Finance, Real Estate and Wealth-being: Towards the Creation of Sustainable and Shared Wealth

wealth-being

Foreword

The real estate industry is a fundamental component of the economy and a key priority to ensure financial and geopolitical competitiveness to any country.

Based on this observation, the new book by Claudio Scardovi focuses on the opportunity to reconsider real estate according to new categories, to find innovative solutions with respect to the great changes that are taking place today. In this context, finance can be seen as a particularly significant transformative driver.

Many of the global trends that push towards traditional business models’ evolution, represent a challenge in real estate as in other sectors. The changing demographic processes, the great migrations, the evolution of lifestyles, the digital and technological progress and big data availability, together with the issues brought by climate change, demand the reconsideration and redesign of the inhabited space from a smart perspective, from cities to the home-office.

The ambitious vision therefore foresees new solutions and drivers for growth, which promote an ecosystem that is favored by multiple urban and social regeneration projects, and offer opportunities to better exploit the real estate component by taking on a holistic approach to personal asset management.

These considerations are particularly relevant for a country like Italy, where the value of residential assets settles at around 6 trillion euros and real estate accounts for about 55 per cent in the asset allocation of Italian households.

Outlined in the following pages is a very bracing challenge, where banks can play an important role in promoting (cultural) innovation. This purpose will be realized only if all the stakeholders involved are significantly committed and aligned around a clear vision, leading to a greater enhancement of the country and its territories.

Carlo Messina

Managing Director and CEO at Intesa Sanpaolo Group

Introduction

Never has the focus on our cities been so great. One of the oldest industries in the world, property, is again at the forefront. 150 million people move to urban environments each year to seek employment and a higher standard of living. Cities are increasingly defining our economic, social and environmental status. Every city requires clarity on how it can compete and the ability to attract new talent and investment to do so.

At the heart of our cities is real estate, the largest asset class on the globe and the main holder of our personal and institutional wealth. Today’s major city challenges of congestion, affordability, inequality, climate change, tiring infrastructure and social/political unrest are demanding that we rethink our approach. Likewise, real estate is far too important to society to be the subject of poor policy, planning, speculation or lending practices which can trigger volatile cycles in valuation.

Positively, liveability and wellbeing are now increasingly defining success, with proactive leaders in the private and public sectors regenerating urban districts by integrating infrastructure, technology and property. My current home, Singapore, focuses on long-term planning and governance. Its 50-year transformation into a highly liveable, prosperous, green, first world economic city state (and buoyant real estate market) is a testament to proactive economic and social policy.

Having spent over 30 years working internationally in major real estate development, I can attest that capital and opportunities to set a bold vision, align interests, create value and leave behind a positive legacy still abound. However, to succeed we must be increasingly open to learning, leveraging technology, engaging community and policy makers, and being prepared to change. With real estate development comes responsibility to create quality people-centric places that improve the environmental, social and economic realities of the communities and cities we serve. Only through this approach are optimal long-term investment returns also generated.

In this book Claudio challenges us to consider the convergence of real estate, finance/banking and technology, and the changing role and use of real estate. He questions convention and explores a broad range of theories, ideas and approaches from risk, ownership, asset management, data and valuation to the importance of wealth, wellbeing and social investment. In many respects it is multiple books in one. Finance, Real Estate and Wealth-Being provokes us to rethink roles, whether they be developers, bankers, policy makers, advisers, technology providers, occupiers or investors, and to imagine a new world and fresh approach to real estate; one which avoids the cyclical and value-destroying errors of the past, and provides enhanced liquidity, quality of life and wealth for the future.

It serves as a timely reminder of the need for change in real estate. We are in a complex industry co-dependent on policy and capital markets, changing user preferences and where disruption from technology is already underway. Cities and their citizens deserve an industry with a strong sense of purpose, good governance and innovation. Those organizations that learn to adapt and evolve will be rewarded with immense opportunities in one of the biggest global growth markets – cities.

