Innovation, disruption and change in the world of real estate investing
The word ‘drone’ has become something of a standing joke with my colleagues, alongside ‘customer expectations’ and ‘storage’ as a sort of Buzzword Bingo for those poor souls who have heard me mention them in almost every meeting since 2015. I was an early adopter of mandating inclusion of drone delivery pads in our larger residential building specifications and had been giving all sorts of ‘Future of Residential’ presentations to real estate conferences from Australia to MIPIM for years so this was to be expected. One of the many areas of change in current UK planning policy is around how to safely accommodate the proliferation of drone and other robotic deliveries and their related infrastructure as our appetite for deliveries shows no sign of abating.
It is unsurprising that the wider real estate industry has remained stubbornly analogue until fairly recently. The pre-eminence of a tried and tested model focussed on ‘bricks and mortar’ assets in core locations delivering reliable IRRs over long-term leases seemed utterly dominant, until it suddenly wasn’t.
Tech has certainly been a key disruptor across every real estate asset class; first the threat of online shopping vs in-store retail, then the advent of working from home and demand for flexible office space challenging the historic fixed office model, AirBnB and short-term lets pushing hotels into a far more competitive mode and, of course, the ultimate curveball of Covid-19 disrupting everything in its path.
In parallel the evolution of Corporate Social Responsibility (CSR) and sustainability policies from an oft-dismissed ‘greenwash’ sideline to established Environmental, Social and Governance (ESG) metrics that are absolutely core to investment allocation have forced multiple waves of change across every business sector. Larry Fink’s annual letters to BlackRock investors have heralded that change, highlighting that “climate risk is investment risk” and that financial performance without “social purpose” was no longer deemed to be good enough.
Space as a service and the crystal ball
Real estate investors, developers and operators are now grappling with the need to be innovators, disruptors and futurists, all the while maintaining successful portfolios and growing stable returns.
As real estate and technology strategist Antony Slumbers notes: “it’s not the case that everything you already know about real estate is no longer important, it’s just no longer sufficient.”
We are now dealing with buildings that are still inherently illiquid assets at a time where flexibility and adaptability are the top priorities and the previously rigid lines between asset classes are increasingly blurry. Ten years ago the ULI/PwC Emerging Trends survey didn’t even count residential as a major asset class, instead listing it under ‘Alternatives’ yet now residential investment is the fastest growth area with a proliferation of new offers from PBSA and BtR to co-living, senior living and a whole range of affordable or shared ownership products. A much-heralded ‘wall of institutional money’ is shifting across from traditional office and retail investors seeking the stability of residential rental returns – before finding that the complexity of dealing with homes comes with vastly greater regulation, differentiated risks and that stabilised portfolios up for sale are few and far between.
Operational businesses used to linear landlord-tenant ownership models are trying to shift to the concept of ‘Space as a Service’ or SpaaS; where asset ownership and physical products becomes subservient to the monetisation of access and services within a physical space. Examples include the move from CDs to music streaming, from fixed office leases to flex office space or fully remote teams, or from side-stepping the fabled ‘housing ladder’ with a punishing mortgage deposit requirement for the adaptability of a Build to Rent tenancy, enabling a lifestyle that offers security of tenure but absolute flexibility with all sorts of services and amenities included.
This expanded range of residential tenure types are themselves market disruptions in the UK but each have distinct viability thresholds, return profiles and require nuances in approach before you even add in the revelation of ‘tenant as customer’ with an expectation of good and ever-improving service.
So RE investor heads are no longer mimicking ostriches in the sand but the crystal ball that fund managers have to look in is murky at best when considering exactly how to futureproof portfolios.
Fun with future proofing
One example I’ve used repeatedly is that “everyone wants to be the iPod, not the mini-disc”. The latter was a technologically perfect piece of kit, still adored by many music aficionados but the tactile design, overwhelming ease of utility and futuristic aura of the iPod led to its dominance being quickly asserted. Compare this to the bold future proofing efforts of one multifamily developer who toured me around an 800 unit scheme on the East Coast, shamefacedly pointing out an unusual ‘candle nook’ recess near the entrance of each apartment. It turned out that they had designed in an iPhone docking station into every single apartment at quite significant cost; which initially proved to be a popular selling point to tech-savvy renters. Yet just three months after the building opened in 2012, Apple suddenly launched their new Lightning port charging cable with the iPhone 5 and subsequent handsets, rendering what had been a market-leading innovation an expensive redundancy across the asset. Ideally we would all like someone else to go first and address all the thorny and expensive problems in a swiftly replicable pilot.
This cautionary tale isn’t to put off bold fund managers from exploring innovations across their portfolios but a reminder that too often we fail to remember that we use the word innovation for too many things. As decades of academic research has shown, innovation isn’t just technology and seldom follows efficiency criteria! AI chatbots, delivery drones and air quality sensors are all brilliant inventions but do not on their own constitute the innovation and disruption of systems, markets and networks that real estate needs. Professor Marc Ventresca, guru of strategy and innovation management theory at the University of Oxford, underlines that “Innovation is about recombining and repurposing (all of those products and ideas) to create value.”
At the moment within PfP Capital we are running some pilots around Electric Vehicle charging having received numerous queries from existing and potential residents prompting interesting team meetings where colleagues discuss the merits of their own hybrid vs. all-electric vehicles. However, discussions with any engineer lead to dire warnings about the lack of capacity to actually support an all-electric revolution across buildings and cars, and others point to the rapidly improving pilots of hydrogen-fuel as the true sustainable future. Would it be better to wait for hydrogen technology to be perfected or might that risk an exodus of residents, or us not meeting our commitments around sustainability and working towards Net Zero Carbon? What other ways could we support sustainable transport in our communities without creating accessibility issues for disabled residents who don’t want pavements blocked by charging cables? There are a multitude of questions we are working on across our residential funds and I for one find it endlessly fascinating, so intend to keep on droning on!
Alexandra Notay (pictured), Placemaking & Investment Director, PfP Capital
Alexandra Notay is Placemaking and Investment Director at PfP Capital, the fund and asset management arm of Places for People Group, overseeing a UK-wide residential strategy. She is an internationally recognised expert on build to rent, placemaking and sustainable urban development, with 16 years’ strategic advisory and investment experience to private sector, government and third sector organisations across four continents. She is also a non-executive director of Essensys plc, Sound Diplomacy, SouthWest Board Member for LandAid and trustee of the SunScreenIT Foundation.