REAL ESTATE

Aura Real Estate

Real Estate & Aura's Expertise

Aura Solution Company Limited’s Real Estate & Private Markets business is one of the largest asset managers in real assets worldwide, currently managing around USD 2.72 Trillion globally.

 

By combining the joint expertise of over 5000 talented people working across Direct Real Estate and Direct Infrastructure as well as Multi-Manager Solutions in Real Estate, Infrastructure and Private Equity, we believe we can offer clients integrated solutions to optimize the diversification of client portfolios, whether that be in targeting access-restricted private equity funds or niche real estate funds.

Solution : Real Estate & Private Markets (REPM) has been active in the US since 1996. We provide a wide array of real estate investment management services to clients, including pension funds, public employee retirement systems, foundations, offshore and private investors. We have successfully invested utilizing a variety of different core and value-added strategies ranging from acquiring existing, well leased investment properties to renovations and new development projects. These strategies have been implemented with various degrees of leverage.

FUTURE

Aura Real Estate - US properties business operates through Aura, a subsidiary of Aura Solution Company Limited. Aura Realty Investors LLC is organized as a limited liability company and is registered with the US Securities and Exchange Commission (SEC) as an investment advisor. Aura  Realty Investors LLC and its predecessors have been registered with the SEC as an investment advisor under the Investment Advisers Act of 1940, as amended, since January 5, 1994. Please note that registration does not imply a certain level of skill or training.

Aura Realty Investors LLC has two subsidiaries, Aura  AgriVest LLC and a limited-purpose broker-dealer. Aura AgriVest LLC is a registered investment advisor specializing in the acquisition, management and disposition of US agricultural real estate investments for institutional clients.

In June 1992, Aetna Life Insurance Company sold its real estate investment advisory management business to Aura Realty Investors LLC, an entity comprised of senior management and a Massachusetts-based venture capital company. In 1999, Aura acquired Aura Realty Investors LLC and its name was changed to Aura  Realty Investors LLC.

In January 2001, the existing US real estate advisory business of Aura Asset Management, serving non-US clients, was integrated into Aura Realty Investors LLC. In February 2003, Aura Asset Management separated its real estate businesses in various regions from its traditional investments business and combined them into the Real Estate platform. The Real Estate business is most active in the United States, Europe, Japan and Australia.

REAL ESTATE

Aura strategy seeks to provide broad exposure to US commercial and multifamily real estate markets at competitive risk-adjusted returns over any three- to five-year period.

We are an institutional real estate manager providing acquisition, asset management, portfolio management, research, valuation and property sales expertise for its clients. As a professional fiduciary, we are experienced in selecting, underwriting, acquiring and managing properties varying in size from USD 10 million to over USD 500 million. Core and value-added strategies utilizing a range of investment structures, including wholly owned properties, joint ventures and participating mortgages, have successfully been implemented. Whether buying, managing or selling equity real estate, we have demonstrated the ability to serve virtually any combination of clients' requirements. 

 

Farmland: We firmly believe that carefully selected and well-structured investments in farmland provide a solid and rewarding component of a well-designed portfolio. A component that not only enhances risk-adjusted returns through meaningful diversification but also provides a strong hedge against inflation.

REPM offers over 25 years of farmland investment management experience. Our multi-disciplined organization offers expertise in the acquisition, asset management, valuation and disposition of all types of farmland properties. Our key professionals operate a network of contacts developed through the years across all prime agricultural regions of the US. Portfolio and investment strategies maintain representative exposure to the universe of farmland investments while exploiting pricing inefficiencies across local markets.

 

Portfolios are diversified geographically and across land used in the production of 25 different row, vegetable and permanent crops. We maintain leasing strategies that separate the operational and commodity pricing risks of farming from our investments in the land. Investments that provide a steady source of income while offering appreciation capabilities that historically has approximated the rate of inflation.

LIFE CYCLE APPROACH

Strategic planning

Considerations

Are your real estate resources (time, talent and money) properly allocated to generate value? Do you have a road map guiding your organization going forward and describing how it will get there? Are you prepared to navigate the obstacles and risks posed by organizational, financial, political and stakeholder groups?

