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Emerging Trends in Real Estate the Global Outlook 2016

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    Emerging Trendsin Real Estate ®

    The global outlook for 2016

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    Emerging Trends in Real Estate ® The global outlook for 2016

    IntroductionThe Emerging Trends in Real Estate ® series is one of the keyindicators of investor sentiment, and based on surveys andinterviews with the most senior property professionals inthe United States and Canada, Europe and Asia Pacic.

    As in previous years, we have drawntogether these regional insights for theglobal report, highlighting the investmentand development trends most likely toshape their respective markets in theyear ahead.

    With such a rich resource of expertiseand experience at hand, the researchshines a light on new ideas and thinkingthat will have have a longer term impacton the real estate sector.

    “There is no amountof thinking we can dothat will make us assmart as listening toour customers.”Hamid MoghadamChairman and CEO, Prologis

    In the global outlook for 2016 we examinethe changing nature and target of capitalows from a country-level approach toinvestment in favour of a highly selectivestrategy for cities, and not just the usualgateways but the more dynamic secondtier cities.

    We also analyse the disruptivecombination of rapid urbanisation,new technology and social change,which is fostering a more consumer-focused property industry, a transitiontowards a more data-savvy investorand a changing perception of real estateas a critical part of social infrastructure.

    The report includes new interviews withindustry leaders from some of the mostrespected organisations around theworld, including APG, KKR, Prologis,Starr International and Unibail-Rodamco.

    With the built environment and real estate

    industry being subject to huge changeright now, we hope you nd this reportilluminating and thought-provoking.

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    1Emerging Trends in Real Estate ® The global outlook for 2016

    Contents2 The outlook for the US

    6 The outlook for Europe

    10 The outlook for Asia Pacic15 Leading logistics

    18 The urban opportunity24 City view

    26 Connected cities35 The power of diversity

    35 Sponsoring organisations

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    2 Emerging Trends in Real Estate ® The global outlook for 2016

    It is clear that investors are looking beyondthe traditional “big six” US marketsand favouring cities with better growthopportunities (see page 18) but also,as one broker with a large national ofcepractice points out: “It is an extremelycompetitive market for placing capital.”

    That competition is driving moneymore and more into a discovery process– a process many describe using the term“granularity”. Drilling down into marketsand submarkets, working with smallerassets within the larger markets,specialised property types—these areall examples of the search to identifythriving niche opportunities.

    There are also signs of a shift towardsshorter-term horizons in the institutionalspace, a telling indication that activemanagement is a growing trend followingthe Federal Reserve’s increase in interestrates in December 2015 and someconcerns over the US economy since then.

    “We are trying not to get into long-terminvestments. Instead, we are looking forinvestments where the capital returnssooner. The average life of investmentsshould be three to ve years,” says onepension manager interviewee forEmerging Trends in Real Estate ® United States and Canada, 2016 .

    The outlook for the USThe US real estate industry’s traditional focus on big citiesand large employers is shifting with small businesses emergingas the growth engine for the economy, and as secondary marketsmove into view.

    Another interviewee warns: “In anincreasingly volatile environment, whetherit’s weather or it’s political instability andterrorism, pooling and sharing of risk isan important way to deal with uncertainty.That costs more. It’s going to be an addedcost of doing business, but I think it’smore important than ever.”

    With such external factors inuencinginvestor sentiment, this could be a pivotalyear for US real estate. The conceptof “path dependence” suggests thatthe movement to secondary marketstogether with a greater attention tovalue-add assets, and a still reasonableexpectation of continuing US economicexpansion, advantages real estate overother investments in the US and abroad.

    Here is where the size, depth, anddiversity of US real estate markets are ofimportance. The varying equity sourceshave distinct capacities, motivations,return requirements, and appetite for risk.

    It is not as though there is a single oceanof equity capital to be deployed,but instead there are streams of capitalowing to the markets.

    The recovery of transaction volumes andpricing during 2015 to pre–nancial crisislevels, especially in the gateway markets,is not prima facie evidence of a bubble.Much is different from a decade ago,not least the reduction in the amount ofleverage in the market, and both the realestate and banking industries have beenassiduous in limiting that risk.

    Nevertheless, it is difcult to be entirelysunny when 64 percent of the surveyrespondents describe the marketas oversupplied with equity capital,and 34 percent believe that equityunderwriting standards will becomeless rigorous in 2016.

    As investors seek to balance capital

    conservation with capital growth,it will be harder to characterise investorsas exclusively core, value-add, oropportunistic. Rather, the providers andthe intermediaries of real estate capitalare looking at the entire spectrum,moving deeper into the geography andthe property-type mix available in the US.

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    3Emerging Trends in Real Estate ® The global outlook for 2016

    Figure 1 Prospects by Investment Category/Strategy, 2016For 2016 and the remainder of this decade,it seems safe to say that the amassingof capital oriented to US real estate willcontinue, but at a lesser pace than it hasbeen from 2012 to 2015.

    This is an extract from Emerging Trends in Real Estate ® United States andCanada, 2016 . The full report canbe downloaded from:www.pwc.com/emergingtrends

    Development

    Distresseddebt

    Opportunisticinvestments

    Core-plusinvestments

    Coreinvestments

    Distressedproperties

    Abysmal Fair Excellent

    Value-addinvestments

    Note: Based on U.S. respondents onlySource: Emerging Trends United States an d Canada survey 2016

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    4 Emerging Trends in Real Estate ® The global outlook for 2016

    The view from the US – KKR

    How are the prospects for KKR’s real estate business over the coming year?

    “The market dislocations that we are all experiencing across all risk assets in thecurrent environment are actually quite constructive for our ability to nd interestingreal estate investments in 2016. Five months ago I would have complained abouthow expensive the US markets were, generally speaking, and that it was tough tond interesting ways to invest capital. We only invested in a couple of US deals in2015, largely due to continued liquidity and capital ows coming into real estate.But now what I think we’re seeing is that the real estate markets are very correlatedto what’s happening with other risk assets, and that is resulting in less liquidity,and therefore less access to debt and equity. Given global uncertainty and volatility,the cost of credit is increasing in this environment and thus the equity risk premiumin the market has also gone up. This backdrop is actually quite good for investorslike KKR who have capital and who have lots of different sourcing channels toleverage off to create deal ow.”

    How do you assess real estate against other asset classes?

    “Credit spreads have widened in the corporate space as well as in the CMBS market.The cost of risk is higher and that has to translate into a re-pricing of equity risk in

    the real estate markets. I don’t believe we can be sitting here in a world wherecorporate bond spreads and real estate credit spreads have blown out signicantlyacross the risk spectrum and we can still have real estate trading at 4 percent caprates. The argument that real estate is a safe, defensive trade might hold someintegrity in the market we were in a year ago where relative to where risk assetswere pricing, real estate looked like a reasonably good place to be. But now thatwe’ve seen other asset classes re-price their risk, in my view, this should translateinto repricing in the real estate space.”

    How do you see that repricing going in KKR’s key markets this year?

    “Up until 90 days ago, robust global capital ows and a thirst for current yieldingassets resulted in yield compression – driving values relative to fundamentals in manyinstances. I’d put 70 percent of the weight of that pricing on excess liquidity in theglobal market place and capital ows and money exposure to US assets, and theother 30 percent on fundamental property level performance. Today, the market isstarting to re-think both of those components of pricing. There’s less capital owinginto the space and capital is being more selective. There have been lots of well-publicised deals that broke down in the Fall, and, for example, Chinese buyers havewalked away from assets in London. You cannot ignore the data or the anecdotesthat suggest these international capital ows are much more tempered in today’senvironment. I think the world is also questioning whether or not there are real growthprospects in the US market. The reason the US 10-year Treasury is trading at 1.70percent is because the market is questioning whether or not there’s really going tobe sustainable growth in the US economy. And if we’re living in an economy where

    there’s little or no growth, generally speaking we’re going to see little or no growthin rents. That will result in real estate values being tempered as buyers will not payfor growth upfront. I am much more excited about investing in this environment thanI was six months ago, for all of these reasons.”

    Ralph Rosenberg,KKRRalph Rosenberg is Head ofReal Estate at KKR, the globalinvestment rm that managesinvestments across multipleasset classes, including privateequity, energy, infrastructure,credit strategies and hedgefunds. The rm has $2 billion ofreal estate under management.

    I am much more

    excited aboutinvesting in thisenvironment than Iwas six months ago.

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    5Emerging Trends in Real Estate ® The global outlook for 2016

    Which global markets and real estate sectors look the most attractive to KKR?

