The real estate market is fundamentally changing and the way people are going to be using spaces and what they are using them for is changing as well.
Host Eoin Ó Murchú is joined by Antony Slumbers, a real estate software and PropTech strategist, and Gareth Lewis, a digital consultant within PwC’s capital projects team, to discuss the real estate sector, specifically some of the emerging trends in the market and how the sector as a whole is adopting and preparing to capitalise on them.
Eoin Ó Murchú
Hello, I am Eoin Ó Murchú and welcome to reimagining capital projects. Today, we will be discussing the real estate sector, specifically some of the emerging trends we are seeing in the market and how the sector as a whole is adopting and preparing to capitalise on them.
As always, I am joined by two esteemed guests, Antony slumbers, a real estate software and PropTech strategist, who independently supports real estate boards on transformation technology and innovation, and you can find him online at www.antonyslumbers.com and on twitter @antonyslumbers; and Gareth Lewis, a director in PwC’s real estate M&A team. He also leads the firm’s real estate research, helping to drive PwC’s M&A business priorities and advising clients on their real estate strategies.
Welcome to you both.
Antony slumbers/Gareth Lewis
Pleasure to be here. Thank you for having me.
Eoin Ó Murchú
Gareth, let’s start up with you, PwC have recently released a comprehensive Emerging Trends in Real Estate report, what are the key messages that came from this?
PwC actually produce in conjunction with the Urban Land Institute three regional reports. We produce those towards the end of the year, so in November last year. That’s reports for Europe, for Asia Pacific region and for the USA and Canada. The recent report you referred to is the global emerging trends report, which brings together all the findings from those three regional surveys.
When you look across those three regional surveys, we actually interviewed around 4,000 industry participants, so participants take part in the survey and interview. There is a huge amount of insight we get from those interviews. It’s also a report which tends to have a focus primarily on real estate investors. So lot of other themes that come out of it, particularly over the last few years, have a familiar theme to them, particularly with the real estate, a theme at the moment is around the fact that we are in a late-cycle. That means that we are seeing prices that are high and lack of opportunities in the sector as prices increase.
Eoin Ó Murchú
Is there anything new or unexpected that came from that report that you weren’t expecting?
For me, the most interesting aspect of that is the idea that that’s actually not just all about the market cycle, there is some really fundamental structural changes that are happening in the market at the moment. Themes like people going up the risk curve, lot of mention of the word obsolescence, and also a major shift into what’s been known as alternative real estate sectors.
Eoin Ó Murchú
Antony, great to have you on the podcast. Gareth talked to us on some really interesting themes, or even buzzwords, do these resonate with you?
Yes absolutely, just like to start by saying it is a good and interesting report. Gareth mentions the word obsolescence, and I think, that’s absolutely the critical pivotal word here. The market really is fundamentally changing and the way people are going to be using spaces and what they are using them for is changing as well. There is going to be a great deal of obsolescence in the sense of this space will not be used in the same way as it is now, but that’s not necessarily a bad thing, because obsolescence previously you think of it in terms of end of life, this is changing use case and that can be a very positive and value enhancing area.
Eoin Ó Murchú
When you say that, that really strikes me as a space or real estate-as-a-service, and to me this has been a theme that’s been emerging for a number of years now. Gareth, what is this business model and who does it ultimately benefit?
Well, I think, my personal take on this overall theme, fundamental shift that we are seeing is the idea that real estate is becoming a much more complex industry. It is growing up in many ways and the major part of that is the shift into being a consumer driven industry. Real estate-as-a-service as Antony said, and certainly a theme where this has come out with the reports in recent years, is this idea of a value shift, from the traditional bricks and mortar side of the industry into the service side. There is a really interesting question around who really captures that value and who takes advantage of it, and do industry participants traditional real estate players really embrace that shift or today just pay lip service.
Eoin Ó Murchú
Is it a complete transformation of the business model in its current format?
