Fewer and better buildings: The future of listed real estate in a low-interest world

There was more than a little doom and gloom surrounding Yanis Varoufakis at the 20th EPRA Annual Conference, where he took almost 400 high-level real estate and investment delegates through his assessment of the state of the European Union.
During his keynote speech in Madrid this September, the former Greek Finance Minister reminisced that the 2008 global financial crisis “was our generation’s 1929”. More concerning was his assertion that “by comparison, no advanced economy has been less prepared for the next recession than the Eurozone is today.”

Yanis Varoufakis, former Greek Finance Minister, shared his view about populism in the age of austerity

José Manuel Barroso, former President of the European Commission, gave a keynote speech about the rise of populism

(From left to right) Panel discussion on CEOs' response to populism with Pere Viñolas Serra, Colonial CEO, Méka Brunel, Gecina CEO, Helen Gordon, Grainger CEO and Rolf Buch, Vonovia CEO

Méka Brunel, Gecina CEO, talked about the challenges real estate is facing: metropolitanisation, technological revolution and climate change

Antony Slumbers, PropAI Co-founder, outlined PropTech trends

Stephanie Flanders, Head of Bloomberg Economics, presented the macro-economic outlook for the Eurozone and the UK

So, what, if anything, can the listed real estate industry learn from this? In practice, according to José Manuel Barroso, there are potentially very few lessons to be learned from Varoufakis’ warning. The former President of the European Commission points to forces beyond most business leaders’ control as the EU’s most deep-seated problems.
For listed real estate corporations, the answer is business as usual, as far as Vonovia CEO Rolf Buch is concerned. “We are living in democracies where the politicians decide the frameworks. As companies, our responsibility is simply to explain the implications of their frameworks and react.”
If business as usual is the order of the day for the corporates, the story is certainly not the same for the investment community. Now a non-executive director at Goldman Sachs, Barroso intimates the bank’s insider consensus that low yields are here to stay. This comes as no surprise for most, but it does present an opportunity for the listed real estate industry to position itself as a real investment opportunity for a low-interest environment. After all, business as usual has led to the asset class’s astonishing outperformance over the past 15 years.
But, for many, the key to maintain this level of outperformance is more about futureproofing their business by responding to major demographic changes rather than reacting to political noise.
For Méka Brunel, CEO of Gecina, the answer is formulating a global vision that translates locally, allowing large businesses to hedge against geographical risks and remain agile, market by market. “If the global view is unpredictable, you must hedge what is going on. First, it is about defence,” says Brunel.
Preparing for the future must be more than just a defensive strategy in action, according to Pere Viñolas Serra, CEO of Colonial, however. He believes that politics and the economy reflect increasing globalisation, and that there are three clear trends. “Urbanization. Technology. Climate change. Whatever happens in politics, we must focus on how we react to these three trends.”
Transforming the real estate industry to account for these tectonic environmental and demographic shifts, may hold the key to remaining an attractive high-yielding investment in a low-interest world. How to do so is another question entirely. Antony Slumbers, co-founder of PropAI, believes that the successful implementation of artificial intelligence and automation is the key.
In his presentation at the Conference, Slumbers depicts a society of the future utilising AI to address urbanisation, climate change and technological shifts. Seeking to investigate how this will change the workplace, as an example, and what effect this will have on the wider real estate industry, his conclusion is not what many people expect: “Fewer and better” is his mantra.
Within the new workplace paradigm, Bloomberg’s Stephanie Flanders’ quip that Boris Johnson replacing Theresa May “may be the first instance of a robot being replaced by an unskilled worker”. Anything structured or repeatable will likely be automated. The value of prediction, therefore, will plummet and in its stead, the value of decision-making and creativity will increase exponentially.
Fortunately, this insight into how the nature of work will change leaves an important role for humans as creators and decision-makers, but it demonstrates an inevitable change in our real estate requirements. “The imperative, therefore, will be office spaces that allow people to do more. To futureproof your offices, you must create environments in which people can do great things,” says Slumbers.
Perhaps most fascinating is how this breaks down assumptions and truths that have created the greatest business centres across the world. In London, Frankfurt and Paris, for example, we assume that big buildings mean big business.
But enabling humans “to do great things” does not actually require lots of space; doing repetitive and mediocre things does. So, given the backdrop of increasingly automated, machine-processed work, it may not be long before we see the office-based presence of even the world’s biggest, most influential businesses shrink beyond recognition.
Slumbers’ examination of offices is just one of many sectors within the wider real estate industry, but should its business model change half as dramatically as he suggests it could, it will be the corporates that adapt to shifting trends most effectively that will remain the best investment value proposition in a European economy of persistently low returns.
The parting shot of his presentation, Real Estate as a Service, sums the situation up nicely. “In real estate, modernity requires density, flexibility and the effective combination of pleasure and functionality. If your portfolio scores poorly against these, sell it.” He may be reading the future of office real estate, but this could also be a glimpse into the future for all segments of an industry which touches people in every aspect of their quickly changing lives.
For investors, then, listed real estate may be one answer to the problem of low-interest rates. For property companies across all segments in the sector, business as usual could mean unimaginable change to remain competitive.