Real estate investors are facing unparalleled global economic conditions as concerns around the economic effects of Covid-19 are felt across all sectors and regions. At the same time, opportunities remain in the sector as the impact of technological, demographic and social trends and the rise of alternative investments continue to change the built environment landscape.
Here we look at five of the key trends that will influence investment decisions.
1. ESG, socially responsible investment and impact investment
Investing in a way that benefits wider society joins the principle that "it is the right thing to do" with an analysis of the financial and performance benefits of doing so – and there is an increasing appetite for more socially conscious investment. Impact investment which actively seeks to do social good, and green investment funds, are appearing more and more in the built environment sector. Having to adjust the standard investment process to have regard to ESG factors may seem familiar for investors who are Shari'ah-compliant and are used to taking an ethical approach to investment. There are clear synergies here that should lead to a boost in opportunities for Shari'ah-compliant investors as ESG filters through to mainstream investment.
If a fund is presented with two investment opportunities, one of which would have a positive impact on society and one which wouldn’t, then if all else was equal they would choose the one with the positive impact. There is growing evidence that the rewards of focusing on ESG factors and social responsibility can lead to better long term results.
2. Investment in the "alternatives sectors" - including build-to-rent, student accommodation, senior living and care / healthcare
The "beds" sectors have been thrown even further into the spotlight by the Covid-19 pandemic, with more of us working from home and with increased demands on quality accommodation from the young to the very old. This is an acceleration of trends that were already known and that were on investors' agendas when looking at investment strategies going forward, and even more investors are considering adding assets from these sectors to their portfolios.
Across the alternatives sectors there is an increasing focus on the community aspect of accommodation. Investors will be looking at operators who are developing different ways of managing their buildings which put wellbeing at the forefront.
Whilst the returns often have a longer-term profile, investment in these sectors is a growing trend with investors who are looking to balance their portfolios by including a more modest but potentially more secure return.
3. Workplace changes and impact on the office market
Our 2019 thought leadership paper on the Future of Workplace Investment explored the changing trends for traditional office investors. Co-working, serviced offices and agile working meant that landlords are having to do more to attract tenants and change the way they manage their office portfolios. It was becoming harder for investors to just invest in office stock and expect long term tenants and a stable and long term return.
Fast forward 18 months and investors in offices are facing even more fundamental changes as a result of the Covid-19 pandemic. The virus has thrown into even higher profile the impact that our previous working patterns have had on the environment, the importance of access to outside space and of maintaining a healthy balance between work, family, body and mind. Even after the pandemic, the office is likely to be less visited and as such office workers will be looking to make the most of their days in. To cater for this landlords and businesses will need to work hard to create high quality places with better facilities for wellbeing and collaborative spaces.
Prior to the pandemic the clear trend was towards higher density offices. Covid-19 has put that into reverse, at least in the short term. This, coupled with the under supply of offices before the pandemic, may mean the resultant requirement for space will not see such a dramatic drop.
Some businesses may look at more office space out of city centres, including suburban offices, to cater for staff that are no longer willing to commute into major city centres. It is unlikely many businesses will be willing to enter into long term commitments in several different locations and instead will be reliant on the serviced office sector to meet these needs. In time we may also see regional office centres benefit as workers are less willing to travel by train into the higher density centre of London.
4. The popularity of industrial and logistics sectors
Having been in the spotlight for some time as an investment asset of choice, the industrial and logistics sectors have perhaps been the most resilient to the impact of Covid-19. Social distancing and the closure of non-essential shops has put the spotlight on the essential role of distribution networks and urban
logistics. The continued progression from physical to online will inevitably increase demand for logistics sites.
Technological advances mean industrial and logistics operations are becoming cleaner and quieter, and there is already a growing recognition that industrial uses are an essential part of a functioning town or city.
ESG topics are rising up the agenda for both businesses and local authorities. Providing space for light industrial and logistics businesses helps maintain, and create, a broader range of jobs, ensuring that developments benefit the wider community. More localised distribution and jobs can help reduce commercial vehicle journeys and commuting which is also better for the environment.
5. PropTech in asset management and investment
Real estate is one of the largest asset classes in the world, yet it has not been at the forefront of adopting new technology. The opportunity for tech-enabled companies to compete in this space is driven by the
innovation to date. The emphasis on proptech is to improve the user experience of renting, buying, selling, and building physical spaces. Companies like WeWork and Airbnb have been propelled into the mainstream by making physical spaces more customisable – from homes and offices to retail shops and storage space. Instead of selling a product, they deliver a service and offer flexibility.
Buildings are changing and are becoming spaces that can shape how we interact and collaborate with each other. The average household has an increasing number of devices connected to the internet. By combining these connected devices with automated systems, it is possible to gather information, analyse it and act based on the data (Internet of Things/IoT). Smart buildings take the concept of smart homes to the next level by incorporating commercial real estate and IoT technology. Companies with mature and affordable systems will benefit by reducing costs, increasing efficiency, increasing employee satisfaction over the long term and by differentiating themselves. And investors looking at a potential asset will be able to use a smart building's systems to make faster, data-driven investment decisions.
