CEO Survey: Real Estate Trends 2019 - PwC

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

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.