CEO Survey: Real Estate Trends 2019 - PwC

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Real estatetrends 2019This year’s market value multiplieris customer connectionPart of PwC’s 22nd Annual Global CEO Survey trends

2 Real estate trends 2019 Part of PwC’s 22nd CEO Survey trend seriesBuilding customerrelationshipsReal estate is becoming an increasingly consumer-oriented business,one in which people are not just aware of, but engaged with, thecompanies that own and operate the buildings in which they liveand work. This change is putting a spotlight on the industry’s longstanding disconnect with customers — and the problems withawareness, reputation and trust that stem from this.Although industry buzzwords such as PropTech and social impactmay sometimes point the way to better customer relationships, theyaren’t sufficient in themselves. Indeed, they can be a distractionand even an excuse for ignoring the pressing need to get closer tocustomers, work out what those customers really want and deliverthat value in a way that makes social and commercial sense.By connecting more effectively with customers, pioneering new waysof living and working, and developing innovative solutions to thechallenges facing urban communities, your business could transformits brand image and boost its market value.

3 Real estate trends 2019 Part of PwC’s 22nd CEO Survey trend seriesConfidence and cautionThe real estate sector continues to deliverstrong returns around the world. Althoughthere have been some late-cycle jittersand divestments over the past 12 months,money continues to flood into this sector.That’s one key finding of PwC’s reportEmerging Trends in Real Estate: The GlobalOutlook for 2019. Investors are targetingthe high yields and asset-backed securitiesthat few if any fixed-income alternativescan currently match. And as interest rateincreases in developed economies recede,real estate looks set to maintain this ROIedge over other fixed-income securities.The findings from PwC’s 22nd AnnualGlobal CEO Survey also support thefeeling that when the cycle does eventuallyturn, the impact will be relatively gentlecompared to that of 2008–09. More than80% of real estate CEOs are confidentabout their company’s prospects forrevenue growth over the next three years.As our CEO Survey report suggests,this type of chief executive confidence(particularly concerning 2020) is typicallya leading indicator of general economicgrowth. And although more than threequarters of CEOs have some concernsover policy uncertainty — Brexit being aprominent example — this doesn’t appearto have affected investment flows intoprime assets.It would therefore be reasonable to ask‘Why change a winning formula?’The answer: Because the rules of thegame are changing.1) Real estate businesses are competingmore consistently as customer-orientedenterprises.2) Businesses see the real estate theyoccupy as critical to attracting andretaining talent and increasing productivity.

4 Real estate trends 2019 Part of PwC’s 22nd CEO Survey trend seriesThe challenge for many real estatebusinesses is that brand recognition,engagement and loyalty with theoccupier of a building have neverbeen priority areas in the sector.3) Awareness of tenant well-being andthe social and environmental impact ofreal estate is increasing.4) Quality of service (amenities) and ofplace (infrastructure as well as setting) arebecoming more important than the sizeand design of the space.5) The risk of rapid obsolescence, prevalentin retail, is now creeping into other areasof real estate. Examples include officesbecoming more difficult to rent or leasebecause they fail to adapt to the evolvingpriorities of the modern-day workforce.In this new world of ‘real estate-as-aservice’, the brand of a real estate ownerand operator — which includes trust,social/environmental impact, health/well-being and how a building makes aperson feel — will have more immediateimplications for the owner’s ability to attractoccupiers, secure finance and be regulatedand taxed appropriately.Coming out of the shadowsThe challenge for many real estatebusinesses is that brand recognition,engagement and loyalty with the occupierof a building have never been priority areasin the sector. This may eventually change,but few people currently know who ownsthe building in which they work, learn orshop. Although this relative anonymity isthe norm within real estate, it would behard to imagine Google failing to put its

