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in Real Estate
12 Real assets
26 Sponsoring organisations
27 Interview participants
1) Emerging Trends in Real Estate Europe 2017, Emerging Trends in Real Estate Asia Pacific 2017 and Emerging Trends in Real Estate United States and Canada 2017
(www.pwc.com/emergingtrends).
The volume of capital seeking a limited Either way, finding the right risk/return Never in my career have
supply of core properties is forcing balance will be a key challenge that will
investors to consider new strategies, be felt throughout the real estate value I had so many risks from
lowering return expectations or accessing chain. And to add another further a political perspective
higher yields by exposing themselves complication into the mix, this challenge in so many places at
to more operational risk and emerging will be played out against a backdrop of an
alternative real estate sectors. industry whos centre of gravity is shifting the same time.
from a financial asset to an operational
Participant, Emerging Trends in Real Estate
business where the customer is king.
Europe 2017
High
Low
PwC 20th Global CEO survey European Real Estate US & Canada Real Estate Asia Pacific Real Estate
Source: This chart combines data from the PwC 20th Global CEO survey 2017, Emerging Trends in Real Estate Europe 2017,
Emerging Trends in Real Estate Asia Pacific 2017 and Emerging Trends in Real Estate United States and Canada 2017.
The US the Trump effect Much depends on whether the Trump So far, Trumps embryonic economic
administration is able to fulfil its pledge policies have had little discernible
While global investors have had time to cut taxes and spend heavily on influence on capital flows into or out of
to come to terms with Brexit and its departments and programs favoured the US. At $402.3 billion2, the US was the
ramifications across Europe, the election by the administration without adding to most active investment market in 2016.
of President Trump in the US has taken the USs near $20 trillion debt. According That volume was down 10 percent on
populist politics and the debate around to another US-based interviewee, 2015 but was simply following a broad
de-globalisation to a new level. by using executive powers the President global decline. New York, however,
has essentially turned to regulatory rather claimed Londons crown as the top
This has triggered a tremor underneath than monetary relief as an economic destination for cross-border capital.
everybodys assumption that globalisation stimulus, and I think thats very positive
is beneficial, says one US-based for the US and probably for the world It depends how much the US benefits
interviewee. I dont think were going because the US will become the engine from being part of the global economy,
to see a return to Smoot-Hawley [Tariff] of growth all over again. concludes one global investor. If the view
but I certainly think youre going to see is that the US doesnt need anybody,
a much more realistic assessment of Most American interviewees, however, and everybody else will follow, I just think
globalisation and its benefits and burdens. are cautious about the economic outlook its a misplaced understanding of how
for a nationalistic US and its impact the US economy works, and the degree
domestically and overseas. On the supply to which foreign capital plays a role.
side, there is some risk, says one. You change the variables in that equation
If Trump really loosens up the banks and you fundamentally alter the flow
Real estate cycles and dismantles a lot of the disciplines, of not just capital but human capital.
normally end because of there is a risk that the banks will go nuts Thats the thing that worries me most:
debt, supply or demand and start over-funding developers. the flow of human capital, which is
very identifiable globally in terms of
shocks, and we dont Another observes: The Trump election ideas and talent. If that flow changes,
foresee any of those victory is clearly changing sentiment, the outlook for the economy is
particularly vis a vis deficit spending fundamentally different.
Global investor, Global Emerging Trends in the US and what that might mean for
in Real Estate 2017 interest rates. About 12-18 months ago,
people were talking about deflation and
negative interest rates as being a real
risk, and you just dont hear that
conversation anymore. Theres a general
consensus now that interest rates are
only going one way up and probably
a lot sooner than we thought.