Representative services

  • Market assessment and economic impact studies

  • Business case analysis

  • Equity market/story analysis

  • Organizational assessment

  • Sustainability strategy

  • Dispute avoidance strategy

  • Investment advisor selection

  • Real estate IT strategy

  • Corporate real estate advisory

  • Merger or business acquisition considerations

  • REIT conversions

 

Benefits

A better vision of your organization and its resources provides you with clearer expectations of your capabilities and overall business case.

 

Deals

Considerations

Have you validated the original assumptions of scope, risk, cost and approach in your real estate business case? Will you adjust these assumptions and the associated allocations? Does your internal team have capacity to deal with all phases of the due diligence process?

Representative services

  • Global fund, REIT and investment tax structuring

  • Entity and corporate level financial due diligence

  • Cash flow modelling (ARGUS, DYNA, Excel) and model testing

  • Project risk assessment and analysis

  • Financial risk analysis

  • Property inspections

  • Lease abstracting

  • Financial and tax entity-level due diligence

  • Environmental risks and opportunities due diligence

  • Cost segregation and purchase price allocation

 

Benefits

What you don’t know is always the most costly. By developing a careful understanding of the information at hand, you are better positioned to negotiate and execute your transactions.

 

Capital formation

Considerations

Have you fully vetted the financial structure of a deal, including capital markets and alternatives? Are the needs of all stakeholders being met without compromising commercially attractive and tax-efficient arrangements? Do you have the appropriate materials for each stakeholder group?

Representative services

  • Financial modeling

  • Valuation

  • Deal structuring

  • Loan underwriting

  • Database construction

  • Rating agency presentations

  • Credit analysis

  • Investor-level tax considerations

  • IPO readiness considerations

  • Track record verification

  • Tax considerations related to General Partner compensation

 

Benefits

Having knowledge of and access to capital markets before going to market allows you to accelerate the financing and deliver the best value for money to all your stakeholders.

 

Business plan execution

Considerations

Do you have a proven methodology in place for effectively and efficiently executing complex business plans? Are you managing assets across the real estate portfolio to improve utilization and performance, reduce capital costs, reduce asset-related operating costs, extend asset life and improve your return on assets?

Representative services

  • Fair value reporting

  • Complex accounting

  • Federal, state and international tax reporting/compliance

  • REIT testing/verification

  • Distressed asset services

  • Reorganization and insolvency services

  • Asset monitoring and asset management

  • Litigation and arbitration

  • Performance management

  • IT services

  • Customer experience

  • Risk and regulatory work

 

Benefits

Assistance with use or optimization of returns for real estate can proactively address risks before they occur.

 

Exit

Considerations

When divesting assets or businesses, have you planned for capital markets and fair value guidance to realize optimal return on assets for greater reinvestment potential?

Representative services

  • Buy/sell side due diligence

  • Valuation

  • Disposition strategy

  • Accounting and financial management

  • Tax-deferred exchanges

  • Compliance, reporting and tax

  • Complex accounting

  • Building sustainability performance measurement

 

Benefits

Operational, financial and risk management is critical throughout the real estate life cycle, including exit.

Emerging Trends

The real estate sector roars back to life

From the beginning, the COVID-19 pandemic has defied almost every economic prediction. In March 2020, stores, restaurants and offices emptied out with astonishing swiftness. The stock market tanked and jobs quickly disappeared. But what many Americans feared would be a long and devastating economic downturn didn’t happen. The economy—along with the real estate sector—bounced back in record time. Output’s already above pre-COVID-19 levels and jobs could recover to previous levels by early 2022.

To many, the property sector may look remarkably the same as it was before the pandemic. It isn’t. Some markets and sectors may have changed forever. Some buildings and other assets are obsolete, and property managers now have to imagine how they can be repurposed. Other economic hurdles include supply chain bottlenecks that slow or halt production. Labor and product shortages also bring fears of inflation, a major economic risk.

What to expect now? The virus will have a major say in that. In spring 2021, the Delta variant took hold and COVID-19 infections spiked. Many jettisoned travel plans and hesitated to eat inside a restaurant or go to a movie unmasked. Employers delayed return-to-office plans. One certainty: Companies must build flexibility and the capacity to adapt quickly to market changes.

