Disruption 2017 - A Failure in Leadership

Learn More in 2018 - Driven into Transformed World 2020

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Disruption 2017 - Learn More in 2018 for 2020

The Real Estate investment industry is finding itself at the centre of vivid economic change and social impact through digital disruption, which is transforming the built environment. While most of these trends are already evident, there’s a natural tendency to underestimate their implications over the three years and beyond:

By 2020, real estate managers would have a broader range of opportunities driven by greater risks and opportunistic values. As real estate is a business with multiannual development cycles now is the time to succeed through these changes.

By 2020, this migration will be firmly established, the growing emerging markets’ middle class and ageing global population are increasing demand for specific types of real estate. Subsectors such as renewable resources, education, healthcare, retirement will be far bigger by 2020.

High energy prices, climate change and government regulation are already pushing sustainability up the real estate agenda, but by 2020, their impact will be far greater.

Technology is already disrupting real estate economics, but by 2020, it will have reshaped entire sectors. And the real estate community will have taken a greater role in the financial ecosystem, in part moving into the space left by banks.

Survive. Sustain. Refine. Divest. Grow.

The changing real estate landscape will have substantial implications for the real estate investment community, which are highlighted below showing implications for real estate strategies.

  • The global investable real estate universe will expand substantially, leading to a huge expansion in opportunity, especially in emerging economies, with population growth and increasing GDP per capita.
  • Technology innovation and sustainability will be key drivers of value. Reinvestable buildings will need to have ‘sustainability’ ratings, while new developments will need to be ‘sustainable’ in the broadest sense, providing their residents with pleasant places to live. Technology will disrupt real estate economics, making some types of real estate obsolete.
  • Collaborating with governments will become more important. Real estate managers, the investment community and developers will need to partner with government to mitigate risks of schemes that might otherwise be uneconomic. In many emerging economies, governments will take the lead in developing urban real estate and infrastructure.
  • Competition for prime assets will intensify further. New wealth from the emerging economies will intensify competition for prime assets; the investment community will need to think laterally to earn attractive returns, to develop assets in fast-growing riskier emerging economies, or specialise in the fast-growing subsectors, such as agriculture, substantial energy and retirement.
  • A broader range of risks will emerge. New risks will emerge. Climate change risk, accelerating behavioural change and political risk will be key. In order to prepare for these implications, the real estate investment organisations will need to make sure they have the right capabilities and qualities.
growth ratchets up a new competition for assets - DIVESTITURE

The divestiture is the partial or full disposal of a business unit through sale, exchange, closure or bankruptcy, and Divestitures are essentially a way for a company to manage its portfolio of assets.

Real estate is an integral part of the emerging markets’ growth phenomenon. Even as growth moderates in many emerging markets, the pace of activity remains rapid, increasing investment opportunities. But growth is only a part. The rise of emerging economies is also increasing competition among real estate managers and the distribution inside investment community.

A new social compact

The growth of emerging countries is rapidly creating powerful new real estate players and new asset managers AMs. As a result, there is both growing competition for real estate assets and growing competition within real estate asset management. Recent surveys showed that trend-setting majority of global Funds invest in property securities, as a cost-effective way to gain access to a targeted property, with most Property Securities Funds from the APAC and EMEAC.

Global Property Securities Funds are increasingly competing for prime assets. This indicates that competition from such Funds for prime real estate might well further intensify as their assets continue to grow, and while new local asset management companies with real estate arms are forming as emerging markets continue to mature.

By 2020, it’s likely that some of these managers will have become major global players, perhaps partly through acquiring rivals in EMEAC and  NALA.

Looking out to 2020, it seems likely that intraregional real estate investment might follow existing high-growth trade routes, further increasing cross-border capital flows.

Technology disrupts real estate economics

Technology is finally coming to the Real Estate, and property players really need to understand how technology is affecting their sector. By 2020, it will have both altered the economics of entire subsectors of the industry, and changed the way that real estate developers and the investment community operate, and Digital Disruption will cause the critical shift both of development and investment sectors.

Technology even has the potential to transform real estate asset managers’ own operations. They’ll make far more use of ‘mobility’ technology that facilitates telecommuting, while also embracing data management techniques.

Real estate capital takes financial centre stage

Private capital will play a critical role in funding the growing and changing the need for real estate and its supporting infrastructure. Just as AMs, real estate funds as Managed Funds find the assets under their control swell, so governments will have increasing needs for capital to finance urbanisation. Private real estate capital will become an important partner of governments. PwC estimates that the broad AM sector will see assets under management (AuM) swell to US$101.7 trillion by 2020, up from US$63.9 trillion today.

The global growth in AuM will come from three different sources: the shift towards individual retirement plans, the surge in high-net-worth individuals (HNWI) in emerging markets and growth in SWF assets. PwC anticipates that, across the entire AM sector, retirement assets will grow from US$33.9 trillion in 2012 to US$56.5 trillion in 2020; the HNWI sector will expand from US$52.4 trillion to US$76.9 trillion; the SWF sector from US$5.2 trillion to US$8.9 trillion. This compares with our calculation that the stock of institutional investment grade real estate will expand by more than 55% from US$29.0 trillion in 2012 to US$45.3 trillion in 2020, according to our calculations. It may then grow further to US$69.0 trillion in 2030.