5 Real estate trends 2019 Part of PwC’s 22nd CEO Survey trend seriesname on its search engine, or Apple hidingits iPhone brand as an anonymous platformbehind the brand of individual apps. Butthat is exactly analogous to branding inmost of the real estate sector. With limitedexceptions — e.g., the Westfield shoppingcentres — the majority of owners of realestate developments are anonymous to theindividual user of the building.This detachment means that customersseldom make the connection betweentheir daily lives and the real estate industry,despite interacting with it almost everymoment of the day. This has implicationsthat ultimately affect your business’s abilityto meet key priorities, such as nurturingstrong loyalty amongst occupiers and‘sticky’ tenants, winning support forfurther development from policymakersand planning authorities, and avoidingthe overregulation that comes with beingmisclassified as a financial enterprise.In many cities, for example, infrastructuredevelopment and changes in planningand zoning practices could pave the wayfor hundreds of thousands of new homesand help overcome a chronic shortage ofaffordable housing. But rarely do advocatesof lower-cost housing think of developersas their allies, and rarely do real estatecompanies get involved withadvocating new transportation links tounderdeveloped areas.The lack of name recognition and goodwillcreates vulnerabilities as well as lostopportunities. For example, governmentscan hike taxes on commercial real estatebusinesses without losing any votesbecause few citizens are aware of whatthe sector delivers or even of its existence.Related concerns centre on reputationand trust. In PwC’s CEO Survey, three outof five real estate chief executives wereworried that lack of trust would affect theirgrowth prospects. This was much higherthan the general percentage across allindustries (50%).Technological advances are also raisingthe profile of real estate companies inways that can seem challenging at firstglance — but could lead to opportunities.For example, increasingly advanceddata analytics are giving people moreinformation about a building’s health andenvironmental impact, and social mediahas allowed negative stories to quicklyspread. This greater level of transparency isoften seen as a threat to the industry, but it

6 Real estate trends 2019 Part of PwC’s 22nd CEO Survey trend seriesactually represents a fundamental shiftin the value proposition of a realestate business.For example, what if the people whoworked in an office building becameincreasingly aware of the air quality in theproperty? This could affect the amountthat a tenant would pay to occupy spacethere. Employees, corporate tenants andcompetitors could tell, perhaps by usingan app, which buildings were healthierthan others and how the value ofoccupancy was changing.Transparency of this sort is an opportunityfor engagement. To be sure, it putsmore pressure on the industry, but manybusinesses have felt that pressure already.From a sustainability perspective, realestate businesses have started over the lastdecade or so to embrace the challenge ofreducing their impact on the environment,with a focus largely on energy use andcarbon emissions. The catalyst behindmany of these efforts has been pressure toreport and demonstrate good governanceto investors. Although reporting andtransparency have improved, the level ofsophistication hasn’t yet reached a pointwhere operational excellence in reducingenergy usage or carbon emissions, forexample, translates to higher performancerecognised by investors. Now, with accessto data, investors will be able to targettheir decisions more precisely, and realestate enterprises will be able to addressconcerns and raise the quality and appealof their property much more effectively.This will affect the standing that real estatecompanies have in their local regions.“Because of the way these things haveworked,” Craig McWilliam, chief executiveof the property business Grosvenor Britain& Ireland, has said, “communities thinkdevelopment is something that happensto them.” But that contentious way ofmanaging relationships in the industry,he says, is poised to change.Viewed together, these developmentsunderline the extent to which tenant welfareand social and environmental awarenessare no longer ‘tick box’ corporate exercises,but bottom-line imperatives that can’tbe ignored. Tackling these issues thusbecomes a huge opportunity for reinventionand differentiation. If your business isassociated with creating greener, saferand more vibrant cityscapes and solvingthe problems facing urban communities,such as shortages of affordable housing,customers are much more likely tobecome advocates for your brand — andyour standing with policymakers anddevelopment opportunities will reflect that.There are also opportunities to create anew seam of value. Just as the costs ofmaterial and manufacturing represent afraction of the full value of a smartphone toa consumer (especially when you add in thefacility of its design, its range of possibleapps, and the value of its community ofusers), the move to a more customerfocussed, service-oriented and brandconscious real estate business model couldboost market multiples to many times thevalue of the physical asset.Finger on the pulseSo how can your business gain thecustomer recognition, insight and trustto prosper and exploit the long-termvalue opportunity within this evolvingmarketplace?Real connection: Think about which partsof the value chain you want to own andserve directly (e.g., tenant/occupier) andwhere you would prefer to assign someoneelse to do this on your behalf. Although aservice company might be well equippedto engage with customers, it’s importantto think about how many layers youwant to put between you and theultimate consumer.Real innovation: Data is clearly importantand the technology to harness it isadvancing rapidly in areas regardingenvironmental quality and the efficient useof space. But PropTech can’t get to thenub of customer issues and how to resolvethem on its own.

