Real estate thematics

Real estate mirrors people’s lives. It focuses on how people use buildings and what kind of space they need. It reflects how we live, work and play. Anticipating changes in human needs, and being at the forefront of these requirements, is key to investing in buildings that will outperform in the future. Although there are myriad trends that we are monitoring closely, there are three key real estate trends that we think will be crucial to future real estate performance.

Advancing technology

Who doesn’t own a mobile phone or use the internet these days? According to Big Data statistics, we are generating 2.5 quintillion bytes of data each day. Why does this matter for real estate? All the digital infrastructure needed to provide this data is housed in physical real estate. Although data providers store data in ‘the cloud’, in reality, this is a data centre with an earth-based location. Data centres and cell towers are benefiting from the exponential growth in data generation and smart technology. Although the sector is relatively small in terms of directly investable assets, it is growing rapidly. In the US, the listed datacentre market is large and well established, a trend that we expect to be replicated in other regions in the future.

What about all the goods being bought over the internet? The products are dispatched, housed and delivered via the industrial and logistics infrastructure across the country. This could be regional distribution centres, edge-of-town delivery units, or even last-mile delivery hubs in the heart of towns and cities. Given the expected exponential growth of smartphone ownership in the future, the demand for real estate space that is related to ecommerce is likely to continue.

Changing demographics

There is a raft of recent statistics that emphasise the slow-moving trend that the world’s population is getting older. Seniors are also choosing different lifestyle options as they age, compared with previous generations.

Why does this matter for real estate? There has already been more demand for senior housing and assisted-living assets. There is also an underlying desire for more healthcare and life-science facilities that cater for the ageing demographic, particularly as we are living longer and have more health concerns as we age. Furthermore, equity-rich empty-nesters, whose children have grown up and left, are looking for a vibrant urban environment and a sense of community – hence the rise in senior living communities.

Innovative landlords are also adapting their existing buildings to better cater for more older people. In shopping centres, for example, landlords are adding wider aisles for mobility devices, lower tables, and more seating. This encourages seniors to shop there and engenders loyalty.

Demographic pressures are also having an impact on the residential sector. More people are looking to start families and to move into larger accommodation, but there is simply not enough supply. This is a result of limited construction and a lack of downsizing by older people in recent decades to meet the increased demand, particularly in larger cities. People often can’t afford to buy because of elevated house prices, or they feel they may find better-quality accommodation in the rental market. For many younger generations, it is also a lifestyle choice to rent. Millennials and Generation Y, for example, value flexibility and are more likely to favour renting. This reflects the growing importance of the private rented sector (PRS) as an investment opportunity for landlords.

Long-term thematics are vital to understanding future trends for real estate assets

Sustainability

The long-term thematic trend that is expected to have the most impact on real estate is climate and carbon risk. How ‘green’ a building is will determine how viable or not it will be in the future and how beneficial it will be to performance.

There are clear sustainability trends emerging in real estate. Higher-specification, more-sustainable assets already command a premium. They are also likely to have fewer vacancies in the future, they take less time to lease, and they are likely to command higher rents. On the other hand, buildings that are more polluting are becoming vulnerable to price reductions, obsolescence and less demand from tenants. A downward spiral that may be terminal in some cases.

With the effects of climate change becoming more tangible, and regulatory demands more onerous in this area, the sustainability theme has much further to run.

What does this all mean for real estate investors?

Long-term thematics are vital to understanding future trends for real estate assets. The changing trends that directly relate to how we live, shop and work, have driven significant outperformance in the past. Indeed, they were tailwinds for sector performance.

The three thematic trends we’ve highlighted are expected to have a profound impact on real estate in the future. Being on the right side, or wrong side, of these trends will have a significant effect on performance and the long-term returns for investors.