Real Estate 2020: Those four global megatrends are currently changing the real estate industry

Which global trends will change the real estate industry in the long term? This question is the subject of the 40 page report “Real Estate 2020 – Building the Future” published by PwC. Even if the trends are not new, their effects are often still underestimated. Especially because the real estate industry has long development cycles – from planning to project implementation – it is important to take a close look at these trends and their effects. In the following, we have highlighted four trends that will change the real estate industry and summarized recommendations that are relevant for a global strategy.

Megatrend #1: Urban expansion creates further megacities

By 2025 there will be 37 “megacities”, that is cities with more than 10 million inhabitants, and 12 of these will be in emerging markets. Especially in the fast-growing countries of Asia, Africa, the Middle East and Latin America, cities will grow rapidly. But urbanization is not just a phenomenon in emerging markets. The cities of the developed western nations will also continue to grow, albeit not quite as fast. Much of the population growth is due to the fact that the “new rich” from emerging markets are looking for real estate in Europe. But not all cities that grow will thrive. While some will boost the economy and become creative centres, other cities will fail.

The prerequisites for urban success are a good infrastructure, cooperation between private developers and the public sector and sufficiently interesting job offers.

Megatrend #2: Demographic change affects demand

Demographic shifts in the coming years will fundamentally affect demand for real estate. By 2050, the world’s population will be 9.3 billion, one third more than in 2000. At the same time, for the first time, there will be more 60-year-olds than 15-year-olds in the world. Between 2010 and 2020, the middle class will have grown by a total of one billion consumers. The young middle class is moving to cities, especially in emerging markets.

Demographic change is creating a need for new and diverse real estate. In concrete terms, this means that real estate developers must become more innovative when it comes to making maximum use of living space. Demand for more specific housing concepts will increase as a result of population-related changes. Urban housing for young professionals, for example, may be smaller, without a kitchen or parking space; the need for retirement homes is increasing; families in some emerging markets may live in guarded communities outside city centres.

Megatrend #3: Growth in emerging markets intensifies competition for assets

Real estate is an integral part of the growth of emerging markets. By 2025, emerging markets are expected to account for 60% of global construction activity, up from 35% in 2005. Asia is expected to be the fastest growing region for construction by 2025, followed by sub-Saharan Africa. Nigeria alone will need nearly 20 million new households compared to 2012.

The growth of emerging markets is creating new real estate players and asset managers, increasing competition in asset management. As emerging markets mature, new regional and local asset managers emerge that have an advantage over Western asset managers: through good contacts with local developers and regional investors, they are better positioned to benefit from the growth of their home region. Some of these new companies are likely to grow into global players and consider acquiring competitors in Europe and the US.

Megatrend #4: Sustainability changes the design of buildings

With a rapidly growing population, we need 50% more energy, 40% more water and 35% more food by 2030. As cities are responsible for 70% of all greenhouse gases, while accounting for only 2% of the total land mass, urbanisation will continue to make it more important that buildings are sustainable. Green office buildings are equipped with renewable energy technologies, include waste reduction concepts and use natural light to improve the economic, social and environmental performance of the property. At the same time, eco-cities like Tianjin in China and Masdar City in Abu Dhabi are striving for zero waste and zero carbon emissions, while Tokyo and Malmö are working on their urban revitalization.

The ever-increasing sustainability requirements present opportunities and challenges. While sustainable buildings have a premium price, retrofitting existing unsustainable assets is expensive. But what happens to the value of real estate if it is not retrofitted? How does this in turn affect the environment? This needs to be observed.

Recommendations for a global strategy

The developments described above are changing the landscape of the real estate industry profoundly and long-term. Based on these trends, PwC’s report derives the following strategic recommendations.

• Think globally: In the future, real estate players will need a higher level of expertise in their chosen fields and locations, as well as more foresight, in order to identify investment trends in different markets at an early stage.

• Understand the underlying economics of cities: In order to be successful as a real estate investor in the course of the urbanization trend, one must first understand why a certain city will be successful.

• Factor technology and sustainability into asset valuation: Both issues are now critical to success and are increasingly demanded by consumers, which is why they should be part of any corporate strategy.

• Collaborate with governments to enable economic and social progress: Close relationships with governments are becoming more important. Developers need to advise governments and be an expert on creative solutions for urban development.

• Decide how and where to compete: Real estate companies should focus on markets they really understand. At the same time, understanding the requirements of local markets and serving the needs of tenants are becoming more important in securing competitive advantage.

• Assess opportunities to reflect a broader range of risks: With the globalization of the real estate industry, the range of risks is increasing. Particularly in emerging markets, geopolitical, legal and intercultural risks are added. Accordingly, a new risk strategy must be developed.