Onwards to 2020: how real estate players can prepare for the challenges and opportunities of the future
A historically unprecedented expansion in urban development looks set to transform the real estate industry globally. While considerable urban renewal has already been underway in several global markets for some years now, the projected numbers for the year 2020 and beyond represent an even greater rate of possible change. Real estate developers, as well as the industry itself, are looking at enormous opportunities across price points and sub-sectors, with both risks and value propositions being redefined. The currently unfolding migration of rural populations to urban centres is the largest ever in human history. With higher growth rates in both the number of people, as well as GDP per capita, this trend will be the largest in scale in emerging economies. However, the growing consensus in adopting technologies that fall under the Smart City umbrella could ensure significant redevelopment activity in developed markets as well.
A recent PwC report titled ‘Real Estate 2020: Building the future’, projects possibilities for higher growth rates, as well as higher risks, over the next few years(1). The report anticipates that total investable real estate will have grown by 55% between 2012 and 2020 and that this rate of expansion will continue over the following decade as well. It goes on to project a total of 37 ‘megacities’ in the world by 2025, up from the current figure of 23, with 12 of those located in emerging markets. The report also anticipates that emerging markets will contribute to 60% of the total global construction activity by that same year.
Meanwhile, GlobalData’s ‘Global Construction Outlook to 2022’ report states that a slowdown in construction output growth in China, to an average of 4.0% between 2018 and 2022, will be offset by a concurrent upswing in construction in India. It expects construction activity in advanced economies to be between ‘stable’ and ‘moderately slower’, during that forecast period. The GlobalData report identifies the Asia-Pacific region – which includes China, Japan and India – as accounting for the largest share of construction activity.
Gemini Property Developers CEO Sunil Gomes believes that real estate and construction will be one of the highest contributing industries to the world economy, over coming decades. In Sunil’s opinion, the emergence of breakthrough technologies, coupled with a global consensus on the need to enact much higher standards in energy efficiency and sustainability, will ensure growth in construction activity worldwide. Sunil recommends that players in the real estate sector be proactive as well as innovative if they are to make the most of a rapidly changing and evolving market.
Technology, urbanisation and sustainability goals will act as primary drivers, in a period of unprecedented construction activity
Over the next few years, innovations in technology, as well as legislations that mandate sustainability goals, are both likely to play a vital role in shaping the construction industry. The resultant risks and opportunities are bound to be highly specific and sizeable.
As per general scientific consensus, even if immediate and substantial efforts were to be made to reorient human societies towards more sustainable practices, the effects of climate change would still become evident over the next few decades. This awareness is fuelling public desire for sustainable living, and also driving a slow shift in perception, which is likely to intensify the political will to enforce compliance to such sustainability standards.
At the same time, rising purchasing power in emerging economies will sharply intensify competition for resources. In many such emerging economies, government intervention and involvement will also play an active part in driving and managing the development of urban real estate and infrastructure. Adhering to regulations and anticipating public policy will, therefore, play a crucial role in operating profitable real estate businesses. Many of the markets that present the most significant opportunity for expansion and profit will also require closer partnerships with governments.
Emerging technologies will also continue to act as significant disruptors to legacy operational and financial models in real estate. Established practices are likely to be constantly redefined over the next few years and developers will need to be innovative in design and construction. Embedding IoT and AI-based smart technologies, greater incorporation of prefab elements and 3D manufacturing, as well as actively seeking to use space more efficiently, will all be crucial strategies to adopt.
Six predictions for 2020 and beyond
The previously mentioned PwC report, titled ‘Real Estate 2020: Building the future’, can be distilled to six main points that are as follows:
- Total investable real estate will substantially expand across the globe, adding 55% in size in comparison to 2012 figures,by 2020. The main driver will be the rise in population and GPD in emerging economies.
- A wider range of risk and return opportunities will arise, due to rapid global urbanisation. Opportunities in developed economies are likely to be low in both risk and yield while emerging economies represent higher possible yield at proportionally higher risk.
- Innovation in technology and sustainability goals will determine value. Both existing and future buildings will need to conform to more exacting sustainability benchmarks, while technology will render certain types of real estate obsolete.
- Partnering with governments will become essential, to mitigate risk in a more regulated business environment, for the real estate industry. This will be especially true of emerging economies, where governments will drive infrastructure expansion.
- Rising purchasing power in emerging economies will intensify competition for prime assets. The investment community will have to leverage a broad range of investments or specialise in high return sub-sectors, to perform competitively.
- New risks will emerge in a fast-changing business ecosystem. Climate change, accelerating behavioural change and political risks will influence the viability of real estate investments. Industry players will need to be mindful of these factors and prepare accordingly.
Responsive and Proactive operational models will be the key to success in the real estate sector
In Sunil’s opinion, being well versed in the decisive influence that all these factors can play, will be a key aspect of operating a successful real estate related business over the next few decades. Despite the need to continually seek competitive advantages to remain relevant, in Sunil’s opinion, the sector should concentrate on the upside of the sheer scale of the emerging opportunity. Using the innovative operational and financial practices adopted by the Dubai development community in recent years as an example, Sunil points out that the industry is inherently capable of responding to the influence of change. Sunil believes that the global nature of the opportunities will present astute and able businesses with the opportunity to expand their operations and leverage the expertise they gain in a particular market, at multiple locations. The global emergence of investment mechanisms, construction practices and related tertiary ecosystems across every aspect of real estate operations, as well as the rapidly expanding demographic of buyers and investors, seems to bear out this qualified and confident optimism.