Asia Pacific too much Investors are also casting their nets wider The smart money
capital, too few assets geographically. In gateway cities, this
means a migration towards assets in is looking at
Transaction volumes in the Asia Pacific suburban or greater metropolitan areas, emerging markets
region registered a 14 percent drop a trend that has been particularly strong
to $132.5bn in 2016, according to RCA, in Australia. In addition, there is growing Pension fund investor, Global Emerging
interest in emerging-market deals. Trends in Real Estate 2017
with slowdowns in Japan and Australia
offset by stronger performances in Both India which has attracted a
China and most other Asian markets. significant number of large institutional
investors and Vietnam have recently
Investors noted in particular more emerged as promising long-term plays,
big-ticket purchases by institutional although shortage of institutional grade
investors, together with a decline in stock ensures that most opportunities
the overall number of transactions as remain on the development side.
buyers balk at rising prices and owners
especially in Japan opt to hold rather China, meanwhile, continues to be a
than sell. difficult market to navigate. While it still
offers opportunities for experienced
Core continues to be the favoured asset investors, deals there are increasingly
class, although as product becomes harder to find. This is partly due to a slowing
scarce, many core investors are now economy and partly to competition from
also willing to adopt development risk. enormous amounts of domestic capital
Growing numbers looking at build-to-core now seeking a home in real estate assets.
strategies, especially where institutional
buyers are likely to be long-term holders As one global investor observes:
of the end product. China wont grow at 10 percent
anymore, it will drop to 3-4 percent a
At the same time, investors moving up year. You started with a country of 1-2bn
the risk curve in search of yield are peasants and 100m urban dwellers,
diversifying into alternative asset classes now you only have 300m peasants
that range from data centres to sub-logistics and that has an extraordinary effect on
facilities to senior housing. productivity, but that change has stopped.
Chinas infrastructure and real estate has
been part of that, and it is going through
the same process. Our holdings there
are very significant, and if we are looking
at new opportunities there, we are
very selective.
Thats not necessarily the case for the Globalisation of capital You may see reduced
entire UK but I see London, still, as a very continues
strong investment market and as a strong transaction volumes,
city. Just because a couple of banks Cross border capital flows are telling
but that is not
leave the city doesnt mean that London you that the globalisation of capital de-globalisation.
will become less attractive and extremely remains quite strong, says one global
depressed because over the years the investment manager, summing up the Pension fund investor, Global Emerging
market in the UK, especially London, mood of many in real estate. Trends in Real Estate 2017
has become much more diverse and
less financially driven. According to most of the industry leaders
canvassed for this Global report, there
Whichever city or region finds favour, is unswerving faith in the virtues of
there is a cocktail of risks that has never globalisation involving financial and
been so diversified and therefore markets human capital despite the rhetoric
are reflecting a clear flight to quality. around protectionism.
Says one investor: There continues to Rolling back globalisation is like pushing
be appetite and inflows of capital to buy water up a hill, says one global investment
quality assets, but what youre seeing manager. Capital flows arent reducing
though is a distinction between any old and while it might be affected over the
real estate and prime. And thats a trend medium term, market forces will prevail
youve seen in the US for a longer period over government policy. I think its overly
of time, where the high-quality assets emotive at the moment, and at some
continue to command significant point, sense will prevail.
premiums because of their safety, how
established they are and the cash flows There is also faith in real estate as an
associated with them. asset class amid the prevailing economic
uncertainty. You may see reduced
Another interviewee says: Some who transaction volumes, but that is not
have taken a more aggressive approach de-globalisation, says one interviewee.
to investment more core-plus, value-add
are thinking aloud about whether they As another global player points out,
should continue with that or go down whoever is in power in Germany or the US,
the risk profile and accept lower yields and whether or not it is a soft or hard Brexit,
to be on the safe side because of all the people still need to eat, still need homes,
uncertainties not just Brexit and Trump still need places to work real assets
but elections in Netherlands, France will be something of a safe haven.
and Germany. They would rather take a
3 percent deal safe, well leased, good
location, low leverage than a 5 percent
core-plus investment with leasing risks.
I dont think the teams I think real estate will continue to be a Efficiency gains
winner and real assets will continue to see or structural change?
or the allocations will investment flows coming in from equities
be mixed any time soon and bonds, said a chief operating officer. Even if investors or fund managers do
the risk and return The typical institutional investor will have not formally merge real estate, infrastructure
85 to 90% in fixed income and equities
profile are perceived and 15% in alternatives, some of which
and agriculture teams, all who contributed
to the report outlined how real estate and
as being different. will be real assets. We think in the next infrastructure in particular were becoming
10 to 15 years that's going to go to a increasingly blurred.
