The property sector is facing an existential threat. The high street has been in the headlines, struggling due to the rise of e-commerce. Occupier preferences for more modern, flexible spaces are altering the traditional demand dynamic. Meanwhile, secular trends including the rollout of 5G technology and population ageing are also having an impact on the real estate sector.
Below, five investors discuss how these long-term themes are redefining the property market.
Rise of flexible offices
Peter Hayes, global head of investment research, PGIM Real Estate
The rise of flexible offices is symptomatic of rapid changes occurring in occupier markets across the world. In part, it can be linked to the adoption of new technologies that make remote working easier, alongside shifting preferences of employers and employees. The former are demanding increasingly flexible lease terms and a higher level of service, while the latter are increasingly preferring convenient modern workspaces.
Flexible working is clearly a global trend. In a sample of 20 major office markets, there is now an estimated 40 million square feet dedicated for use by flexible office providers, up four-fold since 2015. However, while growth continues to accelerate, less than 2% of city office stock is occupied by flexible office providers.
One immediate implication is that such usage requires less space per worker than traditional occupier models, so less supply will be needed. For landlords, there are drawbacks compared to traditional occupiers, not least via highly flexible lease terms and unproven business models of operators pushing up covenant risk. In addition, the jury is still out as to how the sector will fare during a slowdown, as demand among small businesses - a key occupier group - is typically among the hardest hit.
A shopping maul?
Gillian Tiltman, portfolio manager of the Neuberger Berman Global Real Estate Securities Fund
‘Amazonification', or the impact of e-commerce on the world, is the number-one industry trend for real estate investors. It touches parts of the sector investors might never imagine. Amazon Web Services, the firm's cloud-computing provider, is one of the world's largest users of data centers. Even offices and residential apartments feel its mass. It is the largest employer in Seattle, where it has its global headquarters, occupying almost one-fifth of the city's office space.
Of course, the biggest impact of Amazonification is being felt in the retail supply chain. Consumers are increasingly demanding same-day and even same-hour delivery of goods. The resulting ‘e-fulfilment' is very real estate-intensive. It utilises a range of assets, from multi-storey warehouses, through regional infill service centres, to local self-service lockers and pick-up locations.
While logistics is the clear real-estate growth opportunity in e-commerce, investors should not neglect the value opportunity. This has arisen due to a somewhat indiscriminate de-rating of retail assets as investors have become more cognisant of the Amazonification trend. The weaker locations in the retail pack will continue to get mauled by e-commerce, but the best locations in the sector, far from being devoured, can benefit from this trend.
The 5G revolution
Humberto Medina, research analyst at Cohen & Steers
One of the more compelling growth stories we see in REIT and global infrastructure asset classes today is how cell towers stand to benefit from the upcoming build out of faster, fifth generation wireless networks. Tower companies, which lease the space on tower structures to tenants - including wireless carriers, government agencies and broadband data providers - could be key beneficiaries of the upcoming wave of 5G investments. Current stock valuations may not fully reflect this opportunity.
Achieving 5G standards will require dramatically denser networks, which implies meaningful incremental demand for cell towers and massive deployments of smaller cell solutions.
Specifically, tower companies might benefit from increased tenancy, higher rents from amendments to existing leases, as well as new opportunities to build both towers and small cell sites. Therefore, we estimate listed US tower companies will grow cash flows.
Thriving UK life sciences
Tom Duncan, senior analyst - investment strategy and risk at Mayfair Capital
Given the UK's ageing population, technological change and rising quality of life expectations, the UK life sciences sector is primed for further growth. The sector is experiencing shifting locational patterns, with demand focused on city locations rather than the out-of-centre campuses occupiers have traditionally favoured. This has three main drivers.
Firstly, life sciences occupiers rely on skilled talent, which increasingly wants to work in modern, accessible, mixed-use locations, such as city centres. Secondly, occupiers are conducting more primary research using technology, which means human workers spend less time in the lab and more in the office. Thirdly, 82% of UK life sciences companies are small and medium-sized enterprises with similar location preferences to start-ups - flexible office space in central locations, where they can cluster with like-minded firms.
The tendency of life sciences occupiers to seek out particular locational drivers means there are leading indicators of where clusters have the potential to emerge and grow. This creates opportunities to identify and access markets likely to benefit positively from these changes and which have low levels of supply. Suitable stock in these locations should experience shorter voids, above average rental growth and resilient capital values.
The ‘omnichannel' solution
Calum Bruce, manager of Ediston Property Investment Trust (EPIC)
Retail warehousing offers investors an attractive way of harnessing the trends transforming the high street. Retailers used to see ‘bricks ‘n' clicks' as the solution. Today, though, the concept has evolved into being ‘omnichannel'. This means not only having both online and bricks-and-mortar stores, but combining online shopping, physical shops, click and collect, home delivery and a location for returns into a seamless shopping experience.
‘Omnichannel' has real advantages for retailers. Research shows most people who pick up an online purchase in-store buy something else too. The same is true when they return goods. An out-of-town retail park offers the best location for combining all the elements that omnichannel requires - the space for storage and display, parking for customer cars and delivery vans and the opportunity to tempt customers with fuller product ranges. Most importantly, retail warehouses are cheap.
We expect this pattern to become more widespread as high-street stalwarts embrace the omnichannel approach. In the past year, we have agreed terms or exchanged deals with around 30 retailers, in a total of 52 retail-park deals.