Prominent investors, developers, advisors and other professionals discussed how technology and climate change are rewriting the rules of the real estate game at the RICS’s latest global summit. Here are our key takeaways from the RICS World Built Environment Forum, organized in New York this May.
1. Connectivity is the most important asset class of the 21st century
In his keynote speech, Parag Khanna described connectivity as the most important asset class of the 21st century. He believes that we can use maps to describe why the world is becoming so complex and the reason is connectivity. Today, infrastructure and supply chains are more important than nations and borders and the world is no longer defined by countries but by mega-cities. This, however, doesn’t mean that there is no investment necessary outside of mega-cities. There are currently 4 billion people in the world that are underserved by their government. One of the reasons for this is that governments forget that infrastructure doesn't make money in itself, it rather provides the opportunity for others to make money.
2. The end of single-use buildings for universal users is here
Offices are becoming flexible, serviced and branded, just like hotels, and there are several trends that owners of office space should pay attention to. First, remote and flexible work is on the rise all over the world. Although flexible office space only represents 1.6% of the total global stock at the moment, its share is expected to reach 30% in the next decade, with the expansion being backed by a massive amount of capital, invested by major investors. Second, most offices and buildings are designed for the average employee but based on how the way we work is changing rapidly it is possible that there won't be average employees anymore in the future. Third, companies are expanding and shrinking quicker than ever which makes it more difficult for landlords to decide whether a potential tenant is credit-worthy. Fourth, companies remain private for longer than they used to which means that landlords must learn to deal with huge tenants with very little financial transparency.
3. The more we adopt technology, the more we crave human contact
People have never been more connected yet never felt more disconnected. Because of this, creating places that give people a sense of belonging is more important than ever. Unfortunately, landlords are not always interested in creating additional value in a building as long as it's leased and they can sell it in a few years’ time. One of the main challenges of today is quantifying and qualifying changes that help create a better user experience in order to convince investors to make them.
4. Investors don’t really know what to do with climate change
Most market players have no idea how they can price and mitigate the risks posed by climate change. This is partly because until the market is not pricing these risks in, they can't price them in individually and partly because this is radically different than any investment analysis of the past. In search for solutions, investors turn to their peers, brokers and advisors, but it’s insurers that will play the most important role in defining and pricing the risks posed by climate change. What gives room for some optimism is that we have already developed strategies for insuring risks outside of the control of the owner, for example, political risk.
Without a doubt, it will be difficult to price in climate risk. Not all climate-related issues will appear at the same time with the same force and the occurrence of certain climate events can easily escalate costs. By time, it might become impossible to get climate insurance in some locations of the world. Some cities are simply better situated or way ahead of becoming resilient than others. A number of investors already screen and score their assets with climate change on their mind and some have already stopped investing in certain locations, for example, coastal areas that have done nothing to prevent flooding. The criteria for new developments should also see significant changes. It would make sense for the least vulnerable locations in cities to be positioned as the most attractive spots for development.
Some investors are worried about overreacting but the market generally seems to be underreacting. Investment managers need to be proactive and bring the issue up to investors. Lenders also need to be more proactive as they usually rely too much on the insurance market for cover.
5. Technology is changing the game
The largest market players have started acknowledging the future will be defined by technology. Blockchain has the potential to completely transform the way real estate is transacted. It helps the realisation of investment transactions at a higher speed with a lower cost of compliance. It has the potential to commoditise real estate and create a lot more liquidity, it creates trust in a trustless environment and it allows systems to interconnect and work simultaneously. Unfortunately, blockchain technology is not yet scalable at this point and it needs government backing to work and spread in developed markets.
Change is imminent in the valuation profession as well. Valuers should embrace technology and enjoy that it can elevate some pressure off them. Automated valuation models (AVM) are a tool that valuers will use to make smarter decisions. It helps valuations to be produced cheaper and quicker, and it can save the valuer’s time from collecting data. Market players agree that there will always be a need for good valuers to validate the data and challenge the computer.