Private capital will step in to fill the gap left by banks and insurers as a result of regulations that require a reduction in their exposure to real assets. The international Basel III bank capital guidelines and US Dodd-Frank regulations have increased the size the capital buffer lenders have to hold as protection against possible future losses and require that banks better match the duration of their own funding to their loans. So while banks’ willingness to fund prime real estate may be strong, their appetite could diminish if lending becomes a higher risk or longer term. Meanwhile, the EU Solvency II Directive has reduced the ability of European insurers to invest, although Asian insurers are likely to remain highly active.

As the balance of wealth shifts south and east to the developing nations, so the sources of assets are changing, influencing where real estate asset managers distribute and market their funds. The emergence of growing new institutional investors such as Greater China Managed Funds will change worldwide capital flows. Many invest mainly in their home countries, but over the next six years, they’re likely to look increasingly to international markets. Already, real estate asset managers are beginning to take a more central place in the financial ecosystem. Since the financial crisis, real estate asset managers stepped into the funding gap left by banks in some countries.

By 2020, they’re also likely to have developed new investment fund structures that address the shortcomings that the financial crisis exposed in both closed-end and open-end funds, related to transparency and liquidity. But there will be challenges. A consistent campaign of anti-tax avoidance measures, driven by the OECD since the Base Erosion and Profit Shifting (BEPS) Action Plan will see asset managers operating in a world where country-by-country reporting of profits, tax paid and employee numbers is the norm. Fiscal pressure may mount due to bankrupt local and state governments’ cross-border capital flow restrictions and tax reforms.

OPPORTUNISM RULES, BE PREPARED

Opportunities may arise from unexpected places, such as sudden interest from an emerging market buyer or as a result of such market factors as improving the availability of appropriately priced debt financing. Being ready to move at the right time can significantly affect the speed and price at which opportunistic divestments can be executed.

One challenge for financial services businesses is the interrelations across different businesses due to shared compliance and regulatory resources and capital usage. Understanding the value of each business, as well as the impact on value for the group of not having a business in the portfolio, is critical to assess opportunistic approaches.

Changing sentiment in equity markets has been a notable feature of 2015 and 2016, such that dual-tracking of IPOs and sales of businesses has been a successful tactic for a number of divestors. Management teams have been and will continue to be, well served by being ready for both routes, depending on which offers greater value.

WHEN PORTFOLIO REVIEW SAYS SELL – SELL

Many of the higher growth markets will also have more complex real estate environments. Not only will the investment community need in-depth knowledge of local economies, but also they’ll need to navigate opaque planning laws, to work in partnership with government and to make sure their strategy is aligned with government policy. Additionally, they’ll need in-depth insights into local real estate development practices and possible development partners. Developing economies often have little in the way of investment property, so the investment community needs to partner more with developers. AMs might need to access local markets through joint ventures, mergers or acquisitions. If so, they must have the skills to assess possible partners or acquisition targets – in particular, judging alignment of interest.

Specialist expertise and innovation – DIVESTOR

The skills needed would depend on the investment approach but could include:

  • Subsector specialisations. As urban development, retirement homes, agriculture, etc. become subsectors in their own right, so real estate managers will need to be specialists in these areas in order to profit. What’s more, as with any fast-changing environment, entrepreneurialism will be rewarded by higher returns. The pioneers of these subsectors – especially in emerging economies – will earn higher returns.
  • Deal Structuring. Real estate managers will need deal structuring expertise in order to work with local developers and government. Partnering with local developers generally requires rigorous structures in order to make sure that everyone involved abides by agreed targets. When working with government, especially to develop infrastructure, there might need to be new public/private sector models.
  • Asset value management. Historically, it may have been sufficient to acquire real estate assets and maintain them. In future, sustainable buildings will drive higher rental rates and conversely erode values if technology adaptation does not keep pace. AMs and Managed Funds will need to have the ability to continuously improve the value of the holding assets, with no risk of asset value destruction.
  • Product development. As real estate managers fill the gaps left by banks in capital structures, so there’ll be rewards for those that make the best use of entrepreneurial structures – for example, pre-purchasing development assets or creating innovative mezzanine finance type structures. What’s more, AMs and Managed Funds need to offer more liquid structures that don’t tie their investors in for specific time frames. Increasingly, investors will require customised separate accounts/joint venture arrangements, which threaten manager profitability by reducing economies of scale from standardised funds.
  • Risk and reporting. AMs and Managed Funds will need to provide controls, transparency reporting and liquidity that meet the needs of the most demanding institutional investors if they are to compete for assets. Controls will need to be first class and independently certified, while transparency reporting must improve from today’s levels.
  • Regulation and tax. As real estate portfolios become more complex, and regulation increases, so the demands placed on tax, legal and regulatory compliance functions will intensify. Real estate managers need to transform these functions to strike the right balance between insight, efficiency and compliance and control. Additionally, these functions need to be future-proofed by moving them from support functions to true business partners.

Alignment with the business needs to be improved and fully integrated with its expanding activities. Regulatory compliance and reporting will become more important as regulation increases. In particular, the real estate AM sector will become more heavily regulated. Europe’s AIFMD and the US Dodd-Frank legislation have already forced asset managers to register with regulators in these countries, and similar regulations are likely to come into force in other regions/countries in the next six years.

WE WHERE WHY

Wealth Structuring | GP GR | Block Funding | EME | Residence | Retirement Plans in the OECS from EMEA and Russia.

We are an EMEAC independent consulting firm, committedly neutral and impartial with no political, partisan or national interests and, with the explicit intention of creating open and equal dialogue between allies.


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