Future of Finance


Proptech Summary


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The global Pandemic has accelerated a number of long-term trends in the real estate industry, including home-working, virtual meetings and migration to secondary cities.

Covid-19 also sparked interest in technologies, such as people flow management, sanitisation and voice-operated machinery, for employees that must go to a physical workspace.

A more fundamental influence over the future of real estate is data. A small group of “smart” buildings are collecting copious amounts of data for use by real estate managers, asset managers and investors. 

Data analysis is reducing capital allocations to real estate investments; cutting the energy consumption of buildings; and trimming insurance, maintenance and refurbishment costs.

Data is also used by investors in fractional ownership of buildings and by asset managers to search for value and select investments in terms of geography and future potential as well as individual buildings. 

The increasing influence of environmental, social and governance (ESG) factors in asset management is adding to the value of data about the energy performance of buildings.

Commercial office space tenants are increasingly interested in flexible office space in multiple locations rather than single city centre sites to accommodate “distributed” as well as home working.

University students, also subject to an enforced migration from city centres during the Pandemic, are likely to reinforce the long-term shift to remote and distributed working.

Like every business, the future of real estate will be determined by the ability of incumbent developers, investors, asset managers and agents to capture and use data about their industry. 

Full review

The global Pandemic has had a substantial impact on the real estate industry. Empty office blocks and travel restrictions have led to empty hotels, restaurants and shops. Yet much of what appears to be a sudden change in the environment is in reality only an acceleration of some aspects of a continuous process of change, of which the shift to working from home is the most conspicuous.

Covid-19 has accelerated a long-term trend to home working

Homeworking can be traced back at least as far as the early 1990s, when “teleworking” and “telecommuting” preceded even the commoditisation of bandwidth through the Internet. Dispersed workflows and digital meetings were also well-established when the Pandemic struck. So the virus has imparted momentum to existing trends rather than changed the direction of the real estate industry. 

Outflows of working populations were the most visible sign of that acceleration, and rental values in central business districts in the United States responded surprisingly quickly. In the Bay area of San Francisco, for example, average rents were down 15.9 per cent over the summer of 2020, and rents softened even in normally resilient sectors. In New York, new leases were down 25 per cent. 

Interest in health and safety technologies increased significantly

The Pandemic also accelerated developments in health and safety. Though some employees are more productive without the daily commute, others need to be present at a factory or construction site, or at a hotel or restaurant or hospital to provide customer-facing services. Teams, particularly those working on complex transactions or technological installations, need to collaborate face-to-face.

Finding safe ways for groups such as these to go to work has driven interest in technologies that can screen employees for signs of infection, enforce social distancing, sanitise workspaces, allow machines to operate by voice rather than touch, and permit meetings by hologram. These technologies pose issues of adoption, social etiquette and action (what do you do if a pathogen detector finds the virus?)

The “smart” building is packed with data-gathering sensors

It is less problematic to apply technology to transforming the workplace than rescuing it. A “smart” or “connected” building is one designed and built using data (what the real estate industry calls Building Information Modelling, or BIM); uses data to reduce energy consumption by 15-20 per cent; detect faults; and capture the tenant experience across multiple dimensions.

Data about the performance of buildings is now being used not just to manage buildings but to lift investment performance. Institutional investors such as insurers are capturing, certifying and indexing data about everything from footfall to lavatory flushes. By increasing the liquidity of the asset, it reduces the proportion of the balance sheet consumed, releasing capital for further investment. 

Data is reducing capital consumption, energy bills and maintenance and insurance costs 

The completely digital facsimile of a building – in which the physical premises are replaced by virtual reality, including holograms – is still a speculative idea. The “smart” building is still in its infancy too. The value of global commercial real estate assets is c.US$32 trillion, and it is estimated that no more than 0.5 per cent of that stock can yet be classified as “smart.” 

However, considerable investment is now going into Internet of Things (IoT) style sensors within buildings to manage their costs and performance. The data enables owners to catch maintenance problems early, schedule amenities and determine with greater certainty whether a refurbishment of the bathrooms or the elevators is actually justified. This cuts costs and capital calls for landlords.

Fractionalisation – another innovative technique adding liquidity to real estate, not least by simply broadening the range of investors that afford to invest in real estate directly rather than via, say, a REIT – also benefits from the increased flows of data from buildings. Data collected by IoT sensors is being analysed by Artificial Intelligence (AI) and fed to building insurers, for example, to cut premiums.

Data is being used to find value and predict real estate market movements

By adding operational data (such as key FOB usage and energy consumption) to behavioural data (how people use the vending machines and the bathrooms) to financial data (such as rental income and energy bills) to legal data (such as the contractual obligations of landlords and tenants) to wider environmental data (such as transport patterns), it becomes possible to predict market movements.

Predictive analytics are helping real estate asset managers pick investment opportunities at the geographical level. In other words, they are able to put money into growing rather than declining conurbations. Asset managers have also discovered that tenants are prepared to pay premium rents for “smart” buildings because, for example, the energy bills are lower. 

The benefits of the “smart” building are yet to fully translate into real estate investment performance and market pricing, but the trend is set. Buildings with effective operating systems will cost less to maintain and attract happier and higher paying tenants. They are already attracting certificates, ratings and scores that inform investors where to look for value.

