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Technology And Second-Tier Cities Could Keep Real Estate Fire Roaring

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While the world may be in a late-stage real estate cycle, a new report says investment in technology and municipality risk management can keep positive momentum alive for years to come.

Hong Kong skyline
Hong Kong

Despite much of the real estate community speculating how many innings are left in the current era of high demand and not enough supply, the global real estate market continues to post strong returns amid a generally optimistic economic outlook. A joint PwC-Urban Land Institute report posted the results of interviews with industry leaders around the world, and the findings show an entirely new philosophy on assets is needed at a time when technology is an increasingly vital part of doing business. 

“It’s more of a structural trend that we see fundamentally transforming the industry because it’s not about renting out square meters anymore,” Urban Land Institute Europe Chief Executive Lisette van Doorn said. “It’s much more about providing a service.”

The “Emerging Trends in Real Estate – The Global Outlook for 2018” report signals a lack of product for active investors, with too much capital and not enough assets to go around. The scenario has led to investors getting involved in properties earlier in the development process, particularly in student housing. Investors spent $8B on student housing in 2017, down from the $9.8B seen in 2016 but still three times as much as invested in 2014.

Landlords are also partnering with or investing in startups to get a better hold on technology and operations driven by the younger, innovative companies, like Blackstone’s 2017 deal to buy a majority stake in London-based coworking company The Office Group and Blackstone-owned EQ Office’s license agreement with coworking brand Industrious.

“Traditional office operators see it happening, and, for them, it’s an important way to acquire the expertise and experience necessary to offer that kind of service as well,” van Doorn said. “More players are convinced they need to develop this operational management model.” 

Managing Risk In Second-Tier Markets

Technology And Second-Tier Cities Could Keep Real Estate Fire Roaring
Raleigh, N.C.

Pricing of assets in core markets is a challenge to investors in regions around the world. Some investors in the U.S. and Europe are pivoting to second-tier cities like Raleigh/Durham, Amsterdam and Copenhagen. While these areas may be second-tier compared to gateway markets like New York or Hong Kong, their ability to potentially scale up means they should not be overlooked for real estate opportunities. 

“Secondary does not mean smaller,” van Doorn said. “Investors will always go to the biggest markets, but, at the same time, what they’re looking at are more cities that are trying to create vibrancy, good infrastructure and sustainability. Those cities are good at attracting talent and business and are beginning to punch above their weight.”

The shift to markets like these is similar to investor activity between 2005 and 2007, but the report stresses investors are being much more deliberate and thoughtful in their approach to secondary markets this time around than in previous cycles. These cities have greater potential for staying power in coming years due to ongoing risk management.

There is less overbuilding, and investors are mindful about entering markets noted for economic growth potential and established institutes of government, medicine or higher education along with desired affordability.

“There is a lot of research by investors into what cities they choose,” van Doorn said. “It’s not a coincidence as to what cities they are going to. In the past, it may have been from opportunities that arose. Now, there is thorough research based on a big number of indicators.”