DELHI: Rapid urbanisation and demographic changes, especially within emerging markets, will lead to substantial growth in the real estate investment industry over the next six years, according to Real Estate 2020: Building the future, a new report from PwC. At the same time as the industry’s opportunities grow, so too will assets invested into the sector.
The report predicts that the global stock of investable real estate will rise by more than 55 per cent to around $45.3 trillion by 2020, from a 2012 total of $29.0 trillion and will expand again by a similar proportion by 2030. The expansion will be greatest in emerging economies, where economic development will lead to better tenant quality and, in some countries, clearer property rights and will play out across housing, commercial real estate and infrastructure.
The report also finds that private capital will play a critical role in funding the growing and changing need for real estate and its supporting infrastructure.
Intense competition for prime real estate will force real estate managers and investors to seek out new opportunities for yield. Yet the growing and changing real estate world will present them with a far wider range of risks, which they must be equipped to manage.
Regional growth in investable real estate in Developing Asia-Pacific
PwC predicts that total investable real estate in developing Asia-Pacific countries, which includes India, will rise by 140 per cent to $10.2 trillion by 2020, from a 2012 total of $4.3 trillion. The increase in percentage terms is the highest when compared to other regions such as USA, Europe, Latin America, Developed parts of Asia Pacific and even Sub Saharan Africa and Middle East & North Africa. Shashank Jain, executive director & leader – Real Estate Transaction Services at PwC India said, “Real estate is an integral part of the emerging markets’ growth phenomenon. In India, for example, real estate has played a large part in driving economic growth.
Globally, the real estate industry is at the centre of rapid economic and social change, which is transforming the built environment. Already thousands of people migrate from country to city across Asia, the Middle East, Latin America and Africa, attracted by the wealth of these new economies. By 2020, this migration will be firmly established. Cities in these regions will swell and some entirely new ones will spring up. In China, India and Middle East, entire new cities will be built using eco-efficient technologies to reduce their environmental impact,” he added.
Governments and the investment community may need to work together to fund and build these cities and their infrastructures. But, at the same time, its unlikely that all of the new cities planned will attract the resident forecast, as the high vacancy rates in some of Asia’s newest cities already show.
Meanwhile, the growing middle class and ageing populations in these emerging economies are increasing demand for newer types of real estate. While office, industrial, retail and residential will remain the main sectors, affordable housing, agriculture, healthcare and retirement accommodation, will become significant subsectors in their own rights.
As real estate is a business with long development cycles, now is the time to plan for these changes.
Real estate managers will need to respond and adapt…
Real estate managers will need to think more globally as global investable real estate will expand substantially, especially in emerging economies.
Real estate managers will need to understand the underlying economics of cities: Fast-growing cities will present a wider range of risk and reward, ranging from low risk/low yield in advanced economy core real estate, to high risk/high reward in emerging economies. The greatest social migration of all time – chiefly in emerging economies – will drive the biggest ever construction surge. The real estate investment community can deploy urbanisation strategies ranging from higher risk opportunistic development, to lower risk prime investment. But no matter which approach they choose, they’ll need a clear strategic view of why a city will be successful.
Factor technology and sustainability into asset valuations: Some buildings without competitive sustainability ratings will suffer a ‘brown discount’. Technology will disrupt real estate economics, increasing the danger of obsolescence.
Decide where and how to compete: Competition for prime assets will intensify further. New wealth from the emerging economies will intensify competition for prime assets. Real estate managers will need to think laterally, while concentrating more than ever on the basics of local knowledge and tenant demand.
As the nature of real estate investment changes, becoming more global and specialist, more risks will emerge. Risks will include those of partnering with local developers or governments in emerging economies, as well as risks associated with regulation and tax in an ever more globalised industry. Real estate managers will need to assess these opportunities to reflect the broader range of risks.
Shashank Jain said, “Global megatrends will change the real estate landscape considerably over the next six years and beyond. While these trends may already be evident, there’s a natural tendency to underestimate how much the real estate world will have changed by 2020. By 2020, real estate managers will have a broader range of opportunities, with greater risks and new value drivers.
The changing landscape will have major implications for real estate investment and development. It will increase the size of the asset pool, yet change the nature of investment opportunities.”
Success factors for the future will include: a global network with local knowledge and good government relations, specialist expertise and innovation, and a focus on cost management and scale. And above all there is a need to have the right people: to attract, retain and invest in them.
The response to the coming changes in the real estate industry that PwC has identified will require considerable thought in order to form a winning strategy. The successful real estate managers of 2020 will have already started to shape their responses to some or all of these changes.
Shashank , further added, “It’s an exciting time for the real estate sector, in an emerging country like India. Private capital is in huge demand for development and investment, yet competition for the prime assets in intense. Never before has the local knowledge, specialist expertise and good governance relations been more important.”