    “We are most focused on buying into assets or capital structures where the cash-owis in place and we can re-invest some of that cash-ow into the asset to createan accretive return on investment. Typically, these will be deals where there has beena lack of active management or where the asset is not strategic to the owner andthey’re looking to liquidate. And we do feel that we’re closer to the end of the UScycle than the beginning so we’re trying to invest in assets where the road to stabilisationand creating a more core-type prole is short-dated – 18 to 24 months.

    “Historically we’ve been players in US cities ranked from ve to 20 because we’ve notbeen able to nd interesting deals in the gateway cities. I suspect that over the nextyear you will see us invest in some of those gateway markets because capital owsare not as voracious as they were six months ago and the pricing of assets is backingup. That doesn’t mean we’re going to buy core or core-plus assets; that’s not ourbusiness. But in terms of investing in value-add assets – that we’ve been priced outof in the past in those gateway cities – those could be opportunities for us now.”

    KKR is already in healthcare in the US and hotels in the UK; is the groupplanning to invest more in alternatives given current market conditions?

    “In today’s environment you’re going to see alternative asset classes of real estate thatare defensive against a cycle change. I think those alternatives – self-storage, studenthousing, telecoms-type assets – will hold their value. Other alternative real estatesectors – healthcare and hospitality – are more cyclical in nature or are in markets wherethere’s been oversupply, and where, by denition, the public companies that own thesetypes of assets have repriced dramatically. Those actually might be pretty interestingplaces to spend some time because values have dropped signicantly. We look atany sectors in the market place that have repriced signicantly over the last year.”

    Economic uncertainty has created new opportunities for KKR but is thereanything about the current climate that is a cause for greater concern?

    “You have to be intellectually honest about what risk exists in the global macroenvironment and make judgments as to the probability of those risks causing global

    deation in the intermediate to long-term or cause recessionary pressures in maturemarkets like the US or Europe. That’s why assets and risks are pricing where theyare because there is so much uncertainty in the world.

    “On top of the global macro issues you can make it even more complicated by talkingabout migration into Europe, the risk of the UK leaving the European Union or politicalrisk in Spain. There are lots of risks in the world and the major question is: are wegetting paid fairly to invest capital in this market knowing all these risks exist but alsoknowing that we have a bias that we aren’t going to be in a global recession andwe’re not going to be in a deationary environment in the US or western Europe?That’s just our house view. We’re being selective, careful and intellectually honestbut I think we are in risk-taking mode in the environment we’re in today.

    “There is denitely more caution because the world is riskier. But because the world isriskier opportunities have repriced and in my view will continue to reprice and make ita more interesting environment to invest capital today versus six months ago.”

    In terms of investingin value-add assets– that we’ve beenpriced out of in thepast in those gatewaycities – those couldbe opportunities forus now.

    The view from the US

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    6 Emerging Trends in Real Estate ® The global outlook for 2016

    The sheer weight of capital bearing downon European real estate has been a keyinuence on sentiment, once againboosting business for many of thosecanvassed for this year’s report. As manyas 87 percent of them believe that globalcapital ows will continue to inuencetheir investment strategy over the nextve years.

    Survey respondents from the recoveringeconomies of southern Europe are themost optimistic about business prospectsfor 2016. By contrast, there is widespreadacknowledgement that markets innorthern Europe, particularly the UK, aremuch further advanced in the propertycycle, which has led to some caution inthe outlook for the coming year.

    There also remains a disconnect betweencapital ows and fragile occupier demandin many of Europe’s main markets.Though 39 percent of survey respondents

    expect the European economy to improve,there is a strong and increasingundercurrent of concern across Europethat geo-political issues, politicaluncertainty and economic declineelsewhere, especially China, couldescalate and impact on real estate.

    The outlook for EuropeEurope’s real estate industry remains bullish about its businessprospects this year, and though survey respondents to EmergingTrends in Real Estate Europe 2016 are less condent thana year ago, the belief in the region as a safe haven for globalcapital persists.

    Last year’s worries over the possiblebreak-up of the Eurozone have beenreplaced by the possibility of the UK’sexit from the European Union. And thewider consumer benets of a prolongedslump in oil prices are off-set by anexpected withdrawal of capital bysome oil-producing states strugglingwith budget decits. The recent terroristattacks in Paris and the continuingmass migration of people into Europeloom large in the minds of manyinterviewees and survey respondents.

    Despite such event risk uncertainty,one important reason for the overallpositive view of European markets is thatagainst a backdrop of low interest ratesthe difference between real estate andbond yields remains compelling to manypension funds, sovereign wealth fundsand private equity investors. Cross-bordercapital ows are expected to increase,albeit at a more measured rate than

    2015. Some 59 percent of respondentsexpect an increase or signicant increasein capital from the Americas, against 65percent last year, while two thirds believethere will be an increase in Asian capital.

    According to many survey respondentsand interviewees, one of the mostimportant consequences of the increasedliquidity has been and will continue tobe a shortage of assets. Over 40 percentof respondents expect the availabilityof prime assets to get worse, and thereare widespread concerns that anincrease in prices will continue to outstripthe rise in rents. This is particularly trueof London, where there is growingsentiment that values have peaked.

    Across continental Europe, pricesare expected to continue upwards.

    With high prices for standing investments,it is evident that a signicant number ofthose canvassed by Emerging TrendsEurope are condent enough to opt for

    development, not in a rash burst ofspeculation but as a measured andpragmatic way of securing returns.Though real estate debt is plentiful inmost European markets, there is no signof lenders loosening their criteria andre-introducing undue risk into the system,especially with development nance.

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    7Emerging Trends in Real Estate ® The global outlook for 2016

    Figure 2 Inuence on investment strategy over next 3-5 yearsWhen prime property looks expensive,relatively high yielding alternative assetclasses also start to look attractive andEuropean real estate is at the tipping point.Healthcare, hotels, student accommodationand data centres are all expected tooutperform core property. As many as41 percent of survey respondents areconsidering investing in alternative sectorscompared with 28 percent last year.This is not simply a chase for yield butan acknowledgement that many of thesesectors will benet from urbanisationand long-term demographic trends.

    This is an extract from Emerging Trends in Real Estate ® Europe, 2016 . The fullreport can be downloaded from:www.pwc.com/etreeurope

    Source: Emerging Trends Europe survey 2016

    40 44 511

    Divergence of economic performance across regions/cities

    %

    51 36 58

    Global capital ows

    %

    40 41 415

    Geopolitical risk

    %

    27 35 631

    Technological transformation

    %

    6 24 2941

    Climate change/resource scarcity

    %

    26 41 527

    Demographic changes

    %

    Signicantly Moderately A little Not at all

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    8 Emerging Trends in Real Estate ® The global outlook for 2016

    The view from Europe – APG

    As a global real estate investor, what is the outlook for APG’s business over thecoming year?

    “If you look at the listed real estate markets, 2016 has not started very well – we’veseen strong negative returns. But with direct real estate markets, 2016 globally doesprovide a stable background. Of course certain countries – Brazil and China – are ina very difcult position. But all in all, the fundamentals in most developed markets arestill strong, and more favourable than the previous cycle. And importantly, the amountof leverage on the books of property companies and funds is reasonable, with thesmarter investors’ portfolios pretty much at 30 to 40 percent LTVs, so that providesmore sustainable investment returns going forward.”

    What is driving performance in your chosen markets – is occupier demandfeeding through to rental growth or is weight of capital and yield compressionstill fundamental?

    “We think 2016 will be a turning point, and our key focus is how do we invest in assetsthat continue to provide us with cash ow growth? There will be markets, like the USand UK, where yield expansion is likely although in continental European markets youmight see some further yield compression going forward.”

    Which real estate sectors look the most attractive to APG – either prompting youto increase investment or enter new markets – and why?

    “We launched an investment in 2014 with e-Shang – they both own and developlogistic assets in China – and last year we expanded that into South Korea with muchthe same theme: there is a lack of modern-built logistic warehouses capitalising one-commerce and further rationalisation of the delivery of goods and growing domesticconsumption. We are investing not just in the development of these assets but thecompany, e-Shang, itself, and that is consistent with how we have invested since2009 after the global nancial crisis hit us all. We are interested in investing not just inthe properties but also the related operating companies that create the value for thoseproperties, and often create a brand value.

    “We continue to be very active in expanding our exposure to residential. We startedinvesting in the UK in 2011-12 but we have also invested in a company in Finland,focusing on the mid-income, affordable rental housing, where historically we havealways had a large exposure in the Netherlands. We have built a lot of exposure bycommitting to this strategy in the US. And for Asia, we’d be keen to build [investment]platforms there although many markets still do not have an institutional private rentedsector like in Germany, the Netherlands and the US. So in line with what we did in theUK where we have acquired portfolios and initiate those platforms together with strongoperating companies, that’s something we anticipate doing in other jurisdictions as well– Australia might be an interesting example.”