For me, I think it is yeah and I am sure, I suspect Antony you will agree. This is the idea that as I said real estate is becoming much more complex and there is a question as to whether it’s the existing real estate players or traditional real estate businesses that manage to change their business models and capture that opportunity, or indeed is it other organisations from outside of the real estate sector that come in and steal a march; businesses like Google technology business and that’s sort of thing.
Eoin Ó Murchú
Antony, what’s striving the shift to new models in the market?
Fundamentally, it’s technology. Because new technologies are developing, they are going to fundamentally change the nature of the work we do. Lots of people concentrate on the way we work being important, but it’s actually the work we do. There is a book by a Chinese AI venture capitalist called Kai-Fu Lee, called Ai superpowers, which came out at the end of last year. He has a line in that, which I think is very pertinent here, he says ‘…AI algorithms will be to many white-collar workers what tractors were to farms hands, a technology that dramatically increases the productivity of each worker and shrinks the total number of employees required…’. But there is a fundamental paradox here, as the world is becoming more technological, we are actually going to see more and more of the benefits of being human, because any task that is structured, repeatable or predictable, will be automated. That’s been quoted as being half of the tasks that people have paid for in the world of structured, repeatable or predictable; therefore, they will be automated.
What will be doing in that sort of world? Well, we are actually going to be emphasising our human skills. So, we really go to design imagination, inspiration, creation, empathy. Think of computers, they have no empathy. Now admittedly, quite a number of humans don’t have much empathy either, but the better humans have lots of empathy, intuition, innovation, and collaboration, social intelligence, this is what humans are good at and this is what humans are going to be doing in the workplace.
Eoin Ó Murchú
That’s really interesting, because on our previous podcast, we explored the value that data insight can bring to the high street, for example, in terms of knowing your customer. A lot of what you said, resonates around that. In terms of the asset owners, what type of data then should we be focusing going forward with that in mind, with the changing market, with the ever increasing flexibility that these companies are going to be needing going forward?
I think there are three critical areas to be amassing data. First you need to understand how your physical asset is performing in much more granular detail than you do now. That’s going to be possible, because we are basically going to be able to put sensors on everything. We are going to really intimately understand how our building is performing. Not just a sort of structural things, how is it performing on an environmental level, what’s the heat, what’s the CO2 levels, what’s the temperature, what’s the lighting, how is all that, is it performing as well as it can be?
Then you need to know how people are actually using your space in reality as opposed to gut instinct ‘Oh, that meeting room is always busy.’, and then it turns out, well no it’s not, because it’s not busy at all during all the times that you don’t look at it. We need to understand where do people go in our office spaces, where do they not go, when do they go, why do they do that, what are the circumstances that they use different parts of the building differently? Then the absolutely critical last piece of information that we need to know, we need to understand who our customers are.
We are very, very lucky in real estate that we have our customers in our spaces every day. Other industries spend billions of dollars a year trying to reach their customers, we have our customers in our buildings all day and we know nothing about them. We need to intimately know what is the job to be done of each person in our space.
Eoin Ó Murchú
That really drives an interesting point, knowing your customers and knowing about them intimately, Gareth, based on that, are there any KPIs or metrics that the industry should be collecting to capitalise on this?
It’s interesting because hearing Antony talk about that, you can’t fail to come up with a view and you agree with the view that real estate should be a customer driven business, but so much of real estate and so much of the value tied up in real estate is in investment into that asset class. What’s interesting for me is as you have this explosion of data at the granular level around the operational performance of buildings and impact on productivity of the people within them, that data is going to flow up all the way to the investors and investors are going to start becoming much more sophisticated around how they interpret that data and what it means in terms of their interpretation of the value of real estate, which is ultimately what these investors are already concerned about. In the last 10-15 years, we’ve seen lots of new KPIs emerge, non-financial KPIs like sustainability, and more recently health and well-being impact. For me it’s all just part of ultimately how it impacts the value of a property and technology like blockchain will help that enormous pool of data to flow and be interpreted by the ultimately the investor in real estate.
Eoin Ó Murchú
Antony, Gareth was looking back in the last five or ten years or 15 years of technology, what does the next five or ten years in the future look like for the real estate sector and how do you call real estate clients, offices, retail organisations avoid becoming obsolete?