Pension fund investor, Global Emerging 60/40 split. Given how equities markets
Trends in Real Estate 2017 have performed, real estate and real Partly this is a result of the fact that the
assets will be a beneficiary of the definition of what can be constituted
denominator effect but also be a in real estate estate is broadening to
beneficiary of investors looking to include a wide range of alternative
Everyones a winner increase their exposure to that sector. assets, and that having real estate and
infrastructure teams work together can
One area of consensus seems to be that And the difference in characteristics allow investors to access opportunities
infrastructure or agriculture will not muscle between different types of real assets will that otherwise might have passed you by.
in on capital allocated to real estate or also help the sector to grow, particularly
vice versa instead, the allocation to both outside of real estate, they add. Something that will change is that the
will increase at the expense of other asset boundaries between these categories of
classes like bonds or equities. Real estate is the main block, but real estate and infrastructure on some of
investors are looking to diversify their these assets is becoming increasingly
But in general I think allocations to real holdings away from real estate. It is a large blurred, says one global sovereign
assets will increase to perhaps up to market but it's crowded. Real estate has wealth fund investor. And if you do pool
25% of portfolios and we've been a bit been on quite a run recently recently and expertise then you have a chance to
ahead of the curve on that, said the investors are seeing how values are rising. access some of those investments that
head of strategy. But even within that They are asking how values can continue otherwise fall through the cracks of real
25% allocation you need some liquidity to rise and how they can achieve their estate and infrastructure. If you look at
in the portfolio. Real estate has been an returns. Real estate from an investor things like Centre Parcs [the UK holiday
asset class for decades already and has standpoint is liquid and large and is village company bought by Brookfield
a proven track record. more correlated with public markets. from Blackstone in 2015], that was being
And investors are asking, where can looked at by private equity firms that
It is also a much bigger universe we get some uncorrelated returns? were not real estate specialists who
global real estate investment in 2015, Whether it's farmland or infrastructure were seeing it more as a corporate which
was around $1trn5, whereas infrastructure or agriculture, this is less correlated. happened to own real estate. Things like
investment was $349bn, according to caravan parks and car parks also fall into
Preqin, with agriculture and timber small that camp, and even things like hospitals,
again. This hierarchy is expected to remain. and so in those less traditional real estate
sectors there are opportunities.
Putting infrastructure alongside real estate One thing we see is that it is a lot of Putting infrastructure
has made us rethink how we view the farmland and timberland investments are
latter, says one pension fund investor. in places like South America or Eastern alongside real estate
Some infrastructure investments can be Europe, and when you invest in these has made us rethink
for up to 60 years, so it is making us think frontier countries that can mean a lot how we view the latter.
of real estate in terms of a much longer of different people and a lot of different
time frame, deals structured over 20 years. stakeholders are involved. When you It is making us think
It has also made us examine our conviction make a farm or timberland investment it of real estate in terms
levels more. If you are going into an is not just knowing about the megatrends of a much longer time
investment for that length of time, you have or the net operating income, it is knowing
to have a lot greater conviction that you will how to engage stakeholders in the asset frame, deals structure
see outperformance over the life of the deal in the longer term and engaging with the over 20 years.
than if you were just going in for five years. local community.
Investor, Global Emerging Trends
There are also key lessons real estate In terms of where the trend might go, in Real Estate 2017
can learn from other branches of real other natural resources such as water
assets in the vital world of sustainability. could become part of real assets, especially
as climate change continues and makes
Farmland and timber have been under far this vital resource more scarce.
greater scrutiny and pressure given they
are natural resources and there are a lot As for the trend of real assets investment,
of sustainability concerns around them, there is no consensus about how far it will
says one investor. These sectors have go, but significant changes are already
been making great headway in increasing under way, and even if businesses and
transparency and improving sustainability teams dont change structure, mindsets
and I think those lessons are highly have certainly changed.
transferable to real estate.
