PricewaterhouseCoopers, the London-based professional services network, in conjunction with the Urban Land Institute, has prepared a report on ongoing trends in real estate, which sheds some light on the attractions of alternative real estate.
The background to the report is the continued and intensifying consensus that a recession is nigh, that one will get underway either this year or in 2020, and that this fact determines the “criteria for deployment” of one’s resources into the real estate market.
Building economic uncertainty has put interest-rate increases on hold, and that “hold” status benefits real estate as against many other types of investment. Thus, there is still a reasonable outlook for real estate investments near term.
Furthermore, although a general economic turndown will produce a fall in overall property values, that fall will be tempered (runs the consensus) by the continuing build-up of dry powder. There are lots of funds that have lots of cash on hand and looking for something to do with it.
Moving with Caution
Nonetheless, caution is the watchword. One of the developments of our caution-inducing historical moments is the shift of capital into alternative real estate–“a move that in theory overrides the cyclical uncertainties for investors but also has wider consequences for the industry,” says the report.
Alternative real assets (such as investments in student housing) are “more institutional” now than they have been in the past. This has made real estate both a more diverse and a more accessible asset class than it was just a decade ago.
Beyond the challenges of getting ahead of the boom-bust cycle, there are the challenges of more lasting structural changes in the markets, say the authors of the report. One of these broad trends is the idea of “space as a service,” or the inclusion of real estate within the sharing economy. The PwC reports have been flagging this change since at latest PwC’s 2017 report, which quoted the chief executive of a UK REIT on this point: “Twenty years ago we had tenants; now we have customers. In 20 years’ time, we will have guests.”
At that time, the PwC report saw the “value shift” as one that would take the real estate investors’ concerns away from the bricks-and-mortar of real estate to the attending service aspects. By this year, that shift is in part an acknowledged fact. This year’s report quotes a global investment manager saying, “Over time, high-quality assets that have been repositioned and include all the amenities that today’s market requires … are the assets that perform best in a downturn and recover first.”
Commercial Real Estate
Consider income-producing commercial real estate. In 2018 acquisitions of such real estate increased by 3% from the year before, making for the third highest annual total on record. Part of this was due to the resurgence of the US market for such real estate. Investment activity there was up 19% in 2018. Europe (due to sharp falls in France and the United Kingdom) was down in 2018.
Shopping centers continue to be built (though one has of course heard that eCommerce is rendering them obsolete as people become accustomed to having boxes show up at the front porch of their homes). Shopping centers continue to be built but … they must be flexible, accommodating not just the move-in users but other potential users down the road. There should be different shop sizes, for example. As one global fund manager said: “Flexibility is extremely important simply because we don’t know what the future will be, but we do know that things are changing faster than ever before.”
In the UK, anxiety about Brexit constitutes what this report calls a “blight.”
In EMEA in general, real estate investment activity fell from 2017 to 2018 by 10% to $310.1 billion. This was due in party to Brexit, as well as to concern that asset prices were simply too high and no one wants to be the “biggest fool.”
In the Asia-Pacific region, real estate fundamentals have stayed robust throughout 2017-2018. The stand-out city has been Seoul, South Korea. The year 2018 was Seoul’s strongest ever in commercial real estate activity, bringing that city to the level of par with Tokyo as an investment market.
A Final Point
Near its conclusion, the report observes that some sectors such as “flexible” offices, “are so new that the real estate industry, particularly investors and valuers, have not yet reached consensus about how to value them.”
Coming up with a value for an office building with 20-year leases is old school. Valuing flex office space with a lot of tenants who can break leases with only a few months’ notice … that’s a source of great uncertainty.