    Patrick Kanters, APGPatrick Kanters is ManagingDirector Real Estate &Infrastructure at APG AssetManagement, one of theNetherlands’ leading institutionalinvestors, with €37.5 billion ofreal estate and €7.5 billion ofinfrastructure investment undermanagement across the world.

    We are interested ininvesting not just inthe properties but alsothe related operatingcompanies that createthe value for thoseproperties, and often

    create a brand value.

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    9Emerging Trends in Real Estate ® The global outlook for 2016

    Which sectors are the least attractive to APG?

    “We’ve never been a large-scale investor in ofces in Europe. We are convinced thatofces are very much a timing play, and in the long run it’s difcult to make a goodreturn unless you are able to somehow time the property cycle. We are an investor inofces across all three main regions but continue to structure these vehicles in a waywhere we can inuence the exit at a certain point in time.”

    One big theme in Emerging Trends Europe is the growing popularity of alternativereal estate asset classes. How do you assess the investor-demand and the

    prospects for alternatives generally?“For most market participants, they look for higher yielding product and that mighttake them beyond the traditional asset classes. At APG, we think alternativeinvestments can capitalise on trends like tourism and urbanisation. That’s why wehave committed to investment in quite a few student housing funds and companiesin the UK, continental Europe and Australia. It’s related to housing dynamics but iscalled an alternative investment. One sector that’s not on the radar of many investorsis our exposure to outlet centres through Value Retail, McArthur Glen and Neinver.Of our total retail exposure in Europe, over 20 percent now is composed of outletcentres. Providing a unique shopping destination, they are very dominant in theircatchment area and able to attract substantial tourism ows within Europe. It is asub-sector of retail but you can also call it alternative. I think people need to take a

    different view of real estate and how they can continue to drive cash-ow growth,and that involves taking a closer look at the most important trends that are here tostay. That’s why I think outlet centres will become a key sector complementing retailexposure and why student housing should no longer be called alternative.”

    The slowdown in China’s economy, falling commodity prices and continuinggeo-political problems have been reected in volatile stock markets aroundthe world this year. How are such issues inuencing APG’s approach to realestate investment?

    “All of these events clearly show how inter-related all the different countries andregions are. It is extremely important that any portfolio is truly, globally diversiedeven though regions are more and more correlated with each other. One thing thatis related to all these issues is ongoing currency volatility, and there has been a lotof currency volatility due to quantitative easing, commodity price developments andgeo-political issues. In our case, we cannot ignore the valuation of other non-eurocurrencies. Even though we have a globally diversied portfolio, the currency entrypoint has become more important.”

    Even though we havea globally diversiedportfolio, the currencyentry point has become

    more important.

    The view from Europe

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    10 Emerging Trends in Real Estate ® The global outlook for 2016

    While that strategy for such assets hasproved protable, the outlook for morerecent purchases seems less certain.Regional economies are generally weak,exports are down, and currencies aredepreciating. On top of that, today’sultra-compressed yields have takenprices to rareed levels, suggesting wemay be approaching a cyclical peak.

    Investors are still seeking acquisitionsalthough as one interviewee for EmergingTrends in Real Estate ® Asia Pacic, 2016 points out: “It’s a difcult environmentin which to deploy capital. There’s nolow-hanging fruit. There are no particularlyobvious trades.”

    The growing preference among investorsfor core assets has been a consistenttheme in Asian real estate for the lastseveral years, with predictableconsequences. As one investor says,“The challenge on the core side is thatthere are more people interested, but

    there’s not a lot of stock.” This competitionfor deals among so many well-capitalisedplayers is one of the major factors addingto ongoing cap-rate compression.

    The outlook for Asia Pacic As the bull market in Asian real estate enters its seventh year,both pricing and yields continue to tighten across most markets,creating a feel-good factor for many fund managers as they lookto sell assets purchased in the wake of the global nancial crisis.

    One reason behind the enduring demandfor core is Asia’s changing mix of investors.With real estate in the West offeringarguably better risk-adjusted returns,the ow of private equity to the regionis probably not as strong as it might be.Institutional and sovereign capital, however,continues to pour in from a variety ofsources, creating disproportionately highdemand for core buildings. Much of thisnewly arrived capital hails from theMiddle East, including Qatar and Abu Dhabi,with more coming from Europe, inparticular Norway and the Netherlands.

    Demand for defensive assets has also seensuch investors crowding into gatewaycities because, as one fund manager putsit: “As soon as you start going off piste intoexotic sectors or peripheral markets, you’reasking for trouble. From an evidenceperspective, if you look back at all of ourdeals, even if you have to overpay for anasset in the middle of Shanghai, it’s betterthan trying to be clever and get something

    cheap in Nantong.”

    The emergence of so many institutions in Asian markets has changed the investingdynamic in other ways. Investments tendto be longer-term – in the case ofinstitutional buyers, 10 to 20 years.

    And deals are getting bigger, not leastbecause the amount of new capital incirculation has outstripped the stock ofassets available to buy. As a result, “a lotof the big investors are now very focusedon platform or partnership-styleinvesting”, invariably favouring high-valuedeals involving a big local developer.

    Equally important, there continue to belarge increases in allocations of capitalcoming from Asian sovereign wealthfunds – especially China – as well asfrom institutional sources, such asregionally based pension funds andinsurance companies.

    To an extent, this simply reectsincreasing amounts of capital piling upon the sidelines of newly enriched Asianeconomies. Beyond that, however, it alsoreects a changing regulatory environmentwhere authorities recognise that defensiveinvestments in local bond markets orother local assets are not providing goodenough returns, and may also be activelydistorting local markets. This has been theinspiration for economies such as South

    Korea and Taiwan to allow or forcepension funds and/or local insurancecompanies to begin investing abroad.

    Indeed, the other big story in terms ofregional movement of capital has beenthe ongoing migration of money from

    Asian markets into real estate assetselsewhere in the world, as bothinstitutions and private investors seekmore diversication and higher prots.

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    11Emerging Trends in Real Estate ® The global outlook for 2016

    20152014

    2013

    2016

    Distressedproperties

    Opportunisticinvestments

    Core investments

    Development

    Value-addedinvestments

    Core-plusinvestments

    Distressed debt

    1 Abysmal

    2Poor

    3Fair

    4Good

    5Excellent

    3.43

    3.43

    3.15

    3.28

    3.193.58

    3.18

    3.27

    3.13

    3.40

    3.13

    3.09

    3.13

    3.22

    3.09

    3.19

    2.99

    3.43

    3.11

    3.18

    2.53

    2.93

    2.84

    2.99

    1.79

    2.79

    2.80

    2.91

    Figure 3 Prospects by Investment Category/Strategy for 2016Cash outows from Asia began aroundtwo years ago but the volume today isgreater than ever, and shows no sign ofeasing. As one fund manager says,“Outgoing capital is one of the biggeststories in our industry, that we’reexperiencing year-by-year. Over veyears, it’s going to be massively crazy.”

    This is an extract from Emerging Trends in Real Estate ® Asia Pacic, 2016 . The fullreport can be downloaded from:www.pwc.com/emergingtrends

    Source: Emerging Trends Asia Pacic survey 2016

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    12 Emerging Trends in Real Estate ® The global outlook for 2016

    Alison Cooke,Starr International

    Alison Cooke is ManagingDirector for Starr International’s

    Asia Pacic real estateinvestments. Starr is aprivately-held insuranceand investment holdingcompany that invests globallywith an opportunistic strategy.

    The view from Asia Pacic – Starr Int’l

    What is the outlook for your business in Asia over the coming year?

    “We are fortunate to have a diverse portfolio, with opportunities to add value throughprudent asset management and meeting growing end-user demand. Looking aroundthe region, fundamental demand is generally strong and we continue to focus onsituation-lead investments where we can create or unlock value.”

    Real estate markets across Asia Pacic were for the most part very strong in2015. How do you see the markets performing during 2016?

    “Occupational markets look set for a stable year, good demand levels being temperedby a cautious approach to costs. Markets with falling rentals are generally those withover-supply, but established properties in good locations will continue to perform welldespite this. We see some caution entering the investment market with macroconcerns dominating for international investors. However, the weight of capitalwishing to invest and the relative scarcity of investible stock mean that investmentvalues will likely hold rm in 2016.”

    What is driving performance in the key markets in the region – is occupierdemand fuelling rental growth or is weight of capital and yield compression thedominant force?

    “Weight of capital is the dominant force at play, and we could see a little further yieldcompression in key markets with rising rents and high investor demand. With a healthynew supply pipeline across most markets, the expectations for rental growth aremoderating, though the short-term outlook is good in markets which are coming offtheir lows, such as Japan and Vietnam.”

