How should institutional real estate investors react to technological trends?
Real estate is facing a structural shift in its approach to technological innovation. Whether it’s the explosion of venture capital investment in the real estate vertical, the growing number of unicorns, Big Tech making moves into the built environment, or the transportation and connectivity revolutions forecast to take place over the next decade, all signs point to an unprecedented level of change driven by innovation and technology
The industry is in the first innings of a breakthrough 5-10-year period - call it digital transformation, technological disruption or another label – by 2030, real estate, as an industry and as an asset class, will look very different than it does today. As a large institutional investor and one of the world’s leading real estate investment managers, we pride ourselves on being ready to both embrace this change and to play a strong part in helping to shape it, in line with our tomorrow’s world philosophy.
Real estate is a long value chain with the demand for innovation spread throughout. For an institutional investor there is plenty to find interesting, but much less that is directly relevant. The challenge is to filter through the noise and find the key trends and innovators that are driving change in those areas that applicable to an investor’s core objectives.
Technological innovation can be a wide-ranging, all-encompassing topic, so it is helpful to have a framework to organise different trends into. One way of doing this is to look at the lifecycle of making an investment which, excluding development, can be bucketed into three stages: research, transaction and asset management. Within these stages, some themes are more relevant than others.
- When selecting investment cities, how does a city’s innovation and technology score factor in? This is a topic we have focused on heavily in the last few years with our global cities strategy, which filters down to the top 2% of cities for tomorrow’s world, based on both hard and soft factors. It allows us to identify resilient cities that we believe are best places for technological trends and disruption.
- Exogenous technological developments, such as the transportation revolution driven by autonomous technologies are also worth considering. Understanding how these could evolve and embracing the inherent uncertainty by stress testing real estate under different scenarios provides a way of quantifying the flexibility of assets, which is a key factor in establishing portfolio resilience. For example, an obvious example of this is understanding the alternative use of car parking space.
- The application of Big Data & AI can also help to improve asset selection, underwriting and asset strategy. We are witnessing a lot of noise, however leveraging alternative data sources is becoming increasingly accessible. For example, it is possible to use taxi cab data and street art concentrations to predict up-and-coming neighbourhoods in New York city. It is data such as this, which has helped inform our investment strategies in the region. The next horizon will be applying methods such as AI to make actual investment recommendations.
- Real estate FinTech, crowdfunding models and blockchain are yet to fully take-off but offer the promise of changing some of the core characteristics of real estate as an asset class if they live up to their full potential.
- There has been a wave of innovation in new real estate concepts, for example co-working and co-living, which has resulted in an expanded universe of new potential operating partners and tenants. Taking advantage of this, in 2018 we partnered with both WeWork and Edge Technologies on significant transactions.
- The era of ‘digital’ asset management is upon us, encompassing a wide range of themes, from smart buildings to digital marketing, that can help better manage assets and create ‘phygital’ experiences for consumers. The reality is that ‘digital’ asset management is a somewhat recent addition to the toolkit of an asset manager. We’ve had over 80 years to build a best-in-class platform for physical and financial asset management, however, our approach to digital asset management is arguably still in its infancy. An early mover in this space has been energy efficiency tech, which we have been an early adopter of. The next push is about ensuring that a healthy and productive environment is provided, using digital platforms to upgrade the end-user’s experience.