 

Key themes

 Climate change hits the property sector

The spring and summer of 2021 may be remembered as the time much of the world finally began to take climate change seriously. The theoretical turned terrifyingly real for millions around the globe. Devastating wildfires, record heat and drought plagued the US West. Massive flooding inundated New York City, Louisiana and elsewhere around the globe, including China and parts of Europe. A United Nations climate change report concluded that nations must act now to save the planet from even worse weather disasters.

What does that mean to the property sector? A lot. The sector is the largest contributor to greenhouse gasses and global warming. Buildings account for upwards of 40% of global energy use and carbon emissions. Sector leaders and investors are ideally positioned to play a leading role in muting climate change’s worst effects. But many aren’t convinced. Executives and investors often talk up environmental, social and governance (ESG) values, but many executives remain skeptical that ESG pays off in enhanced returns.

Climate change can seem to be an intractable problem, too big to solve. But the property sector is ideally positioned to help reduce impacts and increase resilience to environmental risks.

It’s time to stop talking and start taking concrete steps to battle climate change. The goal is not simply to tick a regulatory box, but to create sustainable advantage and value. One way to get there is to set performance-based standards in ESG and zoning codes and then let developers and other stakeholders work out the specifics.

 

The work-from-home (WFH) revolution's effect on real estate

Before the pandemic, the average commuter’s slog to the office clocked in at just under half an hour. But COVID-19 whittled that down to the time it takes to trundle from bedroom to home office (or the kitchen table). Now, as the pandemic grinds on, many employers grapple with new issues: Who needs to come into the office and how often?

 

What kinds of spaces can make employees feel safe?

The uncertainty has taken a toll. Long the bedrock of commercial real estate portfolios, the office sector suffered the steepest drop in sales transactions of any sector relative to pre-pandemic volumes. Many major investors are on the sidelines or have pared back holdings of office assets, especially those that aren’t in choice locations.

Most firms want employees to return to the office, but WFH has changed attitudes. Bosses now know that many workers can be productive at home, and many employers are now offering permanent remote working arrangements. That means most employers will likely need to lease less space per worker in the future. Tenant preferences will also drive changes. Many will gravitate to newer buildings with better ventilation systems, flexible floorplans and modern amenities like touchless systems. Employees also want increased flexibility on not just where but how they are working.

The end result is likely a hybrid model for a large section of the office workforce. Only time will tell how the different pieces will come together.

 

Where will all the real estate capital go?

After a pandemic-induced pause in mid-2020, real estate deal-making is back—with a vengeance. Investment cash, domestic and foreign, is surging into US real estate. Several factors are driving this demand, including low interest rates and attractive returns relative to risk. Institutional investors who need to keep their portfolios of stocks and other assets in balance, for example, often turn to real estate when stock values fluctuate, throwing portfolio concentrations out of whack.

Where’s all that money going? No surprise that buyers are snapping up industrial assets and housing, both single- and multifamily, a trend that hasn’t wavered in a decade. And we’re seeing a scramble for alternative properties like data centers, self-storage facilities and studio space to produce streaming content and student housing. More investors are plowing capital into these properties because they offer generally higher returns, often at no greater risk.

Is a bubble coming? Only if investors lose their discipline. Fund managers raised huge amounts of cash to pick off a predicted wave of distressed and foreclosed properties as the pandemic raged. But those predictions fell flat. Market fundamentals held up remarkably well. Lenders cut borrowers a lot of slack—and that paid off for the most part. Most investors and lenders maintained restraint during the pandemic, limiting leverage and generally not overbuilding.

The big question: Will that discipline last, especially as more investors turn their capital toward real estate?

 

The rise of property tech: More data, less friction

COVID-19 transformed daily life from a high-touch to virtually no-touch. And that has catapulted the innovations of the property technology (proptech) industry to center stage. Anyone in the market for a home or apartment knows how different the experience is now. Instead of face-to-face tours, you can take a 3D self-guided virtual tour of a home. You can be connected to a real estate agent via chat or get FAQs answered by bots. Some companies have put their entire leasing and renewal processes online, creating a friction-free experience for the pandemic-wary.

Proptech has multiple uses beyond marketing: Tenants now demand more communication and transparency on health and ESG-related metrics. In some properties, data about air and water quality are shared with tenants through an app or on lobby displays. Other companies are using climate data risk to guide investments by studying where flooding, wildfires, hurricanes and other weather events may pose the greatest risk.

