Trends influencing real estate decisions and opportunities
What is driving decision-making in the real estate landscape?
The COVID-19 pandemic has shifted the priorities and habits of consumers, organisations, governments and real estate players, accelerating trends that were otherwise slowly developing, as well as shaping new ones.
The implications have been significant for real estate, altering opportunities and decision-making.
“The pandemic led to investors adopting a risk-averse approach to real estate investment with limited investment into COVID-19-impacted real estate sectors,” says Andrew Ballantyne, head of research – Australia, JLL. “As we have emerged from the depths of the crisis, we have seen capital deployed across the risk spectrum and heightened interest in real estate alternatives.”
From hyper-localisation to shifting emphasis on property value drivers, and the focus on healthy buildings, real estate continues to experience what could be considered one of the greatest structural shifts in modern times.
These are some of the key changes.
The centricity of work in capital cities has shifted to suburban locations, satellite areas outside of the city, as well as industry clusters with strong workforce catchments and public transport infrastructure.
“Because people have been working remotely and like being closer to home, there is renewed demand for retail property, offices and development sites outside the city,” says Josh Rutman, head of capital markets in Victoria for JLL.
“For example, in Melbourne, government agencies are setting up office hubs for staff so they don’t have to commute into the CBD to work. The hubs are in metropolitan areas where a high number of public service employees live.”
The first hub, located in Footscray, opened in February 2021 and two additional hubs in Mulgrave and Williams Landing opened in June 2022.
For retail, suburban and regionally located assets have been performing well with lockdowns driving increased interest in investment since 2020. However, there has been a strong swing back to metro investments and urban locations as the likelihood of prolonged lockdowns and risks associated with COVID-19 have reduced.
Offices are not obsolete
Office investment and leasing transactions occurring across Australia are showing the resilience of the market. Widespread flexible work policies introduced in response to COVID-19 has given workers more choice about where they can set up their laptop but the majority are still choosing the office, even if it’s on a more flexible basis.
Major tech companies, even with their aggressive flexibility policies, are continuing to take office space. Australian software company Atlassian pre-committed to a 40-storey, A$1 billion-plus development for its new Sydney headquarters, due for completion in 2025.
Environmental credentials and ethical values are aligning
Environmental, social, and corporate governance (ESG) reflects an organisation’s conscientiousness around social and environmental factors. And it’s growing fast.
As carbon emissions mandates are imposed and businesses replenish their workforces with a new generation of talent motivated by purpose, the values of investors, owners, and tenants are aligning.
“It has become more core to the investment requirements of larger organisations and institutions to only buy or invest in buildings with strong sustainability credentials,” Rutman says. “This is mirrored by tenants, many of which have minimum requirements around building sustainability.”
With core investments in real estate usually over a seven-year period, and major refurbishment works carried out after 20 years, being ahead of ESG trends is also a key futureproofing strategy, viewed as having a positive influence on long-term return and risk profiles.
“What’s relevant today may not be as relevant as in the future, or things that are on the margin today might be quite major decision-making criteria over the period of that asset’s life,” says Ballantyne.
“Building owners should identify a range of plausible ESG scenarios and think about what that means from a development perspective. That creates a culture of innovation, and an ability to understand trends and then adapt.”
Healthy and inclusive buildings
The health of buildings has clearly accelerated as result of the pandemic. Office buildings with high provision of fresh air are healthier and research has shown it leads to reduced absenteeism and improved mental wellbeing. It is for these reasons businesses upgrading their office accommodation in a tenant-friendly market are opting for buildings and spaces that can support their workforce wellbeing.
Meanwhile, the social aspects of ESG are increasingly manifesting as spaces that consider the requirements of a diverse workforce. Some of the emerging features within offices include prayer rooms and gender-neutral shower and change facilities.
Real estate alternatives
Data centres, self-storage, build-to-rent housing, laboratory space, childcare real estate, and medical centres are types of real estate now being considered seriously by investors alongside the mainstream office, retail, and industrial and logistics sectors.
“A lot of investors are looking at sectors with low volatility, especially given the restructuring of real estate markets over the past two years,” Rutman says. “When you look globally at where these asset classes are more established, that has proven to be the driver.”
Australia’s relatively small size means opportunities are finite.
With population growth a main driver, there is also scalability in build-to-rent housing and health-related assets, including private hospitals and medical centres, Ballantyne adds.
Mergers and acquisitions
The level of merger and acquisition activity in real estate is increasing drastically as investment managers hunt for scale and sector expertise. But the peak is yet to come, with analysts predicting ‘transformational’ levels of activity over the next three years, particularly across Asia Pacific.
The reason: the value of assets under management among insurance companies and other institutional investors is growing significantly which translates to more interaction with a diverse range of managers, including private funds.
This interaction is likely to become M&A activity as large funds seek access to new markets and sectors with the operational expertise that certain private funds can provide.
“The world is looking to deploy into real estate and that gives rise to greater appetite for scale,” says Fergal Harris, head of capital markets at JLL. “If you have a Real Estate Investment Trust trading at a significant discount to Net Tangible Assets – that's 15 percent or even 10 percent - then you're buying that real estate implied at a discount. Buy P2P or public to private, you're getting access to underlying real estate at a discount because your share price doesn't reflect the equity value or the asset value of your underlying assets. And because you are a REIT, it's highly transparent, and it's very easy to make an assessment as to what is in your balance sheet. I have no doubt there will be an increase in M&A activity because of that need for scale. I don’t think we are going to see a lot of M&A in the fund and management space, you’ll see a lot of recaps and LPs being swapped out and swapped back in. Some of the smaller stocks will be targeted because they are easier to take.”
Technology continues to transform the way buildings are managed, allowing previously manual processes to become automated.
Now, the surge in demand for contactless access control via the use of QR codes, mobile phones, biometrics and facial recognition, spurred by the COVID-19 pandemic is accelerating interest in automation of building systems as awareness grows.
“There is a shift in emphasis towards buildings that are wired to run efficiently because they reduce operating costs as well as creating more resilient and user-focused buildings, with positive outcomes for investors, landlords, tenants, workers and visitors alike,” says Richard Fennell, head of property and asset management at JLL.
The global market for integrated workplace management systems (IWMS) – digital dashboards which help facilities managers rapidly identify inefficiencies within offices and real estate portfolios, as well as address the requirements of the post-pandemic workplace – is expected to grow to US$5.7 billion by 2026, up from US$2.9 billion in 2020.