    Which markets and sectors offer the best opportunities for you, and why? Andwhich ones are best avoided?

    “We see opportunities across the region to invest in operating real estate whichmeets changing demographic structures, social and lifestyle patterns and legislation.These include retirement communities, logistics facilities for e-commerce distribution,self-storage and mass worker accommodation. All of these involve getting both thereal estate and the operational model right. In Japan, the 2020 Tokyo Olympics willbe good for sentiment and infrastructure improvements will add value to somesubmarkets. In India, the growth of e-commerce and changes in VAT laws are openingup opportunities for modern regional logistics properties. Whilst we wouldn’t avoidthe sector, we are approaching retail assets cautiously given the structural changeshappening currently.”

    We see opportunitiesacross the region to

    invest in operating realestate which meetschanging demographicstructures, social andlifestyle patterns andlegislation.

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    13Emerging Trends in Real Estate ® The global outlook for 2016

    The Emerging Trends Asia Pacic 2016 report indicates that some investorsare opting to take prots and exit from deals made in recent years while othersare seeking the safety of core assets in gateway cities, perhaps indicating apeak in the cycle. What is your take on capital ows within the region right now?

    “Given the run-up in values since the global nancial crisis, most owners of Asia Pacicproperties are sitting on healthy income yields with limited alternate investmentsand no pressure to sell. Asian owners often take a generational approach to theirinvestments and are happy to sit through multiple cycles. Performance-drivenmanagers will be taking prot where possible, so will be a source of stock. Our viewis that deal levels will be moderate in 2016 despite strong demand.”

    Much is made of the global impact of the slowdown in China’s economic growth.In the short to medium term, how do you see it affecting real estate investmentin Asia as well as capital owing out of the region to Western markets?

    “We have a positive view on the long-term growth of China. We’re seeing strongdemand across the globe from Chinese companies as they develop and balancetheir international investment strategies. Looking forward, this will be inuenced byany changes to China’s capital controls. Changing patterns of Chinese tourism arehaving a major impact in the region, from falling high street retail rents and budgethotel rates in Hong Kong to signicantly higher demand in Japan and other moretraditional Asian resort destinations. A major issue occupying our minds for 2016

    is the knock-on effect of RMB depreciation on other Asian currencies.”

    Our view is that deallevels will be moderatein 2016 despite strongdemand.

    The view from Asia Pacic

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    It is a sector that is right at the centreof a collision of rapid urbanisationand technological change – two of theindustry megatrends given particularattention in the following chapters of thisreport. Across the three regional reportsit is clear that this journey still has a longway to go as real estate businessescompete for dominance with otherbusinesses in areas like last-mile delivery.

    Respondents to Emerging Trends UnitedStates and Canada not only placeindustrials at the top of the commercial

    property sector for investment anddevelopment prospects, but they havealso posted the highest score for industrialproperties in the surveys since 2004.

    Investors there like the value-for-pricerelationship in a property type wherethe average cap rate is 6.9 percent.They also like the downside protectionafforded by the triple-net leases that aretypical in this sector, and the cash-in-hand quality of industrials.

    Leading logisticsIndustrial real estate has been one of the most attractive sectorsover the past few years, and it continues to prove its value toinvestors across the world.

    Emerging Trends Europe points to a verystrong capital ow and bigger allocationsto logistics this year, with three quartersof those surveyed regarding its investmentprospects as “good” or “very good”.

    As one investor points out: “It is expensivebut the yield compression is still comingthrough and you’re also going to seerental growth.”

    For respondents to Emerging Trends Asia Pacic , logistics continues to bethe most popular property type for

    investment prospects. Shortages ofmodern distribution facilities acrossalmost all markets ensures that demandwill continue to grow, especially in China.

    The report notes that demand is beingdriven by the need for rapid deliveryresulting from the e-commerce boom,build-out in the cold-food chain,and structural changes in regionalmanufacturing as operations move toemerging markets such as Vietnam.

    Following such a ringing internationalendorsement, Hamid Moghadam,Chairman and Chief Executive ofPrologis, the leading global logisticsspecialist, offers his perspective onthe dynamics driving this marketand its future investment prospects.

    Leading logistics

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    Logistics – the Prologis perspective

    What is the outlook for Prologis over the coming year?

    “We’re in a period of modest demand but very tight supply, particularly in the US.What’s different about market conditions today from other cycles is that six years intoour current recovery in the US, supply is yet to catch up with demand. So vacancy rateshave been declining and supply is as tight as I can remember in my 33-year career.”

    What do you expect industrial property returns to do in Prologis’ key marketsthis year?

    “We’ve seen very healthy rent growth pretty much everywhere except for Brazil andEurope. Occupancies are at record levels and globally we’re 97-percent occupied.Even in Europe, we’re over 95 percent occupied. Supply has matched demand inEurope whereas in other places new supply has been trending below demand. Also inEurope, cap rates have been compressing from very high levels to more normal levelstoday, and these value increases have taken the pressure off landlords to push forhigher rents. With cap rates stabilizing, we expect rental growth to return to mostEuropean markets in 2016.

    Industrial real estate is once again judged to be the leading mainstream assetclass in the regional Emerging Trends surveys and interviews. What’s your takeon this investor demand?

    “Industrial real estate is a difcult asset class to access for institutional investors.In order to build a meaningful allocation, investors have to assemble a large portfolioof individual buildings. When the right opportunity comes along to deploy a signicantamount of capital in a major portfolio transaction, large institutional investors jumpon it because the next similar-sized opportunity may not come along for a while.This is a key factor in driving demand for logistics assets.

    “We are the largest owners of logistics properties globally, and have a signicant leadto our competitors in Europe. When the industrial business was in a nuclear winterafter the 2008 nancial crisis, no transactions were taking place. In 2012, we recapitalisedthe public company PEPR (Prologis European Properties) and some of our otherproperties in a joint venture with Norges Bank, and that basically gave the all-clearsignal to other investors that the waters were once again safe for investing. Prior tothat, there had not been any meaningful capital invested in the logistics sector inEurope since the downturn.

    “There’s nothing I’d like to tell you more than industrial is the best asset class. I talkto investors regularly and they’re very focused on risk adjusted returns. While theywant to increase their allocations to logistics real estate, they will not do so unlessthe returns meet their thresholds. Fortunately, locations, quality and return still matter,and not every decision is driven by a top-down allocation target.”

    Hamid Moghadam,PrologisHamid Moghadam is Chairmanand Chief Executive of Prologis,the leading owner, operator anddeveloper of industrial logisticsreal estate with $57.3 billionof assets under managementacross the Americas, Europeand Asia.

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    Much is made of the importance of e-commerce to industrial real estate.How do you see it developing?

    “In my opinion, consumers are not buying more because of e-commerce. They’re justmeeting more of their needs through multiple channels. As a general rule of thumb,the e-commerce channel is about three times as warehouse-intensive as the brick-and-mortar retail channel. The shift in retail sales to this channel increases overallwarehouse demand even in a at consumption environment. So, e-commerce isclearly a positive trend for our business. To the best of our calculations, e-commercerepresents about 9 percent (70 million sq ft) of our portfolio. In terms of newdevelopments, it represents about 15 percent of our overall activity.

    “E-commerce as a demand driver did not play a role in past recoveries. However, itdoesn’t explain the entire picture of demand for industrial real estate. I think an evenmore powerful driver is the need for companies to take cost out of their supply chains.In a world where top-line growth is challenged, the only way you can increase yourearnings is to take cost out of the system, and one way to do that is by consolidatingyour warehouses. Instead of having 20 warehouses in the US, you go to six or sevenlarge ones. This consolidation is made possible by the technology deployed in thesupply chain. This trend is making some industrial real estate obsolete and it’screating demand for new, modern facilities in our global markets. There’s nowhereyou see this more clearly than in Japan, where the economy has been essentiallyat for as long as I can remember yet we’ve built our most protable development

    business there because of the trend toward consolidation into larger buildings.”

    The slowdown in China’s economy, economic uncertainty everywhere, the collapsein commodity prices and continuing geo-political problems have been reectedin volatile stock markets around the world. How are such issues inuencingPrologis’ attitude to investment and risk?

    “People don’t lease warehouse space because they want to; they do it because theyhave to. It’s a necessity for their business, and as long as you have population growth,people have to eat and they need to buy clothes, etc, and that creates demand forlogistics space. If a company is going out of business, the last space they give upis where their goods are stored because that’s where the value is.