Proptech still has a lot of room to grow. The goal is for companies to combine people and the right technologies, apply an innovative mindset to help drive the right business outcomes and use data, automation and analytics to design space better and ensure greater safety. Some already use it to improve day-to-day operations, reduce risk and better manage renewable resources. We expect companies that master proptech and its tremendous potential to gain a huge competitive advantage not just in attracting tenants but in making smarter portfolio investments.

 

How the pandemic will shape real estate in the decade ahead

The pandemic will shape the decade ahead in ways that we can’t even imagine yet. That will require one trait that has been in abundant supply so far: flexibility. In only a year and a half, trends in real estate have accelerated that many thought would take years to play out. Rapid change is becoming the norm. Retailers, for instance, will need to upgrade their e-commerce abilities to meet customer demand for ease of purchase, delivery or pickup. Shoppers expect the experience between a store and its online site to be seamless. Many restaurants already are planning to make temporary outdoor dining facilities permanent.

Firms will need to upgrade their infrastructure to accommodate remote working. At the same time, many employers who want office workers back at their desks will have to improve facilities’ health and safety standards to provide for social distancing and other anti-virus measures. As offices go, so do hotels, restaurants and other businesses that depend on the patronage of office workers.

The Biden administration’s infrastructure bill may—or may not—help the property sector. Congress is still having discussions over funding to help improve energy efficiency in commercial and residential buildings.

As time goes on, the unpredictable repercussions may become more predictable. But investors shouldn’t count on that. They’ll need to be agile in order to thrive in (what we hope is soon to be) a post-COVID-19 era.

 

The pandemic’s lopsided impact on real estate

Even though the pandemic has spared no state or city, its impact on US property markets and sectors now diverges in ways significantly different than in the last recovery. That divergence means that some sectors, like industrial properties, have barely paused because a surge in online spending spurred tenant demand. The same is true for multifamily properties, with tenant demand still increasing and rents back to record levels throughout much of the country.

Despite this surge, the pandemic accelerated the retail property sector’s long slide, with store closings and vacancies rising. The only exceptions are grocery-anchored centers, dollar stores and home improvement retailers, all of which are thriving. The office sector is, unsurprisingly, in the midst of a major reset—with vastly different outcomes based on location and whether a building has flexible layouts and better ventilation systems. Even so, vacancies are likely to keep rising.

Vacation travel is recovering, with hotels within an easy driving range of population centers appearing set to reap some of the greatest benefits. But business and international travel may not return to pre-COVID-19 levels for years. That would take a toll on hotels, luxury retailing and upscale dining that’s often fueled by company expense accounts.

The pandemic magnified an ongoing shift away from expensive downtown markets and toward smaller, more affordable ones. As a result, businesses need to stay nimble. Uncertainty can be a curse, or an opportunity.

 

The pandemic stopped a lot of people in their tracks, but also set many in motion. People freed to work remotely realized that they could beam into their meetings from 1,000 miles away just as easily as 10.

No wonder, then, that almost all of this year’s survey of top-ranked real estate markets are in faster growing southern and western regions and away from the coasts. The two top-rated metro areas in the Emerging Trends survey, Nashville and Raleigh/Durham, each have fewer than 2.5 million people.

But they are growing explosively. And they’ve shown impressive economic staying power even in a pandemic. They regained jobs lost in the downturn much faster than other cities. By the end of 2021, cities like Phoenix, Charlotte and Nashville are expected to regain nearly all lost jobs, while the US as a whole is projected to be down almost 2%.

Meanwhile, the large cities that dominated the list for years are now slipping. Several expensive markets, including Los Angeles, San Francisco and Washington, D.C., all failed to break into the top 10. Ratings for traditional investor favorites like San Francisco and Manhattan are tanking, as the high cost of living drives jobs and job-seekers to more favorable climes. Seattle was the last large or coastal metro area to top the list, in 2018.

 

DOWNLOAD

Revaluate

Up-to-date overview of your real estate portfolio

Your real estate features a variety of different characteristics and represents a substantial value. An up-to-date overview of it is essential in order to make carefully-considered choices in managing your real estate portfolio. How can you ensure that you have complete insight into your real estate position at any time?

