PUNE: Rapid urbanization and demographic changes, especially in the emerging markets, will lead to substantial growth in the real estate investment industry, over the next six years. At the same time as the industry’s opportunities grow, so will assets invested into the sector.
It is predicted that the global stock of investable real estate, will rise by more than 55 per cent, to around $45.3 trillion by 2020, from 2012’s 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.
It is believed that private capital will play a critical role in funding the growing and changing needs for the real estate industry 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 ready to manage.
Regional growth in investable real estate in developing Asia-Pacific
The 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 2012’s 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 sub Saharan Africa, Middle East and North Africa.
Shashank Jain, executive director and leader – Real Estate Transaction Services, PwC India, says, “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 a rapid economic and social change, which is transforming the built environment. Already, thousands of people migrate from the country, across to Asia, Middle East, Latin America and Africa. By 2020, this migration will be firmly established. Cities in these regions will grow and some entirely new ones will spring up. In China, India and Middle East, new cities will be built, using eco-efficient technologies to reduce their environmental impact,” he adds.
The governments and the investment community may need to work together to fund and build these cities and their infrastructure. At the same time, it’s unlikely that all 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 population in these emerging economies, are increasing demand for newer types of real estate constructions. While office, industrial, retail and residential, will remain the main sectors, affordable housing, agriculture, healthcare and retirement accommodation, will become significant sub-sectors in their own rights. As real estate is a business with long development cycles, now is the time to plan for these changes.
In the changing scenario, real estate managers will need to think more globally, as global investable real estate will expand substantially, especially in the emerging economies. They will need to understand the underlying economics of the cities: Fast-growing cities will present a wider range of risks and rewards, ranging from low risk/low yield in advanced economy’s core real estate, to high risk/high reward in the emerging economies.
The greatest social migration of all times, chiefly in emerging economies, will drive the biggest ever construction surge. The real estate investment community can deploy urbanization strategies, ranging from higher risk opportunistic development, to lower risk prime investment. No matter which approach they choose, they will need a clear strategic view of why a city will be successful.
Jain further adds, “Global mega trends will change the real estate landscape considerably over the next six years and beyond. While these trends may already be evident, there is 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 on 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, special expertise and innovation and a focus on cost management and scale. Above all, there is a need to have the right people, to attract, retain and invest in them.
The response to the upcoming changes in the real estate industry that have been identified, will require considerable thought, in order to form a winning strategy. “It is 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 asset is intense. Never before has the local knowledge, special expertise and good governance relations, been more important,” shares Jain.
A look at 2020 and beyond
The changing real estate landscape will have substantial implications for the real estate investment community.
The global investable real estate universe will expand substantially, leading to a huge expansion in opportunity, especially in emerging economies. The world population growth and increasing GDP, per capita, will propel this expansion.
By 2020, investable real estate will have grown by more than 55 per cent, compared to 2012, according to PwC forecasts, and then, will expand by a similar proportion in the following decade.
Fast-growing cities will present a wider range of risks and return opportunities. Cities will present opportunities, ranging from low risk/low yield in advanced economy’s core real estate, to high risk/high reward in emerging economies.
Technology, innovation and sustainability will be key drivers for value. All buildings will need to have ‘sustainability’ ratings, while new developments will need to be ‘sustainable’ in the broader sense, providing their residents with pleasant places to live in. Technology will disrupt real estate economics, making some types of real estate constructions obsolete.
Collaborating with governments will become more important. Real estate managers, the investment community and developers, will need to partner with the government to mitigate the 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.
They might have to develop assets in fast-growing but higher risk emerging economies or specialize in the fast-growing sub-sectors, such as agriculture, retirement, etc.
A broader range of risks will emerge. New risks will emerge. Climate change risks, accelerating behavioural change and political risks will be key.
In order to prepare for these implications, the real estate investment organizations will need to make sure, they have the right capabilities and qualities.