Looking 10 Years Into Real Estate’s Future
Commercial real estate in 2025 will be an asset class transformed by technological, political and economic changes. However, global capital flows could have the greatest impact of all, according to a U.K.-based real estate academic. How do you maximize returns for a 2025 exit? As the global economy moves into an era of lower growth and, potentially, lower returns, real estate executives in the U.K. are challenging their peers to question what the commercial real estate industry could look like in 2025 and how investors should prepare their portfolios for such changes. For some, those changes embody 100-square-foot office spaces and retailing offering customizable, digital shopping, with same-day delivery. For others, the changes mean a global economy sharing its cars, apartments, clothes, and maybe even pets, or unprecedented cap rate expansion challenging even the best underwriting standards. For Andrew Baum, executive chairman of Property Funds Research, chairman of CBRE Global Investment Partners and one of the leading figures behind Oxford University’s first real estate conference in March, the real estate investment world of 2025 is about globalized capital flows. Baum asks how investors can decide what to do now to maximize their returns for a 2025 exit. “The implication is that the world of 2025 will be quite different from today,” he says, adding that technology, and political, and economic issues will all have significant impacts on commercial real estate globally. But, he says, “One of the new challenges facing investors today is [the scale of] cross-border capital flows and the challenge in 2025 will be how the real estate industry turns its focus from just 30 countries into 230 countries.” Baum says cross-border capital flows are nothing new for real estate. Indeed, in the past 12 months, more than $234B of capital flowed into overseas markets—an increase of 30 percent over the prior year and an almost 240 percent increase over 2010 levels, according to data provider Real Capital Analytics (RCA). However, as investors start to look for enhanced yield, many are once again turning their attention to emerging markets, and some frontier markets. “We know that in 2025, the commercial real estate industry will no doubt involve more countries and more property types, but it’s not just about waves of capital going into secondary markets in France, or the regions of the U.K.,” Baum says. “It’s also about opening up entire new countries, such as Indonesia, Nigeria, and others, to investment.” In the past year, cross-border capital flows continued moving away from some of the more established emerging markets, including China and Poland, to markets low on investors’ radar, such as India, Taiwan and Puerto Rico, the latter of which saw property transactions double in the three months to the end of September according to RCA. “The big challenge for the industry is getting into truly new markets,” Baum says. “It’s about how we overcome the currency risks of those markets, how we overcome joint-venture-partner challenges, how we build confidence and infrastructure and how we get capital to countries and markets that need it, while still benefiting investors. We need to take a holistic view of real estate to address those challenges.” On helping launch the Oxford Real Estate Conference, being held on March 18 at the Saïd Business School at the University of Oxford, Baum says it’s critical that real estate schools promote such thinking because “the world of real estate needs better- educated people to reimagine this very important resource”.