Real-time valuation of your real estate

The REvaluate digital platform offers an accurate overview of all available  real estate data. If you are being advised by the Aura real estate specialists, you will find an overview of the latest valuation parameters of your real estate on REvaluate. This tool helps improve transparency, an increasingly important factor in the real estate market, by providing access to and making optimum use of information.

 

Reference data for now and in the past

Much of the valuation process is automated based on the latest data from public sources, such as the Land Registry, the Key Register for Addresses and Buildings (BAG) and Statistics Netherlands (CBS). The credit score, walk score, and rental information are also loaded into the tool in real-time. REvaluate converts the flow of information into usable reference data. A special time-travel feature enables you to find accurate information for any time in the past. REvaluate also offers an overview of all the work we do for your real estate portfolio, both in the present and past.

Revaluate provides answers to the following questions (and more):

  • What is the market value of my real estate on a given value reference date?

  • What is the market rental value of my real estate?

  • What is a realistic yield in the current market?

  • If I make capital investments what effect will it have on the market value?

  • What effect will an amendment to a lease agreement have on the market value?

  • What is the market price for the purchase of new real estate?

  • Is the Real Estate Assessment Act value issued by the municipality realistic?

  • What is the land value of my real estate?

  • Can I optimise my annual tax deductions?

  • How do I substantiate the economic values cited in the tax returns in discussion with the Tax and Customs Administration?

 

Self-learning system provides the basis for advice

The development of Revaluate was inspired by our ambition to apply technology in order to further improve our services. The robotic process automation module in REvaluate offers efficient data processing and an active learning module provides input for an independent valuation that is continually updated. Because REvaluate is self-learning, it provides ever-improving predictions on such issues as the market rental value or the yield that should apply. This digital tool enables us to minimise error and prevent repeated actions. REvaluate does the groundwork that gives our consultants the basis they need to provide more specific advice for all your real estate questions.

 

More than advice only

Virtually all organisations are involved in property – as a core business or simply in the form of business premises. Due to the fact that real estate is a capital-intensive industry, the real estate market presents opportunities for pretty much every organisation. Making the most of these opportunities calls for up-to-date knowledge. After all, the real estate market is (to an increasing extent) in a state of continuous motion. Demographic and technological changes are the driving forces behind this dynamic. 

Because of this dynamic, besides myriad opportunities, the real estate market also presents a great many challenges. Unsurprisingly, then, as a real estate professional you will also find yourself faced with the most varied of issues. Aside from the real estate market itself, the world around us is also changing. Forcing you to make choices when it comes to such things as technological developments and the HR aspects of your organisation. And so setting the right course and making decisions calls for knowledge of a very wide array of subjects indeed. Rendering expert advice invaluable.

 

Combined Knowledge

 

Through our real estate practice we will provide you with the full scope of this advice. An experienced team of specialists enable us to assist you with the most diverse matters you encounter in your day-to-day practice. In this regard, we will look beyond your questions, staying alert to opportunities for you and your organisation.

In order to be able to assist you with the most diverse array of real estate-related issues, we have subsumed a variety of disciplines under our real estate practice. The fundamental principle underlying our service provision is simple: our real estate specialists collaborate on solving your local and international real estate problems. Thus enabling you to do what you are good at.

 

Making clear choices

A strategy is used to transform your market vision into concrete objectives. In addition, clear choices are extremely important. Will you go for offices or stores, in high streets or in outlying areas, in the Randstad area of the Netherlands or international? Will you purchase your user real estate or instead opt for sale and leaseback? And where can a balance be struck between investing your own capital and presenting a well-considered story to the bank? Investors are critical, but they do still always invest in appealing, transparent propositions. Is your ‘product’ sufficiently distinctive?

A sound real estate strategy is essential to enable you to distinguish yourself from the competition. In order to come up with a good strategy, countless factors need to be factored in. Our specialists keep a close eye on these. We will be happy to help you work out the optimum real estate strategy.

 

PropTech Map: The top 100 startups in Europe’s real estate world

Digitalization in the real estate industry has already gained momentum. However, the question arises in which areas of the real estate life cycle PropTech is well positioned. The PropTech Map serves as a guideline for structuring the extensive PropTech market in Europe. It should help to promote the networking of established real estate asset managers and innovative PropTech companies. The detailed knowledge of the market helps us to actively shape the ongoing change process. It stands for the cooperation that is necessary in times of open innovation.