What does the creation of a real assets There are areas where these things You now have a nice palette of options in
division mean in practice for major money overlap and we can combine expertise, debt, equity, public and private, and you
managers? In one sense, it is simply a for example people who liaise with the can structure portfolios up and down the
way of sales or client-facing staff to offer public sector can do so for both real risk spectrum and be more thoughtful in
a broader range of products. estate and infrastructure, says one your investment approach, says another
pension fund investor. We had been chief investment officer. We look to be
It is mainly the client facing people rather doing housing and social housing in both more thoughtful with our research and
than investment decision makers, says teams, and there was a partial overlap in analytics and attitude to benchmarking
one chief investment officer. Everyone skill set, so it made sense to have one and approach to investment performance.
who is client facing can go out and talk team. How do we extract synergies and We can be flexible according to a clients
about the whole real assets business, extract deal opportunities? I spend my needs, and if they say they want an 8%
and they see us as an adviser rather than time thinking about that part of it. There return with 6% from income we can
someone who is pushing product. It will were ways of doing research that is more built the right portfolio, different sectors,
come up at the first meeting with the CIO, broad and thoughtful and allow us to emerging markets versus developed,
where we are talking about client needs. find more deals. The scale created by advise them on things they might not
combining the businesses also meant that have considered like high yield debt,
But beyond this, it can be a way it was worth having a dedicated credit but also advise them of risks they might
of improving performance. team to really explore the underlying credit not have anticipated, like duration risk.
worthiness of the tenants in both sectors?
6) www.pwc.com/futureinsight
Trend alert
We identified three trends reshaping the real estate market in 2017 and beyond.
Optionality is a buzzword for real estate Across the emerging trends series this year Affordable housing scores highly in the
occupiers and investors. It allows users there continues to be a growing interest sector investment and development
to adjust their space needs in terms in alternative or niche sectors which offer rankings across the 2017 emerging trends
of size, location, and use as-needed. a measure of diversification and stability series while the associated costs and
It gives property owners the ability to of income returns when mainstream real availability are a common concern.
maximise highest value and best use estate looks expensive and vulnerable. As recently highlighted in ULI Europe
based on immediate tenant demand. While the yields may be attractive the asset Residential Council's Vision Statement
The opportunities are real, but the will require more active management on affordable housing, affordable housing
execution is complicated with so many and managers who can cope with the is an issue that is rising rapidly up the city
moving parts. In a more fluid market with operational aspects of real estate. authority agenda impacting quality of life,
ever decreasing lease lengths optionality social inequality and threatening
may no longer be optional. competitiveness nationally and globally.
As one US CEO put it were not paying
Investors have to enough attention to affordable housing,
and I dont mean low-income or
be careful because
The developer/financier government-subsidised. Just regular rents.
there is a propensity No new buildings are providing that kind
that understands
to underestimate of product. Time will tell if thats going to
optionality in their projects come back and haunt us. Not everybody
operational risk but
is the winner. Optionality makes $75,000 to $100,000 a year.
fall in love with yield.
will be of great value over In order to provide affordable products,
the next generation. Participant, Emerging Trends in Real Estate
home sizes are continuing to shrink.
Europe 2017 In Hong Kong, this trend has taken off
Participant, Emerging Trends in Real Estate
in a big way, with at least one major
Europe 2017 developer adopting the matchbox
model as a major plank of its development
strategy, focusing on apartments with
footprints of just over 160 square feet.
This is reflects the changing demands
Box 4-1 Successful real estate investors will need to take on more operational risk from younger (and some senior) occupiers
Successful real estate investors will need to take on more operational risk who are willing to accept less personal
space as long as they have access
to share social facilities such as gyms,
15%
Strongly
46% 23% 15% 1%
Strongly
kitchens, living areas, and even office
space within the same building.
Disagree disagree
agree Neither agree Modern methods of construction can
Agree nor disagree
also be part of the solution to affordable
Source: Emerging Trends in Real Estate Europe 2017 housing as modular construction
becomes the norm and robots join
workers on construction sites.
Live | Residential
Work | Office
In a knowledge-based economy,
I really like to stay in the brain
hub markets like Boston.