ESG considerations are increasing the appetite of asset managers for data

An increasingly influential force in the investment decisions of asset managers is environmental, social and governance (ESG) factors. Energy-efficient buildings obviously suit ESG portfolios better than the alternative, because two fifths of carbon emissions emanate from building materials, processes and operations. Buildings whose ESG performance is documented by data are easier to invest in.

One less-than-obvious opportunity created by ESG-influenced investing in real estate is the likely emergence of localised energy generation, and of localised heat reduction and cooling capacity to mitigate the impact of ESG obligations on the value of residential housing (which is worth an estimated US$240 trillion worldwide) as well as the US$32 trillion commercial real estate market.

Discounted real estate investments look attractive relative to equities and bonds

But the Pandemic has created short-term opportunities for investors too. While city centre rents are under pressure, investments such as automated warehouses and cold storage facilities, have prospered. And, in an environment that combines negative real interest rates and over-valued stock markets, real estate prices discounted for Covid 19 look an attractive investment. 

A short-term conundrum for investors, on the other hand, is whether the shift to home working proves permanent. There is evidence that employees dislike the blurring of the line between work and life, miss the social contact of going to work, and often lack the space to work from home comfortably. However, there are other signs that the change to working from home will persist. 

The permanent shift is probably to distributed rather than purely home working 

In California, for example, the decision by a number of companies to tell staff they would not have to return to the office for at least a year had an unexpected consequence. Surveys of staff found 60-70 per cent of employees wanted to use the opportunity to move to a lower cost city such as Salt Lake City in Utah, Bend in Oregon or Jackson Hole in Wyoming. 

Yet, again, the drift of working populations to secondary cities pre-dates the Pandemic. Real estate investors were already putting money into many of the locations favoured by Pandemic migrants because the returns looked promising even before the virus struck. So there is a growing conviction that distribution of the workforce will continue even after the Pandemic subsides.

This has prompted employers to review their real estate strategies. Companies are anxious to retain talent, and recognise that, while migration from major cities is likely to prove permanent, working from home is not. They are now searching for flexible office space in secondary cities, where employees could go on the two or three days they prefer not to work from home.

Flexible leases on multiple locations are likely to displace city centre buildings

Flexible space is an obvious way to manage the trend in the short term. So are shorter leases. However, the long-term concomitant of a de-urbanisation of working will be a shift in the economics of centralised office space. Buying or leasing a large building in a central business district is a significant cost, and the building becomes steadily less economic as the density of occupation falls. 

While most employers have understandably adopted a wait-and-see attitude, some have gone further. Asset manager Schroders, which recently leased new premises on London Wall in the heart of the City of London, announced in the summer of 2020 that working from home had gone so well during the Pandemic that the experiment would become permanent.

University students are getting accustomed to remote working

Another group of migrants from city centres in the summer of 2020 have also found exile less disruptive than they expected. University students have pursued their studies remotely without much disruption. PhDs looking to commercialise their research, especially in areas such as AI and data analytics, have experienced no difficulty in raising funds and developing their businesses.

In fact, the Pandemic has vindicated the decision by many start-ups to ignore the geographical location of talent. Instead, they reckon they can attract and retain talent by allowing people to choose where they work from, and how. Innovative alternatives to established flexible space providers (such as WeWork) have emerged (such as The Collective, which offers flexible co-living as well as co-working).

Flexible workspaces have responded to the health and safety challenges of the Pandemic

True, these models have been negatively affected by the Pandemic as well, because their original premise is that people will work communally. Both WeWork and ServCorp, which provides serviced offices and segregated space as well as coworking, have had to emphasise their commitment to social distancing, personal protective equipment and additional sanitisation measures. 

Yet even this unexpected requirement was accommodated relatively easily, because that is what “flexible” real estate entails. For example, information security considerations have always meant that flexible co-working is not a viable option for all companies. So flexible workspace providers have long since adapted their models to lease segregated space to tenants with separate connectivity. 

The future of real estate will be determined by data not the Pandemic

For such an illiquid asset class, real estate has proved surprisingly resourceful, but also tied as inextricably as any business to the elemental force driving the future of capitalism as a whole: data. The future of real estate hinges less on an end to the Pandemic than on the ability of the industry to capture, analyse and present useful data in ways that inform investors, satisfy regulators and delight tenants. 

Questions to be addressed at PropTech Part II

1. Which parts of the real estate industry have benefited from the Pandemic?
2. Is the migration from city centre office blocks proving permanent?
3. Is data from “smart” buildings changing how real estate assets are priced?
4. What does the data tell us about upcoming real estate investment opportunities?
5. How are asset managers using data to inform ESG-driven investment decisions?
6. What impact is fractionalisation having on real estate investment and ownership?

The Future of Finance is always open to hold further meetings to answer these and other questions and to continue the conversation. If you would like to sponsor such a meeting please contact Wendy Gallagher at the number or email address below. Also view our upcoming meetings elsewhere on www.futureoffinance.biz

Wendy Gallagher
Tel: + 44 (0)7725 160903
Email: wendy.gallagher@futureoffinance.biz