7 Real estate trends 2019 Part of PwC’s 22nd CEO Survey trend seriesRather than placing all your bets oninvestment in technology and PropTechstartups, a more viable approach isdeveloping a brand that people relate to.Focus on the consumer touch points thatenable you to pick up on the social,cultural and technological trends that areshaping demand.And you don’t have to respond only toemerging trends — you can also shapetastes and lead the market. Companiessuch as Apple have shown that with apowerful, carefully nurtured brand and aclear vision, you can earn trust and loyaltyand ultimately be in a position to shape andinfluence consumer needs. This ability tounderstand and influence consumer needscould be a game-changer for the real estateindustry, in which huge investments arecommitted up front to develop buildingsthat will be meeting the occupation needsof customers many years into the future.Why shouldn’t people get excited aboutan amazing new real estate developmentconceived and delivered by a charismaticand innovative chief executive? Whywouldn’t they declare their wish to live orwork there, with the same anticipation asthey might feel about the launch of a newsmartphone?Real inclusion: To develop a relatablebrand and confident vision, it’s importantto ensure your workforce has the diversityand inclusivity to reflect and understandthe customers and communities youserve. As real estate evolves into atruly customer-driven business, it willrequire a more sophisticated approachto understanding the complex needs ofdifferent customers. And as the rangeof services and opportunities increases,business with diverse talent — staff fromdifferent backgrounds with a wider range ofskills — are more likely to thrive.This represents a cultural shift — althoughthe people coming into the industry areincreasingly diverse, senior managementis less so. As PwC explores in Fasttracking gender balance across real estate,a 2019 report launched in partnershipwith Real Estate Balance (an associationthat promotes women’s leadership inthe UK real estate industry), acceleratingprogress on diversity and inclusivity takesmore than just policies and initiatives. Ifdiversity and inclusivity are recognised asvital in-meeting customer expectations,they should be treated like any otherstrategic imperative — and be embeddedinto business objectives, performancemeasurement and incentives.Seizing the prizeReal estate is at a crossroads. The moreconscious people are about the ownersand managers of the buildings they spendtheir lives in, the greater their expectationswill be. And the more real estate comesto be seen as a consumer product witha profound influence on the quality ofpeople’s lives, the higher the rewards willbe for businesses that get the connectionsand outcomes right.If you as a real estate company executivecan create a trusted brand that issynonymous with quality, tenant well-being,environmental awareness and supportfor the community, whilst maintaining thetraditional strengths of an asset-backedbusiness, this would be a huge source ofdifferentiation and value.As real estate evolves into a trulycustomer-driven business, it willrequire a more sophisticated approachto understanding the complex needsof different customers.