David Hutton

Group Head of Development at Lendlease

1Finance and Real Estate (and Technology)

Crazy rich Sicilians

Imagine a wonderful script for a sparkling Hollywood or Bollywood comedy, something like Cinderella transformed into a modern movie. A movie almost entirely filmed in Sicily, Italy. Let’s call it Crazy Rich Sicilians. The main character is Assunta De Sole, an Italian-American economics professor based in New York who meets and falls in love with Andrea Rossi, a fellow academic who is living there and was born in Palermo, Sicily’s capital. She does not know that he is an Italian aristocrat with links to some of the oldest and wealthiest business dynasties (and likely with some Bourbon blood in his veins as well). She only begins to realize this when he invites her to his native city for his best friend’s wedding. In its scenes and costumes alike, the movie is lavish – wealth porn, in fact, with ostentatious luxury integral to the story. It is set in some of the most magnificent landscapes on the island – where all the best-known movie stars, real estate developers and fashion designers seem to have converged in testimony to the branded materialism that exemplifies success in Sicily.

The movie will take cinemas by storm, promoting the lavish, carefree and cool lifestyle of crazy rich Sicilians (no mafia references are appropriate here), who have amassed unprecedented wealth over the last few generations, not only through their individual entrepreneurial prowess but also, and more importantly, as a consequence of the super-competitive territorial positioning that has been achieved by Sicily, brought to global dominance because of its fittingly intertwined (and optimally managed) obsessions with finance, real estate and technology.

Sicily is one of the most business-friendly and socially stable societies in the world. It is also the natural port of entry into mainland Europe, one of the largest geopolitical wealth blocs in the world. And Sicily is the richest closed community that is globally well connected, which has been able to exploit its incredible heritage in terms of culture, art and history. This is before we mention the beautiful places and landscapes that have made it one of the most sought-after tourist destinations – from trips to observe the winter sky from Mount Etna to the eight-month season at Taormina, Cefalù and Capo Passero – not forgetting Palermo itself, of course.

After this movie, there might even be demand for a couple of sequels, with the love between the two young professors unfolding in the beautiful country of Italy. In Neaples Rich Girlfriend, she could end up discovering that she is actually the forgotten child of an even richer businessman-cum-politician based in Naples and with influence at the European Commission. In this episode, the couple travel across Italy and visit such prestige locations as Bormio (which recently took over from Saint Moritz as the most exclusive Alpine resort) and Rapallo (which took over from such run-down and out-of-fashion places as St-Tropez). The conclusion to the trilogy, Rich People Problems, could tell an even more excessive wealth porn story, the wealth-being of mainland Italians, their culture, art, fashion, homes and cuisine being shown in their full complexity: local authorities wrangling about whether to build the bridge linking Italy with Sicily from gold or platinum, and central government precipitating a political crisis because of its indecision about whether to use the few spare trillion euros of the country’s net wealth to colonize Mars or to build a new stadium in Rome.

Not invested here

Unfortunately, for the author of this book and aspiring movie-maker, this script has already been filmed, and the three books by Kevin Kwan on which it is based have been published as well. Even more unfortunately, for the author of this book as an Italian citizen, this blockbuster hit has been filmed in Singapore (Crazy Rich Asians) and the two sequels (Rich China Girl and Rich People Problems) will also be filmed there, as well as in Hong Kong and mainland China, if they come to fruition.¹ Apparently, the chances of these movies being set in Sicily were high. Possessing one of the most beautiful coastlines in the world, Sicily has the chance of becoming a vibrant access port to mainland Italy and to the rest of Europe. It enjoys much better weather than Singapore, with constant sunshine and bearable humidity. It also has plenty of space: while Singapore has over 5.6 million people and just over 700 square kilometers of land, including an area taken from the sea, Sicily has a population of 5 million and more than 25,000 square kilometers. In truth, Singapore is far more efficient and less congested than most cities of its population size, given the abundance of modern infrastructure, connectivity and commitment to quality public realm and green sustainability. Finally, Palermo also has a vibrant cultural heritage that, with no offense meant, far outclasses that of the city state of Singapore.

Singapore’s gross domestic product (GDP) per head is about USD 98,000, versus the USD 20,000 of Sicily, with a growing gap: the Republic of Singapore has continued to grow at a healthy rate and is now a renowned hub for education, entertainment, innovation, tourism, technology, finance and real estate. While its citizens are developing a taste for arts, fashion and good living, senior managers from GIC and Temasek (the two sovereign wealth funds that are charged with investing Singapore’s high net wealth) might well have a different perspective: that finance, real estate and (more recently) technology are its citizens’ and leaders’ overarching obsessions, being – in our view – one of the key drivers of the city state’s extraordinary economic success since the proclamation of independence in 1965.