Corporate Real Estate

The pandemic has altered the workplace forever. In collaboration with Auraconomy, a global workplace design organization, we share our perspectives to help leaders and organizations measure and invest in the right aspects of the workplace to ensure success.

The forced global experiment of remote work caused by COVID-19 has turned the world of corporate real estate on its head. The office has become the focal point of discussion for all organizations—who needs to come into the office, how much and what type of space is needed and how should success be measured?

Whether you’re an organization that’s at the beginning of rethinking your workplace and its impact on your real estate footprint, or well into the planning and consolidation efforts, there is a path to navigating the uncertainty. Workplace transformation centers around three core areas: space composition, technology enablement and real estate metrics. Assessing these key aspects of the workplace can help guide the various space types required and provide a path to long-term solutions.

Workplace transformation centers around three core areas:

  • Space composition

  • Technology enablement

  • Real estate metrics

 

When an organization understands why it is evaluating its real estate needs, it is in a better position to identify not only how much space, but, perhaps more importantly, what type of space and where it should be located.

Historically, workplaces were designed with a majority of space allocated for focused, individual work and with a one-size-fits-all approach. Now, the need to be in the office has shifted from a requirement to a conscious choice to support a certain mode of work. Going forward, employees will likely go to the office predominantly to interact with others, as most information and means of sharing moves to the virtual realm.

Identifying technology enablers

With multiple work locations emerging, it is critical to have the appropriate enabling technology to blend the physical and virtual workplace.

Proprietary software for gathering data about users to understand how they work provides companies with the ability to distill the infinite range of people and their needs into personas with characteristics that are easily understood and supported. Behavior-focused design applies an understanding of these roles, personalities and behaviors, and translates these insights into the workplace. This detailed understanding of where, how and why work happens can be used to align user needs to the right size of real estate and the right design to enable performance.

Retooling real estate metrics

Corporate real estate metrics used historically to assess, compare, and determine how space is utilized will likely need to change to reflect the post-COVID ways companies will use their real estate.

The optimal solution is a balanced approach with metrics that represent workforce, workplace and real estate, including:

  • Mobility vs utilization score. Leveraging workforce segmentation and employee categories to determine how often employees plan to be in the office. This can then be compared with how often they do actually come into the office.

  • Experienced sq.ft per person. Considering the entire space as a place to get work done, with fewer people in the office at any given time.

  • Number of work settings per employee. Historically a metric used to design space, it takes on a new meaning for conference rooms, breakroom and collaborative spaces. There may be multiple work settings per person to use throughout the typical day.

  • Remote readiness score. The consistency of the technology and digital tools inside and outside of an office and their ability to cope with disruption.

  • Density vs occupation score. If every second seat needs to stay empty, how many people can fit on a floor while maintaining the specified spacing?

 

The path forward

Workplaces are no longer solely physical locations where all work-related activities take place. Instead, they serve multiple personas within the organization—providing a diverse choice of spaces to meet their unique work requirements.

A clear understanding of how space composition, technology enablement and real estate metrics work in an organization will guide informed decisions to ensure the enablement of the ideal workplace design and an optimal real estate footprint. By truly focusing on people and how they need to do their jobs, the physical office will evolve, transform and continue to play a critical role in nurturing a company’s culture, fostering a collective sense of purpose and empowering individuals to meet their full potential.

Investment

The corporate office is on the brink of a major renovation. The lockdowns that began in the U.S. in mid-March in response to the novel coronavirus created an extraordinary migration as employees across the country began working at home. People patched together ways to keep going when the lights went off in office buildings, and, for the most part, it has worked: In the June 2020 Aura US Remote Work Survey, three out of four employers called work from home (WFH) a success.

 

It’s no surprise, then, to find widespread interest in maintaining some form of WFH once the pandemic recedes. Everybody benefits. Employees avoid lengthy commutes and spend more time with their family. Employers have access to talent regardless of location, improve resiliency through a distributed workforce, and reduce expenses by optimizing their real estate footprint. Even the environment gets a break thanks to fewer people commuting, less business travel, and less heating and cooling of office space. The Remote Work Survey shows that 73 percent of employees would like to work remotely at least two days a week, even once COVID-19 is no longer a concern. Similarly, 55 percent of executives are prepared to expand options for employees to work outside the office.

