Rapid urbanization and demographic changes, especially within emerging markets, is anticipated to 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 anticipates that the global stock of investable real estate will rise by more than 55 percent to around $45.3 trillion by 2020, from a 2012 total of $29.0 trillion, and is expected to expand again by a similar proportion by 2030. The expansion will be greatest in emerging economies, where economic development should 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 is expected to 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 likely cause 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 should be equipped to manage.
“The real estate industry is currently undergoing fundamental changes today that we expect will significantly reshape the landscape in 2020,” said Byron Carlock, U.S. real estate practice leader, PwC. “And with $40-50 trillion of infrastructure investment forecasted, there will be significant new real estate opportunities, especially for urban density housing and transit-oriented development – and urban high street retail. Real estate managers and investors need the vision to anticipate emerging trends in the medium-term and prepare for them now in order to be successful in 2020.”
Other changes in real estate by 2020 will include:
- A huge expansion in cities, with mixed results. By 2020, the 21st century’s great migration to the cities will be well underway. Cities are expected to swell across the fast-growing countries of Asia, Africa, the Middle East and Latin America. Even the developed Western countries will be urbanizing, albeit at a slower pace. By 2020, cities will be competing fiercely with each other.
- Growth in emerging markets is anticipated to ratchet up competition for real estate assets and competition between real estate organizations.
- Sustainability will transform design of buildings and developments, presenting opportunities and risks for real estate asset managers.
- Technology will disrupt real estate economics: growth in online shopping will continue to reduce the need for retail space, but shorter delivery times increase the need for warehouse space close to customers. As workers increasingly work from home or satellite offices, the need for office space will decrease. For developers, technology advances will make eco-efficient building more practical. Real estate capital will take financial center stage. Private capital will play a critical role in funding the growing and changing need for real estate and its supporting infrastructure. Real estate managers will need to leverage the full range of financing possibilities to take on new types of risk, often with long-term investment horizons.
Real estate managers will need to respond and adapt…
- Real estate managers should think more globally as global investable real estate will expand substantially, especially in emerging economies.
- Real estate managers 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. 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 likely intensify further. New wealth from the emerging economies is expected to 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 associated with partnering with local developers or governments in emerging economies, as well as risks associated with regulation and tax in an ever more globalized industry. Real estate managers will need to assess these opportunities to reflect the broader range of risks.
“Demographic shifts will affect demand for real estate fundamentally in 2020 with the aging Baby Boomers creating an increase in demand for specialist types of real estate like senior and intergenerational housing, while there will be a rise in micro-units for the younger population,” said Mitch Roschelle, partner, U.S. real estate advisory practice leader, PwC. “As the real estate industry and environment evolves, there are certain risks that market participants should be aware of so they can navigate those challenges thoughtfully, while also being able to jump on the increasing amount of opportunities in the space. This is how we help our clients at PwC – and we’re working with them now so they will be fully prepared in 2020 and beyond.”
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