate professionals enables it to assemble for its clients the most
ULIs interdisciplinary membership represents all aspects of the industry,
qualified and appropriate team of specialists in the areas of capital
including developers, property owners, investors, architects, urban
markets, systems analysis and implementation, research, accounting,
planners, public officials, real estate brokers, appraisers, attorneys,
tax and legal.
engineers, financiers, and academics. Established in 1936, the Institute
has a presence in the Americas, Europe, and Asia Pacific regions, with
members in 80 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
PwC (UK) and 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 ULIs
position as a global authority on land use and real estate. In 2016 alone,
Byron Carlock
more than 3,200 events were held in 340 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 of
KK So
communities around the globe.
Asia Pacific Real Estate Tax Leader
PwC (China)

Gareth Lewis Patrick L Phillips Urban Land Institute


Emerging Trends in Real Estate Global Project Director Global Chief Executive Officer 1025 Thomas Jefferson Street, NW
PwC (UK) Urban Land Institute Suite 500 West
www.pwc.com Washington, DC 20007
Lisette van Doorn 202-624-7000
Chief Executive Officer uli.org
Urban Land Institute (Europe)

John Fitzgerald
Chief Executive Officer
Urban Land Institute (Asia Pacific)

Kathleen Carey
President and Chief Executive Officer,
ULI Foundation

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

26 Emerging Trends in Real Estate The global outlook for 2017


Emerging Trends
in Real Estate
The global outlook for 2017
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 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/emergingtrends
www.uli.org

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 2017 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
orcompleteness 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 2017. London: PwC and the Urban Land Institute, 2017.

ISBN: 978-0-87420-265-6

Emerging Trends in Real Estate 2017