One of the reasons why successful businesses fail is that they focus on the marketplace of today rather than plan for the future. It is important to look forward with a view to placing better strategic bets today.
It is impossible to make firm predictions, but it is safe to say that certain mega trends will have a major impact on the real estate industry, affecting developers, investors, landlords and tenants.
In the past six months, JLL has been looking through the lens of sustainability to explore the future of the global property sector, identifying the economic, environmental and social mega trends it believes will affect the industry between now and 2030. Four, in particular, have the potential to drive the success or failure of a UK-based real estate or investment business.
Low-carbon economy
One of the first mega trends that will affect UK real estate investment is decarbonisation and the clean technology revolution that could make it feasible. Back in 2008, the UK committed to reduce greenhouse gas emissions by 80% by 2050, and identified property as the most politically expedient, cost-effective sector to get us there. Seven years later, we are already seeing major signs of change, such as the passing into law of minimum energy performance certificate regulations on the final day of Parliament.
We are also seeing a fossil fuel divestment movement among long-term investors, with big names such as the Rockefeller brothers and Harvard University leading the charge. Driving this movement are mounting concerns over the potential for “stranded” assets or the over-valuation of oil, coal and gas reserves, which may need to be left in the ground to meet the decarbonisation challenge.
Reducing energy consumption provides financial benefits from efficient operations and more stable service charge costs, and investments in rooftop solar by the likes of Ikea, Sainsbury’s and SEGRO can provide an additional income stream. But more fundamentally, in the future we may see global capital seeking “carbon-light” investments, with sustainable real estate becoming a safe haven.
Ageing demographics
By 2030, there will be 50% more people over the age of 65 in the UK compared with 2010. This will create the most multi-generational workforce in history. With this will come new workplace challenges, including embracing the skills of an ageing workforce and adapting workplace design to make it more accessible. There will also be an increasing commercial opportunity for the development and management of retirement complexes, assisted-living homes and healthcare facilities.
But the health imperative will affect not only the older generations, as more people start to recognise the link between their wellbeing and the buildings they inhabit. Offices will be the first asset class where landlords feel the pressure, as tenants wake up to the productivity and retention benefits of greener, quieter and better-ventilated workplaces. However, developers of all sorts of buildings will increasingly benefit from taking a health-centric approach to their design and operation.
Urbanisation
By 2030, about 60% of the world’s population will live in cities, and this mega trend could present the greatest investment opportunity of all. Strong population growth and densification will undeniably put big pressure on infrastructure, the environment and the social fabric of cities, which will drive massive public and private investment into high-speed, low-carbon transit systems, such as Crossrail 2, HS2 and Transnorth.
Real estate opportunities for multimodal logistics hubs through to commuter villages will abound as these infrastructure projects come on line.
Urbanisation will also drive up demand – and rents – for central office, retail and residential space. Residential affordability in city centres will be key, unlocking further private rented sector opportunities.
Affordability will also drive working professionals further out. Commercial solutions may include the development of a new group of satellite towns around major UK cities, generating significant opportunities for residential developers.
Transparency and social value creation
We are facing a future where inclusive capitalism is being lauded by the governor of the Bank of England and clampdowns on business tax avoidance are electoral gold dust, but what does this mean for real estate? It is likely to mean that listed real estate companies and their major corporate tenants will need to define their social purpose clearly and with integrity. This will be increasingly important to the millennial workforce these companies are seeking to attract and retain.
But this mega trend may also flow down to the building level, especially for large retail assets that rely heavily on community relationships and their brand to generate strong consumer footfall. Across all asset classes, JLL is already seeing a burgeoning interest in evaluating the socio-economic impact of buildings over the long term. Positive stories about public (or private) realm improvements, job creation and local economic contributions are beginning to be told, and negative social impacts benchmarked.
This is nascent, but signals that those who understand their social impact will, in turn, produce a better, more resilient real estate product. And those who have a trustworthy story to tell about the social contribution of their investments will find themselves better placed to weather future economic or reputational storms.
Looking forward
This is only a snapshot of some of the mega trends that will affect property over the next 15 years, with technology and data, climate change and resource constraints also likely to have a strong influence.
But how can companies use such future thinking in a meaningful way to future-proof their business model? Some major real estate players are taking advantage of the boom times to look long-term and consider the resilience of their core real estate product. Others are considering more fundamental shifts in capital allocations, seeking out structural changes that may make them more immune to the next real estate downturn.
Finally, there are new funds on the horizon that will seek to generate a commercial return from solving these environmental and social challenges.
Sophie Walker is director of strategic sustainability services at JLL UK
