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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
Yet there is an undercurrent of caution The last financial crisis has had a lasting
estate as a productive
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
influenced by a gradual reversal of building obsolescence has become
whether that’s ten years
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
unwilling or unable to embrace change polarised opinion in the real estate industry
same thing in how you
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-
European pension fund investor,
operators seek to keep their real estate
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
According to Real Capital Analytics (RCA), At this stage in the cycle, pricing of core
place for a prolonged
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
900
reassured by the relatively strong macro-
economic outlook for most major markets 800
around the world, which is underpinning 700
occupier demand. If anything, the talk is of
600
real estate being in a prolonged late cycle.
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,
100
there is increasing economic growth in
0
virtually all major markets. That’s self-
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
reinforcing, and certainly bodes well
for real estate as an asset class.” EMEA Asia Pacific 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 observes: “My first guess was that the
‘no more easy money’
would expect. And that has to do with raising of interest rates would take longer,
banks being much stricter in what they’re but it has happened more strongly and
With growing economies come rising
asking for when it comes to speculative globally than expected. This is going to
interest rates as a check on inflation, and
development loans. In fact, in many be the caveat to the solid growth we
the expectation of more to come, at least
countries they are still not really available are experiencing here.”
this year in the US and the UK. Continental
at reasonable margins, and that helps
Europe is further behind although the
the market to stay in sync.” There is another caveat, and that’s
European Central Bank has signalled
the end of its asset purchase programme politics. Brexit casts a long shadow,
Not surprisingly, however, investors are still, but national elections in the US,
diverting their search for secure, long-term by the end of 2018, and rate rises are
expected to follow in 2019. “No more The Netherlands, France and Germany
income into alternative real estate sectors. have come and gone, leaving property
Debt is increasingly seen as a safe means easy money,” says one interviewee.
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 –
are now on the agenda for real estate. of the Italian election in March this year,
Trends Europe survey expect non-bank
There is nothing like the anxiety that there is a sense of the industry taking a
lenders to increase their activity in 2018.
prompted a huge sell-off in global deep breath after all the political noise
stock markets in January this year. of 2016 and 2017.
There is another dimension to the relative
attraction of debt finance, and that comes The expectation among European
interviewees for Global Emerging Trends is Even so, with the major global investors
from the recent tightening up of the capital
that it will be one to two years before rising increasingly thinking long-term – and well
requirements for banks, known as Basel
rates exert a major influence on real estate beyond the current property cycle – the
IV. The reaction from the banking sector
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.
because they have avoided the level of
of transactions greater than $10 million in
overbuilding seen in previous cycles.
There are good reasons
the US during 2017, an 8 percent decline
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
The slowdown in activity reflected a “a broad brush” approach to how they noise, although large
reassessment of pricing throughout the assess the smaller cities. “We’re working chunks of that are
very hard not to make the mistake of the
year in the major cities following the US
past and go to secondary and tertiary already in the price in
Federal Reserve raising interest rates
three times, with the expectation of cities simply to chase yield at the wrong equity and real estate
point in the cycle. But instead we’re very
further increases in 2018.
focused on what I’d call second tier cities
markets. But a degree
Investment tumbled by 32 percent in that demonstrate really strong economic of caution is warranted
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
educational, or governmental, which are in the eighth or
investment destinations, RCA says only
Washington, D.C., and Houston registered stabilise those markets. We’re trying to be ninth inning, to use
very tactical and chase markets that exhibit
stronger activity.
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,
real estate markets alike are destined Global Emerging Trends in Real Estate 2018
Trends US and Canada. More selective
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
10 Operating costs
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.
and Spain setting new records.
but positive”, drawing comfort from 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
between current yields and the country’s changing the industry in fundamental and
super-low sovereign bond prices. often unexpected ways. Traditional risk/ “For all asset management
return classifications are breaking down. firms, across their product
Many core investors are moving up the risk
When RCA factors in development land,
curve in an effort to meet target returns. lines, Asia is an area of
then the standout performer in 2017 was
Hong Kong, which saw site sales jump Others are going down the risk curve to expansion. It has superior
seek the type of steady but safe yield no
78 percent to a record $21.4 billion,
longer available from sovereign bonds.
overall growth to the rest
partly in response to a tripling in the
value of income-producing assets
of the world … you want
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
Trends is that overall outflows are unlikely
estate across the Americas, Asia Pacific
to decline significantly, given that sovereign
Korea or Germany over
and Europe has been one of the key
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.
as 33 percent last year to $127 billion, a substantial body of Chinese-owned
reflecting the fact that investors are capital held outside mainland China, much It’s more the fact that
targeting logistics warehousing as of it in Hong Kong, that is not subject to the there is a continued
rules. And, of course, the narrative around
companies change their supply chain
Asian capital extends well beyond China. build-up in dry powder.
management, particularly where online
retailing is involved. Either capital gradually
“If you look at what’s happening in Asia
in terms of building up social security
goes into private
CIC’s acquisition of Logicor – Europe’s
largest deal last year – and the GLP/ systems with pension schemes and markets without
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
estate, then you’re talking big numbers,” levels, or it goes in
still being deployed in global real estate.
Emerging Trends Asia Pacific reveals says one global player. “Real estate and a lot more rapidly, in
infrastructure is on the agenda of all
“unprecedented growth” in capital
pension schemes. And within Europe
which case investors
outflows from Asian markets in 2017 –
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,
Global Emerging Trends in Real Estate 2018
“Over the coming five years, I think there
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,
sectors are at an inflection point: major particularly given the oversupply in the
department stores are undergoing a US,” he says. “Customers’ footfall will “I think there is a grave
process of deconstruction and smaller be harder to capture in individual malls. danger of complacency
Operators are not going to be able to
mid-price apparel brands are failing,
push rents so much and they are going at the top end and
footfall at many shopping centres is
falling, and new retail brands are to have to pay more on the capex side. understating the amount
So, underwriting errors on both of these
emerging at a slower and slower pace.
could be quite substantial and expensive.
you’re going to have to
At the same time, out-of-town shopping
centres come dead last in Emerging There is a grave danger as that unwinds spend to maintain the
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
a lot of thought to.” and therefore maintain
slightly higher, 16th out of 20 sectors.
the attraction to the best
As this investor suggests, such “massive
This retail malaise is routinely attributed
change” is evident “in the US in particular,
retailers and ultimately
to expansion of e-commerce sales,
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,
among major shopping centre owners, Global Emerging Trends in Real Estate 2018
apparel industry, and changes in the mix of
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
time, we suddenly decide secondary technology costs up for anybody from
when we’ve seen the
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,
Global Emerging Trends in Real Estate 2018
upbeat because it is relatively immature,
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
many that meant years later having to from their own point of view, bigger
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
are setting up R&D facilities in Silicon Valley
The need to embrace disruptive operational advantage
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 make money in an increasingly crowded
The human resources challenge is huge that can use technology to give themselves
− real estate is still not hiring enough field will require greater sophistication.
even the smallest edge. And those that have this greater
of the right people, or putting the right
people in positions of influence, according sophistication will be rewarded.
And with real estate late in the cycle,
to many of the senior professionals investors and owners will need to
canvassed for Global Emerging Trends. “Being at the forefront of change and
utilise any means necessary to improve capturing some of this new inflow will
There is not enough leadership from the performance of assets – and maintain
front on these matters, with real estate give companies an outsize advantage,”
performance during a downturn. one interviewee says. “If you look at
chief executives in particular perceived
to be reluctant to hire the right people Blackstone and Brookfield, they are
On the first point, one investor cites the maybe 5 to 10 percent better than their
and undertake the change in business sharply increased competition they are
models required to keep up with the peers and they are hoovering up capital.
currently facing, as record amounts of Technology creates outsized winners
pace of change. 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
go bust over night, but it will be death
People matter – is real estate PwC's survey is borne out to a great
getting it right? degree by interviewees for this report,
by a thousand cuts,” another adds.
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
buildings that companies in the sector buy business sector. “The only way is up,”
with spreadsheets, 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
are really thinking about how to adapt to
go bust over night, the way necessary to flourish.
the changing world.
but it will be death Survey data compiled by PwC indicates
Echoing this sentiment, one investor
by a thousand cuts.” that real estate chief executives are less
makes a similar comparison to other
concerned with changing the way they run
their businesses in the face of disruptions sectors. “If you look at Goldman Sachs,
Proptech consultant,
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 investment and R&D facility in Silicon
are not doing enough to accelerate “Implementing 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
compelling human reasons why leaders
investment, and many can offer.