Emerging Trends in Real Estate United States
and Canada 2017
Source: Emerging Trends in Real Estate Europe 2017, Emerging Trends in Real Estate Asia Pacific 2017,
Emerging Trends in Real Estate United States and Canada 2017
Strongly
Strongly Disagree disagree
agree Neither agree
Agree nor disagree
PwCs real estate practice assists real estate investment advisers, The Urban Land Institute is a global, member-driven organization
real estate investment trusts, public and private real estate investors, comprising 40,000 real estate and urban development professionals
corporations and real estate management funds in developing real dedicated to advancing the Institutes mission of providing leadership
estate strategies; evaluating acquisitions and dispositions; and in the responsible use of land and creating and sustaining thriving
appraising and valuing real estate. Its global network of dedicated real communities worldwide.
estate professionals enables it to assemble for its clients the most
ULIs interdisciplinary membership represents all aspects of the industry,
qualified and appropriate team of specialists in the areas of capital
including developers, property owners, investors, architects, urban
markets, systems analysis and implementation, research, accounting,
planners, public officials, real estate brokers, appraisers, attorneys,
tax and legal.
engineers, financiers, and academics. Established in 1936, the Institute
has a presence in the Americas, Europe, and Asia Pacific regions, with
members in 80 countries.
Global Real Estate Leadership Team
The extraordinary impact that ULI makes on land use decision making
Craig Hughes is based on its members sharing expertise on a variety of factors
Global Real Estate Leader affecting the built environment, including urbanization, demographic
PwC (UK) and population changes, new economic drivers, technology
advancements, and environmental concerns.
Bart Kruijssen
European, Middle East & Africa Real Estate Leader Peer-to-peer learning is achieved through the knowledge shared by
PwC (Netherlands) members at thousands of convenings each year that reinforce ULIs
position as a global authority on land use and real estate. In 2016 alone,
Byron Carlock
more than 3,200 events were held in 340 cities around the world.
US Real Estate Practice Leader
PwC (US) Drawing on the work of its members, the Institute recognizes and shares
best practices in urban design and development for the benefit of
KK So
communities around the globe.
Asia Pacific Real Estate Tax Leader
PwC (China)
John Fitzgerald
Chief Executive Officer
Urban Land Institute (Asia Pacific)
Kathleen Carey
President and Chief Executive Officer,
ULI Foundation
Anita Kramer
Senior Vice President
ULI Center for Capital Markets
and Real Estate
Interview participants
Adia TH Real Estate
Bill Schwab Rahul Idnani
Allianz Real Estate Helaba
Francois Trausch Jrgen Fenk
APG Asset Management Hines
Patrick Kanters Lars Huber
ATP Real Estate Partners Ivanhoe Cambridge
Allan Mikkelsen Nathalie Palladitcheff
Blackrock Real Estate JLL
Simon Treacy Richard Bloxam
Blackstone L&G
Anthony Myers Bill Hughes
CBRE Global Investors LaSalle
Jeremy Plummer Jon Zehner
CPPIB Prologis
Peter Ballon Chris Caton
Hamid Moghadam
Equity Group Investment
Sam Zell Tishman Speyer
Michael Spies
GIC
Madeline Cosgrave Unibail Rodamco
Jaap Tonckens
Global Logistics Properties
Dr. Seek Ngee Huat
We have drawn together those regional insights to focus on the most relevant investment and development trends
across the globe, the outlook for real estate finance and capital markets, and the long-term influence of megatrends
over the industry.
www.pwc.com/emergingtrends
www.uli.org
Emerging Trends in Real Estate is a registered trademark of PricewaterhouseCoopers LLP (US firm) and is registered in the United States and European Union.
March 2017 by the Urban Land Institute and PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which
is a separate legal entity. Please see www.pwc.com/structure for further details. No part of this publication may be reproduced in any form or by any means, electronic
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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the
information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy
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liability, responsibility, or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication
or for any decision based on it.
Recommended bibliographic listing: PwC and the Urban Land Institute. Emerging Trends in Real Estate 2017. London: PwC and the Urban Land Institute, 2017.
ISBN: 978-0-87420-265-6