    “Supply chain costs and their impact on corporate efciency is a top-of-mind issuefor most our customers. There is no amount of thinking we can do that will make usas smart as listening to our customers. One of the key advantages of having a 700msq ft global portfolio and more than 4,000 customers is that these are the very peoplewho are making 4,000 separate decisions about where the world economy is going.The way that’s translating into our business today is that we are 97 percent leasedand our rents went up by double digits last year, and that’s never happened beforein my career. Either the logistics business has really lagged and the weaknesses willshow up later, or supply of new product has been more disciplined in this recoverycycle. Our view is that people have not gone crazy with new developments. Instead,there is a bidding war for quality space in good markets.”

    E-commerce is clearlya positive trend for ourbusiness ... I think aneven more powerfuldriver is the needfor companiesto take cost out oftheir supply chains.

    Leading logistics

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    The urban opportunity

    “We feel that urbanisation will have thenumber one impact on real estate. We don’tinvest in countries any more we invest inurban areas,” says one of Europe’sleading institutional fund managers.

    With widespread recognition of theimpact of urbanisation, global investorsare now thinking increasingly about howto identify the best cities in which todeploy capital. It is clear from all threeregional Emerging Trends reports that formany investors it is no longer enough totarget countries.

    As one global fund manager declares:“We’ve all taken capital growth with caprate compression but that story can onlygo so far.”

    The US report goes as far as proclaiming2016 as “the year of the secondary andtertiary markets,” reecting the fact thatparticipants are favouring cities withbetter growth opportunities – an astutestrategy at a time when the US economy

    is adding jobs and new supply is stillmodest by historical standards.

    Such opportunities represent acombination of traditional higher growthmarkets that offer favourable businessconditions, markets that were hit by theglobal nancial crisis but are in a positionwhere demographics may drive futuregrowth, and new markets that appearto be in a position to move up a classin the investment strata.

    Urbanisation is proving a key inuence on investors as capitalstarts owing into the more dynamic secondary cities as wellas established gateways.

    Figure 4 Overall real estate prospects – cities in the US

    DevelopmentInvestment Homebuilding1 Dallas/Fort Worth (2,3,1)

    2 Austin (4,1,2)

    3 Charlotte (11,5,4)

    4 Seatt le (3,10,5)

    5 Atlanta (5,6,8)

    6 Denver (8,13,3)

    7 Nashvil le (7,2,14)

    8 San Francisco (9,14,12)

    9 Portland, OR (10,7,16)

    10 Los Angeles (1,8,25)

    11 Raleigh/Durham (20,15,10)

    12 San Jose (6,11,17)

    13 Boston (14,4,27)

    14 Orange County (12,26,11)

    15 New York - Manhat tan (13,9,40)

    16 San Diego (16,27,19)

    17 Phoenix (17,38,15)

    18 Minneapolis /St. Paul (19,16,37)

    19 Miami (25,25,22)

    20 San Antonio (36,47,7)

    21 New York - Brooklyn (21,12,41)

    22 Indianapolis (18,17,42)

    23 Honolulu (40,50,9)

    24 Washington, DC-District (28,39,18)

    25 Charleston (38,18,29)

    26 Chicago (15,24,46)

    27 Columbus (31,20,31)

    28 Oakland/East Bay (32,28,24)

    29 Tampa/St. Petersburg (33,35,23)

    30 Houston (50,59,6)

    3.87 3.79 4.34

    3.82 3.83 4.17

    3.71 3.69 4.07

    3.82 3.57 4.00

    3.79 3.68 3.93

    3.74 3.51 4.14

    3.75 3.81 3.67

    3.73 3.51 3.77

    3.71 3.63 3.64

    3.87 3.61 3.50

    3.57 3.50 3.88

    3.78 3.54 3.61

    3.66 3.69 3.48

    3.68 3.31 3.78

    3.67 3.59 3.26

    3.62 3.27 3.57

    3.61 3.19 3.66

    3.59 3.48 3.28

    3.48 3.31 3.54

    3.34 3.05 3.94

    3.54 3.51 3.25

    3.60 3.45 3.25

    3.30 3.02 3.88

    3.42 3.19 3.59

    3.32 3.40 3.44

    3.64 3.32 3.20

    3.38 3.34 3.41

    3.37 3.25 3.51

    3.36 3.20 3.54

    3.23 2.91 3.96

    Weak Declining Average Improving Strong

    Note: Numbers in parentheses are rankings for, in order, investment, development, and homebuildingSource: Emerging Trends United States an d Canada survey 2016

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    In this year of change, Emerging Trends’US markets-to-watch survey also revealsa new number-one as Dallas/Fort Worthclimbs four places from last year’s surveyand leapfrogs state rival Austin in theprocess, which remains in the number-twospot. Nashville, Atlanta, and Portland,Oregon, are new entrants into the top10 for 2016, while Minneapolis and San

    Antonio enter the top 20. Clearly the idea

    of second tier cities – also known in theUS as 18-hour cities (see box) – as anattractive alternative to the “big six”US markets is starting to take hold.

    Economic growth potential seems to be thereason behind the movement of marketswithin and into the top 20 for 2016.

    But it is not all positive: Houston providesthe most dramatic move, falling fromnumber one to 30 as a result of concernsover the prolonged slump in oil pricescombined with the current level ofnew development.

    The negative sentiment towards Houstonserves as reminder that institutionalinvestors are acutely aware that their realestate holdings do not exist in a vacuum.

    That markets-to-watch survey wascompleted last year and since then, ifanything, the external inuences on USreal estate have been more profound.

    The Federal Reserve has raised interestrates, the slowdown in China’s economyhas kept commodity prices, particularlyoil, trending down while there have beensharp falls in global equities markets.

    And as Ralph Rosenberg, Head of RealEstate at investment rm KKR, suggests,the US economy does not appear inquite as good shape as last year(see page 4). So much so that the bigsix US cities that had looked expensiverelative to their second tier counterpartsnow appear to be worth consideringagain, at least for KKR.

    The urban opportunity

    The rise of the 18-hour cityThe advent of the 18-hour city in the US marks a remarkableturnaround in sentiment towards secondary markets thatbarely two years ago were out of favour with investors.

    Last year Emerging Trends identiedthe rise of the 18-hour city and thisyear the real estate industry isexpressing growing condence in thepotential investment returns in thelikes of Austin, Denver, San Diego andSan Antonio.

    The dramatic change in investorsentiment is evident in the 2016 top 10rankings – with the exception of SanFrancisco and Los Angeles, the balanceof the markets are 18-hour cities.

    A stronger US economy and improving

    occupancy rates have clearlyunderpinned the change in fortunes.But these cities have also seen moremoderate cap-rate compression thanthe major – 24-hour – gateway cities,and so provide an opportunity forsuperior yields. They also facelower-than-average supply pressure.

    Equally important, the developmentand application of technology make itpossible for these markets to offer thebenets of a larger urban area at asignicantly lower cost. There iscultural capital as well as nancialcapital at work here, and what wasonce distinctly unfashionable is nowtagged as “cool”.

    The dominance of domestic investorsin US real estate has undoubtedlygiven the 18-hour city movementsome momentum that would bedifcult to replicate among secondarycities in Europe. But there are signsthat global investors are starting tocast their nets beyond the big sixgateway cities, which suggeststhat this US phenomenon will havelasting signicance.

    Either way, says Rosenberg, KKR’sinvestment focus is at a city level.

    “We target and select urban centreswhere we think the long-term trendsare very positive but where pricinghas not fully priced in that potentialpositive momentum,” he says.

    A similar approach is evident atleading Dutch institution APG AssetManagement, where the emphasishas been on cities rather than countriessince 2009. “We have denitelyimplemented that in our strategy,”

    says Patrick Kanters, APG’s ManagingDirector Real Estate & Infrastructure.

    “The focus has been on a smaller set ofkey growth cities throughout the world,

    with the main return driver of real estatebeing employment and demographicgrowth. We have very much concentratedour investment on those places wherethere is employment growth for theforeseeable future.”

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    But Kanters points out that APG’sstrategy does not revolve around bigcities exclusively. High-growth secondarycities gure, too. “These cities aredenitely included. In the Netherlands,if you look at our retail and residentialexposure, it is not just about Amsterdambut also other key Randstad cities, suchas Utrecht and the Hague, which stillshow further growth and are expected

    to see further improvements ininfrastructure and connectivity.

    “These medium-sized cities can scorevery high in liveability standards. They arewell-connected and though they mightbe slightly less densely populated theystill have favourable growth prospects.”

    Shifting beyond the capital

    The growing importance to investors ofsecondary cities across Europe has beendocumented in Emerging Trends Europe for the past two years, albeit this shift ofcapital has not shown quite the samemomentum as the 18-hour citymovement in the US.

    According to this year’s report, the veleading cities for investment prospectsare Berlin at the top spot, followed byHamburg, Dublin, Madrid andCopenhagen. Many interviewees expectthe German capital to thrive well beyond2016, based on its young population andits growing reputation as a technologyand cultural centre, as well as havingthe land available for development.