might prefer to maintain the status quo. CEOs don’t want to In the main, these are some of the largest

“Implementing cultural change takes


spend the money.” investors in the world, with portfolios
running into the tens of billions of dollars.
investment, and many CEOs don’t want But that is not always the case – one such
Proptech consultant,
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
products. Some are hiring the people But on the downside, a project that
transformation of the 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
almost all not from the real estate sector, developed is useful as well as innovative.
technology-driven 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
adapting malls to new technology and
that are facing disruption, there is little
ways of living, some anticipate that even
sectors of the economy.
surprise that interviewees most commonly
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.
Most interviewees believe more mature “The extension to Westfield London will will be replaced by digital
markets like the US, China, and the UK have a John Lewis department store. products. But we can
Will that still be a department store in 20
will see growth moderate but continue
years? I don’t think so,” one investor use digital products
nonetheless, and the rest of the world
is catching up. says. “People are underestimating how ourselves and offer
capex will impact the valuation of even
the best centres, because they can hide
them in addition to the
One development in the retail sector is
the fact that shopping mall investors it below the line.” apartment to customers.
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
of disruption was increasingly felt in 2017, using modules that are
in their properties. They are getting on
and converting it to other uses, such as and which interviewees felt would continue produced in the factory
to see huge changes over the coming
co-working space, libraries, health care
years, and that is offices and hotels.
and only installed on site,
centres, and even mini-golf courses, as is
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
corporate occupiers. “If you are focused In the world of hotels, Airbnb is evolving.
are looking at that as a
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;
Global asset manager,
offices that do not meet these criteria will while Airbnb has eaten some of the hotel
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.

Tenant requirements
It would seem as if the real estate sector
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
Valuation
currently given over to parking when
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 0 10 20 30 40 50 60 70
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
systems, drones, and artificial intelligence
and embracing them are seen as having the potential to improve
companies and new entrants from the
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
“As that industry becomes more efficient
a Blockbuster situation and standardised and costs come down,
and an opportunity for the traditional
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
valuation of $20 billion from its last
is to attract talent and
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
a market capitalisation of $19 billion.
to do this better than
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
ULI’s 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 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
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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