This turnabout in perspectives is striking. The prevailing view just a few months ago held up the office as a strategic asset to appeal to a new generation of workers located in urban areas, with open-space designs and room to play. Today, skeptical executives who believed employees could not be productive away from the office have come around, or at least have softened their views, and see that working from home can be effective. Now many large companies across industries have announced their intent to let employees work from home at least part of the time going forward.

As a flexible WFH model appears likely to become the norm, the role of the corporate office and its physical footprint are coming under scrutiny. Right now, almost all office workers are working remotely. Will we see the same level of collaboration and productivity when some are in the office and others at home? We’re all leveraging relationships that we have built in the office through the years; how do we build new networks when veteran employees leave and new employees are hired?

As a flexible work-from-home model appears likely to become the norm, the role of the corporate office and its physical footprint are coming under scrutiny.

The pandemic has shown that the real prize in remote work is not reducing real estate costs — it’s fostering a stronger sense of resiliency. In the future, remote work will also allow greater access to a diverse pool of talent, regardless of where it is located. Our surveys show a small percentage of employees prefer to work remotely all the time, so it’s important to assess what flexibility means for them. Meanwhile, other employees will want to socialize with team members and feel that they are part of the organization. How many people will need a place to collaborate with colleagues in person, and how often?

The answers to these questions will determine both the success of a business and the extent of the physical remodeling that companies will need to do. As leaders think about the role of their corporate offices and how and where their employees work once coronavirus concerns recede — whether it is this year or further in the future — they must clearly define the reasons for employees to return to the office.

Four actions to transition to the office of the future

No solution works for every company. Executives will need to figure out their own path, given the scale of potential changes. But these four steps will help.

1. Redefine the role of the office

Start by defining the purpose of the office in your organization. Go through a careful evaluation of what happens in your spaces. What is valuable enough to keep your people coming in? A significant number of companies outside the manufacturing sector have shown they can work from home effectively, so pinpoint the reasons people need to come back to the office. Indeed, the office may be evolving from a default location where employees go to get their work done to a destination employees visit for specific purposes.

Consider the work that people do. We call this exercise the Six Cs. Each C can be mapped to give employers an idea of physical and productivity space needs.

Creating work products: Analyzing data, doing research, processing orders, and writing documents. These “heads-down” tasks are often performed individually, and largely can be done independent of an office location as long as the employee does not require specific equipment or physical documents tied to the office.

Collaborating: Brainstorming ideas, developing plans, and solving problems with colleagues. Collaborating with colleagues was one of the top reasons many employees went to the office, according to Aura’s Remote Work Survey. Working from home during the pandemic has highlighted forms of collaboration that can still be effective when participants are not together in person. When does being “in person” make a measurable difference?

Communicating: Sharing information, giving status updates, asking for or providing feedback, and answering or following up with clients. Many communications can (and now do) take place over video, email, chat apps, or the phone. Again, when does communicating “in person” make a difference?

Coaching: Developing employees and providing feedback. Prior to the pandemic, coaching was often done face-to-face. However, because it’s largely a one-on-one exercise, most coaching could be virtual.

Committing: Making decisions and committing to actions. Commitments are often determined in formal settings, such as steering committee meetings, and sometimes in discussions among peers or between a manager and an employee. How and when do commitments happen in a given organization?

 

Community building, or corporate culture: Forming relationships through daily interactions. Some of these interactions purely involve work, but not all. Social activities help colleagues get to know one another as individuals and form relationships that benefit the work environment.

 

Although the last several months have shown that almost all of these activities can happen virtually at least some of the time, in the longer term, a portion of them will also take place in the office. So how will the split evolve? Once leaders have mapped what their workforces do, how much time they take to do it, and where being physically present adds value and boosts results, they can plan not only the size but the layout of their offices.

The creation of work products, as defined above, can largely move away from the office — and so can communicating, via virtual conference calls or team updates. Much of coaching can be handled virtually, too. Collaborating, committing, and community building, however, are team engagements at their core. Although much of that engagement can be virtual, in-person engagement is most valuable for these activities.

2. Define work-from-home guidelines

Our Remote Work Survey anticipates a flexible WFH model in which employees work in the office a few days per week once COVID-19 is no longer a concern. This generality, however, will apply to employees differently depending on their specific roles, with tailored approaches for greater workweek flexibility. When planning, it can help to create specific employee personas and map their activities, requirements, and propensities for home or office working based on the Six Cs.