8 Real estate trends 2019 Part of PwC’s 22nd CEO Survey trend seriesStrategymade realHow can real estatebusinesses balance socialand financial return?Across cities worldwide, people are struggling to findaffordable housing, commuting on worn-out roadand rail systems, and attempting to raise familiesin neighbourhoods where young people see fewopportunities and are increasingly alienated frommainstream society.In many cities, the have-nots now include not justlower-income households, but young professionalsand middle-class families priced out of the market byspiralling inner-city housing costs. Social media hasenabled people to share their frustrations and putpressure on business and government to respond. Realestate businesses are told, ‘If you’re not part of thesolution, you’re part of the problem,’ but solutions thatfit any viable business model are not obvious.The leaders of the real estate industry will be called onto think about innovations more closely. These mightinclude collaborating with leading local businesses thatsubsidise housing for employees, or experimentationwith modular buildings in which apartments can beadjusted as family sizes shift, or with mini-apartmentdesigns in which people share more types of commonspaces. There might be more opportunities to helpdevelop zoning changes, or open up different types ofcommuting options, or participate more wholeheartedlyin plans that take advantage of data and analytics.Many well-respected real estate companies are thosethat innovated, in years past, by developing new typesof home designs for the middle class.Many efforts will involve collaboration and trust, anddata can make a difference here as well. This meansa willingness — not just within the industry, but withinlocal government and community groups as well — tolook for common solutions. Can you help foster thenecessary conversations? Are you able to lead them?Those skills may make the difference between anenterprise that survives and one that is recognised asa civic contributor.

9 Real estate trends 2019 Part of PwC’s 22nd CEO Survey trend seriesAuthors andcontactsAustraliaRoss HamiltonReal Estate AdvisoryPartner, PwC Australia 614-13-777-447ross.a.hamilton@pwc.comHong KongKK SoAsia Pacific Real Estate Tax LeaderPartner, PwC Hong Kong MaglioccoCanada Real Estate LeaderPartner, PwC Canada 1-416-228-4228frank.magliocco@pwc.comJapanHiroshi TakagiJapan Real Estate Tax LeaderPartner, PwC Japan ChenReal Estate AdvisoryPartner, PwC China CarlockUS Real Estate LeaderPartner, PwC US 1-214-938-4062byron.carlock.jr@pwc.comGinger Y. JiangReal Estate ValuationPartner, PwC China HughesGlobal Real Estate LeaderPartner, PwC UK an Eickermann-RiepeGerman Real Estate LeaderPartner, PwC Germany Uwe StoschekGlobal Real Estate Tax LeaderPartner, PwC Germany JohnstonEuropean, Middle East & Africa Real Estate LeaderPartner, PwC UK 44-207-804-2722angus.i.johnston@pwc.comGareth LewisReal Estate Corporate FinanceDirector, PwC UK

About PwC’s22nd Annual GlobalCEO SurveyPwC conducted 3,200 interviews with CEOs in more than 90 territories. Therewere 70 respondents from the real estate sector, and 22% of real estate CEOsreported an annual revenue greater than US 1bn.Notes: Not all figures add up to 100%, as a result of rounding percentages andexclusion of ‘neither/nor’ and ‘don’t know’ responses. We also conducted face-to-face, in-depth interviews with CEOs and thoughtleaders from five continents over the second half of 2018. The interviews can befound at Our global report (which includes responses from 1,378 CEOs) is weighted bynational GDP to ensure that CEOs’ views are fairly represented across allmajor regions. The research was undertaken by PwC Research, our global centre of excellencefor primary research and evidence-based consulting services: can find other CEO Survey reports here:ceosurvey.pwcAt PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 158 countries with more than 236,000 people who are committed to deliveringquality in assurance, advisory and tax services.Find out more and tell us what matters to you by visiting us at publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information containedin this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the informationcontained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone elseacting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 2019 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity.Please see for further details.

the norm within real estate, it would be hard to imagine Google failing to put its The challenge for many real estate businesses is that brand recognition, engagement and loyalty with the occupier of a building have never been priority areas in the sector. 4 Real estate trends 2019 Part of PwC’s 22nd CEO Survey trend series. name on its search engine, or Apple hiding its iPhone brand as an .

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