Brand, intellectual property and real estate will be the key stores of wealth in the future. The question for investors is where and what to buy to store wealth for the next 10 years.
Rana Foroohar, from the Financial Times, gave that insight in her keynote speech at the ANREV conference late last year, causing a happy stir in the audience. Institutional investors in real estate are well placed to provide a home for savings and incomes in the future.
In a world where the real US 10-year government bonds rates have delivered roughly 1% per annum over the last 10 years, Asia Pacific office total returns have averaged 9.6% per annum over the same period. Although not directly comparable, it is pretty compelling.
The question for investors is where and what to buy to store wealth for the next 10 years.
At the start of 2018 we are observing a globalised economic recovery with all three regions growing. This year we should start to see a quickening of interest rate rises to a more normal nominal level following the global financial crisis.
However, interest rates are part of a longer global downward trajectory for which there are mixed opinions as to the cause.
Regardless of this 30-year cycle, central banks are signalling that rates may rise should inflation take hold. The potential for inflation to lift as growth continues means that even as nominal levels rise, the level of real rates is likely to be much lower than pre-GCF.
Low real rates and the prospect of inflation will continue to see investors allocate to real estate, either towards 10% of their portfolios or even greater for those well-versed in real estate investment.
The growing global economic recovery provides a broad swathe of real estate demand. You can find our short-term outlook for real estate markets in our quarterly Global Market Perspective
Here are some of the longer term secular shifts to watch in 2018 that will influence how real estate performs as a long-term store of wealth:
Winning cities with long-term demand for real estate
The cities with long-term demand for real estate and those with technology-based occupiers win as other tech occupiers co-locate to attract talent. Migration to winning cities will continue to be a global phenomenon.
No wonder, then, that there is a battle to host Amazon’s next HQ, given the spillover effects to young millennial talent it’s likely to attract.
Across Asia Pacific, we found the primary reason for the choice of location for technology firms is access to talent.
If you can get your city/suburb/neighbourhood to be the next tech hotspot, agglomeration works and long-term demand will sustain.
Since demand has the potential to be global (smartphone access) and supply very local – specific locations in tech-focused cities will win.
Falling cost of technology to shift transaction costs
This will allow a shift in transaction costs. Information and search costs, bargaining costs, and monitoring and enforcement costs of any exchange have moved fundamentally over the last 10 years.
Airbnb is a case in point.
Hotels survived because, from a transaction cost viewpoint, they were cheaper than trying to find a room to rent on a short-term basis.
That was until the arrival of the smartphone. Now hotels have to compete on service; location is less of a hold. This will apply to other forms of real estate.
Rise of the ‘co’ economy
Curating communities of co-workers and co-occupants will be the new role in adding value to real estate. Technology reduces the costs of outsourcing and freelancing. In turn, that changes employment patterns and a desire for people to co-locate with like-minded people – whether co-working, co-living, or finding friends and having fun.
The genius of co-working companies is not the real estate space – it’s creating a sense of belonging.
Putting co-working space in unused floors in city centre department stores and malls, and extending multi-occupancy communities online, is a trend to watch.
Capital flows into alternative real estate
Transaction cost reduction through technology also provides the framework to explain the drive into alternatives.
Technology makes splitting out the ownership and use of assets much more efficient than previously envisaged. The ability to price deductions from payment streams or add up payments – similar to additional baggage charges for air travel – will all flow into the real estate world.
Increased flows of capital have driven traditional core office yields lower. Nonetheless, the competition for assets and the volume of capital, combined with technology, has shifted towards it now being cost effective to set up contracts to split ownership and operation of assets.
Real estate will continue to be a store of wealth. Investors will continue to deploy more capital to the sector. Understanding how technology impacts people is the key to generating real estate returns.