The Marina Bay Sands, perhaps the most iconic building in Singapore and setting for one of the most lavish scenes in the movie, in which an exclusive wedding party takes place beside the super-sized roof top swimming pool, is strikingly different from the cathedrals and theaters of Palermo, let alone the ancient Greek temples nearby. Another comparison is provided by the luxury cars parked on the top floors of brand new and technologically advanced skyscrapers, just a few steps away from their owners’ dining rooms, which contrast with the dented old cars to be found parked in the pedestrianized areas of Palermo. The luxury to be found in Singapore tells a story of wealth that has been created for multiple reasons, and has been able to leverage the key drivers of finance and real estate (and more recently technology, which has linked the two main drivers in an optimally disruptive way). The role played by the Singaporean government has also certainly helped (the best and brightest are employed by the government), through solid leadership, elimination of corruption, strong immigration, focus on trade, inclusion, low taxation, housing provision, health care, education, transparency and robust policy and planning.

These two sectors – finance and real estate – with technology acting as a catalyst of change have been able to fund, develop and sustain the competitive positioning of the territory. This has taken place through carefully planned urban development of the central areas and smarter neighborhoods alongside the regeneration of marginal and depressed areas – places where land was once worth nothing at all (an example being the artificial areas taken from the sea) but has multiplied its value tens or hundreds of times. As real estate values have increased, so have the wealth and wellbeing of the community as a whole, in a virtuous, self-sustaining circle of growth.

Of course, there are many other examples where an initial spiral of geopolitical wealth creation, spurred on by finance and real estate, has relied on unsustainable excesses and has sometimes run out of control (examples being some of the emerging global metropolises in the Middle East) or suffered setbacks and hiccups for multiple reasons, including war and natural disasters (examples being found among the mega cities in the North and Sub-Saharan Africa). Of course, we could argue that the reasons behind the growth in the value of a territory, with its business community and social ecosystem, are multiple and heterogeneous, including for example the local culture and ethos, the rule of law, the quality of the policymaking and the overall political framework, and, last but not least, the availability of easy-to-monetize natural resources such as oil or gas.

Finance and real estate

We could argue that Singapore’s obsession with finance, real estate and technology, this being mostly digital innovation, with a penchant for smart data and artificial intelligence (AI), is unique; as unique as the obsession with finance, real estate, shopping centers and tourism is for Dubai, or finance, real estate and gaming is for Las Vegas. Still, it is worth further considering why finance and real estate (with the help of other factors and certainly technology, which act as the catalyst for the many changes to come) contribute so greatly to the wealth of a territory. And it is worth discovering what could be made to work better, thereby synergizing a relationship between the banking and construction businesses, something that has so often led to excesses, imbalances, bubbles and then systemic crisis and financial crashes.

Furthermore, we could and should ask how the major financial players could act to change this relationship into a business opportunity rather than just viewing it as a source of risk, by evolving their strategies to actively manage real estate as a key component of the wealth creation that is at play in their communities. There is a close relationship between finance, real estate and the wealth of a country. Finance can allow the pursuit of sizeable, technologically advanced, landmark real estate development projects, including anything from buildings to shopping centers to critical infrastructures. The more valuable this real estate is, not in terms of its financial cost of replacement, but in its end use and usefulness, productivity, yield generating capacity, attractiveness, and contribution to the wellbeing of and even inspiration for lifestyles and ambitions of those who use it, the greater its value and the more dynamic and productive the members of the community around it.

This is not just a matter of natural resources (Dubai doesn’t have oil) or natural beauty (the Nevada desert is not an obvious place for holidays) or abundance (Singapore is overcrowded, is fighting to take new land from the sea and is uncomfortably humid): a great city can be built almost anywhere. The value of real estate is driven by location and not by its cost of replacement, so an attractive location makes real estate something that is sought after at almost any price. A building worth 200,000 euros per square meter in Via Monte Napoleone in Milan is not very structurally different from another one worth 2000 euros a few miles away. The value of the location is driven by its beauty and attractiveness, and is also based on the business and social purpose for which it seeks people’s attention, time and money. What Via Monte Napoleone is to fashion, St Moritz is for winter sports and St-Tropez for summer holidays; what Canary Wharf is to financial services and Palo Alto is for high-tech jobs. Every winning community has a unique and special purpose and mission, and a consistently designed value proposition that is pitched to the people who could inhabit it; and the same should be true for a wider territory, which likely hosts more communities – whether business or social.

The more a location becomes valuable, the more sustainably valuable becomes its real estate as an investable asset, as a repository for wealth