Real Estate Investment: A data revolution?
Data capture and use is rapidly on the rise, increasing transparency and creating both challenges and opportunities. Here, we explore some of the implications for investors.
4 mins to read
Technology is increasingly embedded across real estate, from city design, to construction, architecture and operation. But how is the data that it generates influencing the future of real estate and how is it creating value for investors?
Historically the commercial real estate sector (CRE) has lacked the same level of transparency and data capture as the residential sector. This is changing. Compared to other investment classes, relationships and asset expertise have been a differentiator for investors in the opaque CRE sector. These factors remain important, but skill set requirements will expand to include data capture and analytics. As transparency in the market improves, relationships and personal knowledge is not enough, as barriers to entry reduce. This has already happened in other financial markets. For the agile real estate investor these structural changes will provide an opportunity to enhance value in new ways.
Technology, tenant lease lengths and price performance
In the office sector, while overall co-working is still a small proportion of total space, it is disrupting what tenants want from the wider sector in terms of flexibility and lease lengths. This has implications for relative returns, as traditionally it is longer, secure income that has helped support yield.
In contrast, in the logistics sector, technology is serving to extend average lease lengths. We estimate that fit-out costs of modern warehouses can be up to four times the construction cost of the base building. It is not uncommon for tech fit-outs for some e-commerce companies to run into the millions. These high fixed costs mean that expected lease lengths of the mega distribution centres are extending, providing further scope for yield compression.
The rise in proptech
As investors respond to the ‘lower-for-longer’ environment with technological advancements, they are also widening their portfolio to include proptech. Deloitte found that two thirds of global commercial real estate investors are looking to invest 10% to 30% of their real estate capital in proptech over 2019. According to Real Estate Board of New York (REBNY) and Royal Institute of Chartered Surveyors (RICS), 72% of proptech firms are targeting the commercial real estate sector, providing a rich pool of investment options and showing how CRE investors need to be poised for disruption.
Breakdown of Proptech Investor sector
Source: REBNY, RICS, Knight Frank
Geographical Information Systems (GIS) have long been used to understand and optimise location, while Building Information Modelling (BIM) is optimising the form, build and use of structures.
On the valuation side, some machine-learning (statistical) models can outperform traditional investment valuations by improving forecasts of income and yield. For example Mckinsey found that machine learning can achieve more than 90% accuracy in forecasting apartment rents, but that 60% of forecasting power comes from non-traditional data sources, such as proximity to local cafés or grocery stores.
Sophisticated analysis of text through natural language processing to create sentiment analysis has been shown to enhance cap rate modelling for investors. This method has also been a leading indicator in trading algorithms for some time and can be applied to the relatively inefficient CRE market.
Investors are also using machine learning and non-traditional methods to identify cities that are best poised to take advantage of innovation and urbanisation to drive the wealth and population growth needed for well performing real estate markets.
Value from data and technology
"Investors are getting more sophisticated in their approach to real estate"
In addition to technology and data helping to optimise investment decisions, we expect data to drive value in itself. In the office sector, services are increasingly offered through apps, enabling tracking of use, which helps support customer services, operators and owners to maximise use of space. Data is also generated through this tracking of occupants. If investors are able to retain rights to this data, this will provide value in itself. Just like cross-border investors becoming de facto foreign exchange traders, technology will mean some CRE investors become de facto technology firms.
How will proptech impact global real estate investment and development?
The connectivity premium
Technology is making buildings more valuable. The average household in Sweden has 16.9 devices connected to the internet and it is estimated that there will by nine IoT devices for every human on the planet by 2025. This increasing requirement to always be connected also extends to the workplace and is expected to feature heavily on the list of occupiers’ must-haves going forward. Digital connectivity will play a large role in CRE valuation in the future, with highly rated buildings based on WiredScore connectivity certification, for example, potentially commanding a premium.
While data and technology have almost unlimited scope, there are challenges for the real estate investor who embraces technology. Data security is paramount. The cost and risks around this should not be underestimated, including the reputational risk and cost of potential data breaches. With sophisticated data modelling and data mining come sophisticated tests needed to ensure output is robust. Privacy concerns are also an issue. Regardless of these challenges, data and technology is changing real estate. It is essential for commercial real estate investors to be aware of changes and be agile in their response.