    Notably, London has slipped from the top10, suggesting that investors are seeingbetter growth prospects in regional UKand European cities in the short term.In the long term, however, the UK capitalremains the rst choice in Europe formany international investors focusedon wealth preservation with liquidity andthe scale of the market, together withrelatively robust economic performance.

    The strong ranking of Birmingham,Britain’s second city, reects the positiveview expressed during the interviews onproperty investment in UK regional cities.It is no accident. Birmingham is set tobenet from substantial infrastructureinvestment, in particular the HS2 high-speed rail line to London scheduled toopen in 2026. But that is not the wholestory. According to a separate study last

    year by ULI and TH Real Estate, entitledThe Density Dividend: Solutions for growing and shrinking cities , Birminghamhas become a master of its own destinyby establishing a long-term plan in 2010that made the case for well-designed,higher density developments to achievethe levels of growth required in the city.

    A simplied planning process has beenmade possible by a City Centre EnterpriseZone, enabling business rates generatedwithin the zone to be recycled intopriority projects that all promote cityliving. Place-making has been at thecentre of everything.

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    The outlook for Asia Pacic is differentagain because of the emerging marketstatus of much of the region. For thatreason, as much as any other, investorsare targeting cities rather than countries.Emerging Trends Asia Pacic reveals thatinvestors continue to be generally“skittish” about China, for instance.Concerns range from its soft economyand depreciating currency to oversupply,

    high values and compressed cap rates.Yet Shanghai nonetheless remains“a shelter in the storm” – its middlingperformance in the city rankings reectsits status as China’s only true gateway,where prime assets will always bein demand.

    Alison Cooke, Managing Director forStarr International’s Asia Pacic realestate investments, argues that the cityfocus is prevalent throughout the region.“Absolutely. As elsewhere, Asia Pacic’scities have different economic and socialdrivers as well as supply dynamics,”she says. “From a user’s perspective,cities with cohesive planning andwell-integrated commercial, residentialand recreational facilities are naturallymore attractive. Singapore is a greatexample of this. Authentic integration ofheritage real estate gives cities a specialcharacter and often provides a strongfocal point for commercial activity.”

    Source: Emerging Trends in Real Estate As ia Pacic 2016 survey.

    Figure 6 City investment prospects, 2016

    1 Tokyo 3.66 2 Sydney 3.523 Melbourne 3.434 Osaka 3.395 Ho Chi Minh City 3.216 Jakarta 3.207 Seoul 3.188 Manila 3.179 Shanghai 3.15

    10 Aukland 3.1411 Singapore 3.1012 Bangalore 3.0613 Mumbai 3.0614 Beijing 3.0215 Hong Kong 2.9916 New Delhi 2.9817 Taipei 2.9218 Shenzhen 2.8919 Bangkok 2.8620 Guangzhou 2.8421 Kuala Lumpur 2.7622 China—secondary cities 2.54

    Generally poor Fair Generally good

    The urbanisation impact

    Investors may stick with tried and testedgateway cities or they may venture intothe more dynamic regional centres.

    Either way, there is little doubt thaturbanisation is the fundamental backdropto their decision-making. All the megatrendsare inuential but in the Emerging Trends

    Europe survey and interviews there is aremarkable weight of importance attachedto urbanisation, above all others.

    One planning expert talks of the“extraordinary inuence” of urbanisation.“It is both a correlation and cause relatedto the agglomeration effect. As peopleand workforce move to urbanised areasthe prospects for those areas are best.The largest and best-connected citieswill win.”

    It is also clear that urbanisation isincreasingly viewed in the contextof housing development and theprevailing supply shortages in manyEuropean cities, not least the growingneed for single-person homes.

    The trend towardsurbanisation, and its

    impact on housing,is going to be amassive issue.

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    The urban opportunity

    “The nature of the work space, the hotelroom and the apartment are changing,”observes one global investor-developer.“We are creating new types of shoppingand residential, and maybe where landis expensive we will create vertical city,mixed-use projects. The typical workerno longer wants to do the commute.They want to work, sleep and eat inthe same place. There is a shift back

    into the urban environment in mostmajor cities. Residential units aregetting smaller and design is changing.”

    For real estate players as diverseas investment rm KKR and leadingindustrial developer-operator Prologisthere is yet another dimension tothe urbanisation question, and that isidentifying not just areas of populationgrowth but in particular those centreswhere there is clear evidence of agrowing middle class.

    “We do spend a lot of time thinking aboutlong-term trends, and that could rangefrom the continued emergence of aconsumer middle class in India or China,and how we position ourselves to takeadvantage of that trend over the next10 years,” says KKR’s Ralph Rosenberg.

    “You want to look at countries or regionswhere population is signicant and thearea is moving from poverty into middle

    class,” says Hamid Moghadam,Chairman and Chief Executive ofPrologis. “Classic examples of thatwould be China, Mexico, even Brazil,because there is an ‘S’ curve in termsof consumption. As you move into themiddle class you start consuming a lotand when you become very afuent youdon’t necessarily consume more than amiddle income person. So that steep partof the ‘S’ curve are the markets that aremost interesting to a player like us:populous areas with good middle-incomeconsumption patterns.”

    Trending on infrastructureUrbanisation raises many and varied issues for real estate butthe industry is starting to come to terms with one challenge –or opportunity – infrastructure investment.

    “In response to urbanisation, suchinvestment makes sense but also inresponse to the broader economy andwhat will be required to spur growth inEurope and the US,” says one globalreal estate player. “We will be seeingmore movement to investment ininfrastructure, and that investment willrequire public and private money.”

    Institutional investors have traditionallykept their capital allocations to realestate and infrastructure investmentapart but there are signs that some arethinking of them in the round, not leastbecause of the growing inuence ofmegatrends, especially urbanisation.

    “Consideration of these issues is afundamental part of every investmentdecision we make,” says Alison Cooke,Managing Director for StarrInternational’s Asia Pacic real estateinvestments. “Urbanisation ishappening at different rates in differentcities and is strongly driven by newinfrastructure and public transportation.

    For example, we are developingresidences close to a major new ringroad, yover and proposed metro line,as the improved accessibility willunlock signicant value in our land.We believe that activity-basedworking models will develop furtherand that building exibility for thatinto new commercial propertieswill be a key differentiator.”

    According to one pan-European fundmanager, a more strategic industrymove into infrastructure investment ismore likely than not. “The economy isweaker on the Continent [comparedwith the US and UK] and so thequestions around megatrends becomemore pertinent,” he says. “The thingwe all learned in the last downturn wasthat location factors are so important.When we were trying to let ourbuildings, proximity to public transportstood out every time – connectivity.”

    Where people go, investment tends tofollow. As one global fund manager says:“People in general want to be in the citiesthat provide opportunities. In order todevelop opportunities smaller citiesoutside of global cities should develop anew strategy. They need to differentiatethemselves to attract human capital.”

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    Unibail-Rodamco’s shopping centreportfolio is spread across ContinentalEurope but mainly located in largemetropolitan areas. Can you explain

    your investment rationale and what you’re looking for in a city?

    “Our approach hasn’t changed actuallyfor years now – the focus on largemetropolitan areas in developedEuropean countries. Simply put, whatwe look at rst of all is generally thecatchment area fundamentals and thecompetitive dynamic in the city. To giveyou an example, a mall with six millionvisits can be absolutely fantastic in a citylike Dijon in France. But in Paris, way toosmall. There is no one single standard bywhich we judge an investment decision.The likelihood of being able to make aninvestment meet our risk-adjusted hurdlerates requirements is the key driver.

    City view As the owner of 72 prime shopping centres across ContinentalEurope, Unibail-Rodamco has a commanding presence in themarket. Chief Financial Ofcer Jaap Tonckens shares thecorporate view of retail and city development.

    “The note of caution I’d bring in thoughis that when making an investmentdecision, we have to consider thelong-term fundamentals. For example,an investment through developmentcan take between seven and 15 years.So we have to look through the cycle …we don’t change our strategy on a dime,depending on what’s happening in thecurrent political climate, for instance.We cannot operate our business chasingthe latest avour of the day. So for us,what we’re looking for are generallycities that would appeal to large retailers,therefore we are aligned, we think,in terms of the presence of a catchmentarea, preferably with above-averagepurchasing power and overall populationgrowth. But overall growth can varyand so you really also have to take afundamental view of whether or not thesecities and catchment areas have thepotential to generate the required returnon the investment. And that’s when youstart looking at the competition inlocations, quality of the surroundingarea, connectivity with the publictransportation system and accessby road. All of these elements come

    into play.”