First of all, I think, real estate needs to understand technology before the technology industry understands real estate. We need to understand technology because we need to understand what it can do for us, but also what it is doing for all our customers, how is it changing the nature of business and work that our customers are involved in?
So we really need to understand, we need to broaden our skill sets, but then also inline of what we were talking about the human side of things, we need to broaden our skill sets in terms of hospitality, data analytics, all manner of these human interactions, which we are becoming much more like a service industry than a product industry. The basic skills of a real estate company, which at the moment is pretty much real estate that’s it, needs to become much wider. We need these multifunctional teams who can now move from selling a product to delivering a service.
I think the key point here is that there is that there is so much potential to provide a better service that you’re going to find a big differentiation between those who really get stuck in and understand this and produce a service which is multiple times better than the competition and that’s what is going to drive long term value.
Eoin Ó Murchú
What it will look like for investors?
I was going to say, I tend to look at this more from an investor perspective and I think, we generally are, there is cross roads for real estate investors. The challenge for investors is, do you go down that root of embracing the new operational customer driven real estate business, or do you want to try and remain in more of the traditional approach to real estate, which is in that passive role where you tend to see real estate as something you park some money and get a bond like return and I think, we are at that crossroads now.
Again it comes back to this question of, is it traditional real estate businesses that go down that route, and become these new players that are tapping into the huge opportunity that exists in this new industry, or is it other players coming into the market. My personal view is that it is not all bad news for the real estate businesses, because they are in a fundamentally advantageous position being the owners of the real estate in the first place, I don’t know what do you think about it?
We are very likely to be in a position where actually we are making a bigger cake here, potentially a much bigger cake. The potential for driving more revenue out of a building by providing more services and all these sorts of things, is very great. You could end up with the building generating a lot more revenue. The question is, who is going to get it. Now you can sit outside it and say, ‘no, I am not going to do anything at all, I will outsource all that’. That’s fine, but you have to realise you are going to be leaving a lot of money on their table and your position in the value chain is going down, because the really important person in this new world is who is creating, curating the user experience, because it’s the user experience that’s going to generate the new revenue.
Eoin Ó Murchú
On that, already it seems like a huge opportunity for the real estate sector as a whole. Antony, what did they need to do right now to optimise this and to really make the most of it?
The real point is you need to get seriously stuck into this new way of thinking, multifunctional teams, understanding the technology, understanding the changing work, understanding the changing nature of demand and then really go deep; in that case, how do we create a product which is of greater value. As I say there is a great differentiation, so the opportunity to outperform is huge here, but it’s not a simple game, you have to get seriously stuck in to leverage all of this.
My view is I think there will always be investors in real estate that want to go after that and maintain a Bond-like return. I think the point to make here is that if that’s your world, if that’s where you want to stay, then you’ve got to expect your returns are going to go down because all these capital wanting that sort of relatively safe bond-like return, and someone else is going to be taking that value as Antony said. But I think, it’s really hard to say what you do right now to embrace these changes or react to these changes, but I think one thing you can be fairly clear on, as I said at the start is the real estate is becoming a more complex industry. Therefore, versus where we’ve been in the past, one step businesses could take now, whether you are an investor in that passive world who wants to just understand what’s going on or you an operator, more down the operational route, where you actually want to be playing a part in this new road, you need to have an increased diversity of talent within your organisation to be able to react to that and understand it. I think that a clear piece of advice now what can companies do right now would be to grow the diversity of their talent pool.
Eoin Ó Murchú
I think that’s probably a good place to leave today. Thanks both Antony and Gareth for a lively discussion and thank you all at home for listening. The podcast notes will have a link to the emerging trends in real estate report, and key contact details, and of course, we have a lot of information on our website at www.pwc.co.uk/reimagine.
We would be back again soon with more episodes, but in the meantime, we have a healthy back catalogue of podcasts available online, so if you haven’t done so already, please do check them out.
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Capital Projects & Infrastructure Technology Lead, PwC United Kingdom
Tel: +44 (0)20 7212 4932