    Are you interested at all in the faster-growing secondary or regional cities?

    “Only if there’s an opportunity to ownor develop the market-leading assets,to be frank. Selective secondary cities,we do look at. But the question is also adenitional one. For example, I would notcall Lyon or Barcelona secondary cities.They stand on their own.”

    Are you running out of largemetropolitan areas in which to grow

    your shopping centre business andopen new space?

    “It’s a fair question. Though it may appearso, the group won a large project inBrussels last year; the same in Hamburg.We’re currently developing a large mallin Wrocław in Poland. But it is not justabout new malls – 30 percent of our€7.4 billion development pipelineconsists of extensions and renovationsof standing assets. Size for the sakeof size is not our objective, and buildingmalls for the sake of building malls is notour goal. In addition to our developmentopportunities, we generate growththrough rental uplifts in our standingassets. We are not in a position wherewe are desperate to deploy cash.”

    If the bigger property players

    concentrate on the larger metropolitanareas is there a danger that smallercities may suffer from generaldisinvestment as a result?

    “The key here is that there’s always goingto be a market. If the big players moveout of some markets, you have smallerplayers moving in. Let’s take the oppositeexample of what you describe. Minto,in Mönchengladbach (Germany),a shopping centre in the middle ofa secondary city! This is the choice of

    local municipality to encourage privateinvestment and relocate retail activitiesin the city centre.

    “Is the local municipality alert andproactive, and encouraging or enablingrenovation and protable investment tooccur? It’s a mixed palette. Assuming thepopulation is there, retailers also have alarge role to play in terms of investing intheir stores and investing in the in-storeexperience. If you no longer offer whatconsumers want, it becomes very toughto keep a business model alive.”

    Jaap TonckensChief Financial Ofcer of Unibail-Rodamco,Europe’s leading l isted commercial propertycompany. The group’s €37.8 billion portfolioincludes shopping centres, ofces andconvention and exhibition centres.

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    The urban opportunity

    What other forces or trends do youthink are impacting on cities?

    “Population growth or the lack thereof,infrastructure quality such as publictransportation, quality of life, job creation,etc … all these elements are impactingcities. And it has consequences on thequality of the retail offer. If there is nocritical mass of successful brands it’svery hard for retailers to justify being

    there, and for retailers that don’tdifferentiate themselves, they’re facinga tough future.

    “Furthermore, internet retail will havea signicant impact. Retailers no longerneed a store on every street corner and,thus, site selection and retail locationbecome more important. It is cheaper tosend a product that’s been paid for witha driver to the front door of a client thanit is to pay for an agent to nd a location,pay the rent, stock the store and paypeople before you’ve sold a single unit.”

    Longer term, how do you judge theprospects for shopping centres?

    “I am personally very positive aboutthe future for large shopping centres,the kind we specialise in: iconicarchitecture, places inspired by famousdesigners, a unique retail mix withinternational premium brands andpersonalised services for the visitors.The next generation of our assets will

    also take into account the growingdemand for mixed-used programmes,such as Überseequartier in Hamburg(pictured) where the group will developa shopping centre, ofces towers, cruiseterminal and housing in a single location.What we’re going to see, I think,are companies that have found amodel that works for them are goingto stick with that. Again, a consistentstrategy is key to future success.

    “Naturally, some malls are going tocontinue to do well and some will not.There are always going to be new playersready to invest and if money is easilyaccessible there will be developmentsthat shouldn’t be built. Depending onthe regulatory environment – zoninglaws and the like – signicant oversupplyand dead malls are a possibility. You seesome of that in certain cities in Polandand Spain, where there are very limitedzoning rules that would limit the buildingof malls to ensure an appropriate balancebetween gross leasable area and thenumber of inhabitants. The cycle willalways hold new surprises, some good,some not so much.”

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    26 Emerging Trends in Real Estate ® The global outlook for 2016

    “If you’re passive on holding real estatethis can be a risky position,” says theCEO of a major European REIT.

    Negotiating the lease and waiting forthe money to come in is no longerenough to deliver a favourable return.We are in an age in which there are muchgreater demands on our real estate.Population growth is putting greaterpressure on available space and creatingmore awareness of the social andenvironmental impacts of real estate.Faster information ows make it easierfor tenants and investors to compareand inuence value.

    At the same time, cities are competingagainst each other to attract investment,foster innovation and offer a favourablequality of life. The fate of real estate andcities are intertwined and investment intransport, digital communications andother infrastructure developments areset to become an ever more important

    element of real estate asset management.

    Connected cities A disruptive combination of new technology, social changeand more exacting occupier expectations is shifting the valueequation within real estate from tenants to consumers,from space to experience, from asset class to service provider.

    For investors, this translates into a needfor a closer engagement with real estateas a service and its role as part ofsociety’s critical infrastructure. It’s moreimportant than ever to actively manageperformance and return.

    The move to more active real estatemanagement is not new. Developmentsin technology and demands on spacemean that buildings can quickly slip intoobsolescence without regular renovationand investment.

    Climate change and resource scarcity

    Technological breakthroughs

    Rapid urbanisation

    Demographics

    3.10

    2.60

    2.37

    2.27

    Shifts in economic power

    2.11

    Figure 7 Megatrend impact on occupier expectations: Asia

    Source: Emerging Trends Asia Pacic sur vey 2016

    Building brandsIn turn, occupiers are coming to seebuildings as a way to project their brandrather than just a place to work. Theywant buildings that create a positiveimpression and which encourageinnovation and collaboration. Google’slengthy deliberations over its headquartersin London highlights the seriousnesswith which corporate tenants viewtheir physical presence and the growingdemand for full control over designand use of space, rather than adaptingto a developer’s formulaic blueprint.

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    Figure 8 Megatrend impact on occupier expectations: US

    Source: Emerging Trends US survey 2016

    Figure 9 Megatrend impact on business decisions: Europe

    Source: Emerging Trends Europe su rvey 2016

    For retailers in particular, the qualityof the premises and how it projectstheir brand is becoming crucial onceagain as shopping centres becomelifestyle centres and the choice ofshopping online or instore gives wayto a multi-channel experience, with thephysical store at its heart.

    But this is just the beginning. An even

    bigger transformation in occupierexpectations lies ahead. The way peoplework and what they want from theirworking environment is increasinglyreshaped by accelerated urbanisation,demographics, changing social attitudesand enabled by technology.

    “Organisations used to crush peopleinto a building and not spend any moneyon it during the lease. Real estateused to be regarded as a pure cost.Now, the building says somethingabout your business, it is part ofvalue creation; helping to recruit,enforce the brand and provide visiblesustainability credentials that youcan talk about,” says an EmergingTrends Europe survey interviewee.

    Connected cities

    39 29 125

    Rapid urbanisation

    %

    45 32 119

    Demographic and social change

    %

    8 32 341

    Shifts in global economic power

    %

    20 36 538

    Technology breakthroughs

    %

    5 16 1137

    Climate change and resource scarcity

    %

    Large impact Moderate impact Slight impact Not much impact No impact

    2

    6

    1

    32

    16

    35 31 21

    Rapid urbanisation

    %

    36 40 17

    Demographic and social change

    %

    13 27 432

    Shifts in global economic power

    %

    22 34 1130

    Technology breakthroughs

    %

    5 34 30

    Climate change and resource scarcity

    %

    Large impact Moderate impact Slight impact Not much impact No impact

    6

    4

    2

    8

    24

    8

    22

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    28 Emerging Trends in Real Estate ® The global outlook for 2016

    Technology-empoweredtenants

    We have apps to gauge our tnessor control the heating in our homes,and now tenants are beginning to usethis hyper-connected and ultra-sensitiveInternet of Things technology to managetheir working environment.

    The ultimate end-goal aroundmeasurement is productivity. Optimisingthe use of space is clearly a crucialelement of this. Savvy occupiers areusing new sensors, booking-in systemsand other nely-tuned measurementtechniques to eliminate surplus spaceand make more effective use of whatthey have. Survey respondents in

    Asia report a marked increase in theefciency with which occupiers use space(see Figure 10). In Europe, 85 percent

    of participants say that occupiers areusing their space more efciently now,the same proportion who believe thattechnology is changing the way we usebuildings (see Figure 11 and Figure 14).

    But the shift in expectations goesbeyond just cost savings and use ofspace. The ability to create spaces thatappeal to talent and support their healthand wellbeing is equally, if not more,important. Key criteria include location,infrastructure, corporate brand, supportfor exible working and corporate socialresponsibility. “The idea of measuringproductivity by the number of hours

    spent at a desk is outdated,” saysa participant in our European survey.

    As businesses come to recognisethe full value of employee health andwellbeing in attracting, retaining andmotivating their employees, a numberof companies have adopted theDelos Well Building Standard®, whichmeasures the quality of the environmentacross the component elements of air,water, nourishment, light, tness,comfort and mind.

    This will further increase the trend weare already seeing from occupiers to paymore for shorter and more exible leases(Figure 13).

    72% Agree

    12%

    Neither agreenor disagree

    Stronglyagree

    Disagree

    3%

    Stronglydisagree

    0%

    13%

    Source: Emerging Trends Europ e survey 2016

    6%

    26%

    18%

    47%

    3%

    Often AlwaysSometimes Not much

    Figure 10 Efcient use of space

    Source: Emerging Trends Asia Pacic sur vey 2016

    of business leadersworldwideare changing theirapproach to workforcerights and wellbeingin response tochanging stakeholderexpectations1409 CEOs from around the worldinterviewed for PwC’s 19th AnnualGlobal CEO Survey, 2016

    90%Figure 11 Occupiers are using their existing space more efciently now

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    Sustainable agendas

    The wellbeing agenda is an extensionof the already strong pressure forsustainability, but it has the potential tobe a game-changer for the real estatesector. Environmental issues suffer fromstill being seen as a long-term concerns,whereas health and wellbeing is personaland immediate – affecting our lives andour families lives right now.

    But as a reality check, many propertyowners will need to invest signicantsums just to meet new energy standards.Nearly a fth of commercial buildings1 inEngland and Wales are at risk of beingtaken out of the letting market becausethey fail to meet new government energystandards, when, from April 2018, it willbe unlawful to let any building with anenergy rating below E.

    Reasonably importantNot important Important Very important I do not know

    Costreduction

    Aligning internalgovernance

    and reporting

    Promoting theworkplace and

    wellness agenda

    Deliveringcustomer

    service

    Enhancingproductivity

    Carbonstrategies

    SupportingSustainability/

    Energy

    Supportingcorporate values

    7 8

    36

    31

    5

    9

    1

    21

    38

    27

    6

    3938

    12

    3

    35

    15

    9

    5

    20

    31

    43

    3

    14

    36

    47

    2

    27

    44

    20

    3

    42

    31

    12

    5

    33

    44

    20

    3

    % % % % % % % %

    Figure 12 How important are these elements to your/your corporate occupiers’ property strategy?

    Source: Emerging Trends US survey 2016

    1) Cushman & Wakefeld research, 17th February 2016 http://www.cushmanwakefeld.co.uk/en-gb/news/2016/02/act-now-to-ensure-commercial-property-buildings-comply-with-energy-act/

    Connected cities

    Occupiers are willing to pay for shorter leases and enhanced exibility

    Disagree

    47%

    Agree Neither agreenor disagree

    Stronglyagree

    15%6% 32%Stronglydisagree

    0%

    Occupiers are demanding shorter leases

    57%

    Agree

    22%

    Neither agreenor disagree

    Stronglyagree

    Disagree

    12%Stronglydisagree

    0%9%

    Figure 13

    Source: Emerging Trends Europe su rvey 2016

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    Other

    Aligning internal governance and reporting

    Supporting Sustainability/Energy

    Promoting the workplace and wellness agenda (e.g. talent management/staff retention)

    4.33

    3.44

    2.81

    2.70

    Carbon strategies

    2.50

    Supporting corporate values

    Cost reduction

    Delivering customer service

    2.48

    2.43

    2.22

    2.19

    Enhancing productivity

    Figure 15 How important are these elements to your/your corporate occupiers’property strategy?

    Source: Emerging Trends Asia Pacic sur vey 2016

    Nevertheless, as gure 12 shows,wellbeing is now judged as moreimportant than sustainability in the US,Europe and Asia. But under currentmeasures, sustainability and wellbeingmay not necessarily be complementary.By way of example, the greatestcontributor to embodied carbon in a typicalofce building is the travel of its occupantsto and from that building. But while

    increasing the number of showers wouldencourage more employees to cycle intowork, landlords and occupiers may beconcerned about the impact on levelsof water usage. There are many othersimilar examples which raise thequestion of whether the value equationencompasses the right breadth ofmeasures and whether standardsare incentivising the right behaviour.

    Digital drives customers

    Just as the digital developments inother sectors have made consumersmore informed, able to compare valueand switch service providers, data isempowering and beginning to raiseexpectations among real estate tenants.“The customer has historically beenexcluded, but more information meanspeople are more aware,” says aparticipant in our Emerging TrendsEurope survey. The risk is that ownersand investors will be caught on the back

    foot as tenants use productivity measuresto not only reduce the space they rent,but also in choosing the location,characteristics and operators oftheir buildings, or simply to press formore favourable terms on renewal.“Occupiers are increasingly askingquestions about how they can monetisethe negatives of a building’s performance,”says a participant. If tenants do not getwhat they want, they’ll look elsewhere,which will raise the bar for what owners

    and investors need to offer.

    Technology is changing the way we use buildings

    Stronglydisagree

    63%

    AgreeStronglyagree

    0%

    Disagree

    1%22%

    Neither agreenor disagree

    14%

    Figure 14

    Source: Emerging Trends Europ e survey 2016

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    Figure 16 Impact on occupiers’ space requirements over next 3-5 years

    12 45 340

    Increasing workplace density/efciencies

    %

    20 41 138

    Cost reduction

    %

    4 24 1953

    Supporting corporate values

    %

    10 31 1148

    Promoting the workplace and wellness agenda

    %

    36 40 122

    Access to adequate transport network/infrastructure

    %

    14 33 845

    Urbanisation of businesses

    %

    15 39 740

    Flexible working

    %

    21 39 536

    Growth of e-commerce

    %

    12 40 444

    Proximity to customers

    %

    8 43 445

    Proximity to complementary businesses/ innovative business environments

    %

    5 29 858

    Supporting sustainability/energy/carbon strategies

    %

    7 20 1459

    Availability of government incentives

    %

    Very signicant Signicant Moderate No impact

    Source: Emerging Trends Asia Pacic sur vey 2016

    It also raises the bar for the real estatemanagers in terms of data management.If tenants are using this data it willinevitably translate to real estateperformance and valuation. So real estateowners and operators need to get aheadof the game as pressure is being appliedat both ends of the spectrum. From anincreasingly empowered occupier, toinvestors looking for greater transparency

    and speed of information ow across anevolving range of performance measures.

    Are we in the middle of a digital revolutionin real estate? Forward-looking businessesare successfully combining traditionalyield measures with customer datain areas such as tenant satisfaction,health and wellbeing. They are usingtechnology to speed up and cross-check their analysis.

    Connected cities

    Data is changingthe world fast andreal estate is only

    just getting its headaround it.

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    32 Emerging Trends in Real Estate ® The global outlook for 2016

    Commercial property – the lastimperfect market

    New “PropTech” businesses are movinginto this space. An example is Geophy,a Dutch-based company aiming todisrupt the opaque commercial realestate market, by using algorithms tovalue property even if it has never beenon the market. Used by some of Europe’s

    largest institutional real estate investorslike PGGM, Geophy has developed a‘quality score’ which enables investorsto make better data-driven propertydecisions. Geophy uses data sets relatedto location, reliability and proximity topublic transport, the local environment,whether there are nearby shops, vacancyrates, and the condition of the building.

    Those investors that are slower toembrace new analytical developments

    may nd it harder to understand andrespond to tenants’ fast-changingdemands. And change might happenfaster than many expect. BuildingInformation Modelling (BIM) and BuildingManagement Systems (BMS) will embeda full set of transferable information withinproperties and build a picture of therunning of the building. New Blockchaintechnology is emerging as a solutionallowing the due diligence for a propertyto be veried almost instantly using acombination of the above technologies.

    How could this impact the industry?It promises to be an interesting timefor many. Brokerage fees will be harderto justify, the need for large fundmanagement teams might becomeobsolete, property managers or newentrants will become custodians of thisdata and will have to implement seriousdata security provisions.

    From data on an individual occupyingan ofce building, collected via wearabledevices, to the increasingly connectedcomponents of a building itself via theInternet of Things, the built environmentoffers an overwhelming amount of datarelevant to the assessment of real estate‘performance’. Could this revolution be the‘Uber moment’ for the real estate industry?

    So what do these converging trends meanfor owners and investors? None of theshifts in technology, customer demandor the social role of the workplace we’vedescribed here are either sudden orrevolutionary. Rather they build ondevelopments that have been gatheringin momentum for ten years or more.But the structure of the real estateindustry, how it operates and how itgauges value and returns have changedlittle over this time. In fact, the way theindustry is structured – with its multiplelayers of investors and outsourcedservice providers – is specically witha purpose to shield the ultimate investorfrom operati


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