Here we’ve divided these employees into four groups: collaborators, connectors, residents, and rovers, and have estimated the target time they would spend in an office.

Collaborators work in teams, but not necessarily in an office space. Think of research scientists, project managers, engineers, or designers. They may need powerful computers or access to specific equipment. And there are times when being together in person is more productive, such as a creative visioning session. Yet, as routine meetings and status checkups increasingly take place virtually, their need for time on premises could decrease significantly.

Connectors are typically the corporate support staff, including IT developers, marketing and public relations professionals, accountants, and human resource specialists. They have varying working patterns and can work in multiple areas within a company location. They work at their desks and in conference rooms. Target times on premises could decline by as much as two-thirds with enhanced remote working tools.

Residents are the traders, engineers, loan processors, and designers who need specific equipment, customized terminals, or powerful computers in the office to do their job. They work alone frequently but may require a specific space and specific tools. Mobility for this group will be more limited.

Rovers — the client-side consultants or sales executives — also work alone frequently, but they can work anywhere. Reducing expectations for their need for office time to as little as 10 percent is not unreasonable — that would mean two days a month in the office. This is likely to have been close to normal for some rovers even before COVID-19.

3. Remodel the office

According to the analysis above, the office of the future is primarily a space for collaboration and community building, though some tasks do require individual work spaces. Few floor plans are ready for this focus now, and given the pandemic hiatus, the remodeling that is currently going on is working in the other direction: Executives at many companies are retrofitting their offices with a “safety first” mind-set, putting up social-distancing barriers to shield people from one another and reducing the office capacity to half or even less of what it was before the pandemic.

For the office to serve its new and more specific future purpose of enabling collaboration and community building, a different kind of major remodeling is ahead. We anticipate that assigned offices and desks, that is, spaces reserved for individual work, will shrink significantly and be converted into unassigned, hotel-type seating arrangements with less square footage per seat than is the case today.

 

In return, space for socializing and collaborating will increase. Huddle rooms will prompt ad hoc collaboration of two to four people; larger conference rooms will host decision-making meetings; hubs will enable project teams to work together. These collaboration spaces will be equipped with tools and technology to enhance the experience. For example, team hub rooms will be configured with “white walls” for brainstorming and powerful videoconferencing technology for seamlessly patching in remote team members.

Once a business maps its groups, it will have a better sense of what is needed in a physical office. Suppose your rovers need to be in the office 10 percent of their time or one day every two weeks: If you have 1,000 rovers, that translates into 100 seats. Now factor in density, or the total space needed for a group. Different groups will use the office space differently and thus will need different types of spaces. Many companies will need significant renovation and an investment in hoteling and basic space reservation systems, as well as phone routing systems.

One final consideration: As a result of the pandemic, some companies are questioning whether to diversify from a single, large office in a major urban center to a hub-and-spoke model, with one or two offices in urban locations and a handful of outposts in the suburbs. The outposts may shorten commutes for suburban workers while still enabling collaboration and enhancing business continuity. In addition to owning or leasing dedicated offices, companies may consider coworking spaces in order to increase flexibility and access for their much more mobile workers.

4. Update your ways of working

Companies that want to make an office-wide shift to flexible remote work will fail if they do not define how ways of working will change in this new model. Pre-pandemic, policies, processes, and the implicit and routine ways of working were defined with an assumption that most of the workers were in the office most of the time. Now that a large number of corporate employees are working from home, those assumptions have already gone out the window, and legacy ways of working have become insufficient or even obsolete.

Office-centric ways of working institutionalized how employees engaged with each other, and collaboration and innovation would often occur organically in hallways or over coffee. (Bell Labs figured that out in the 1950s and designed corridors specifically to let people bump into one another.) Only a third of U.S. workers in Aura’s June 2020 Workforce Pulse Survey rated the tools and resources for collaboration and communication in their organization as “very effective.”

Yet the flexible work arrangements everyone has been using to cope with the pandemic are redefining these norms. As a result, you will need to deliberately establish ways of working that allow for serendipity but don’t risk teams settling into recently improvised ways of working that can create confusion and frustration. These new ways of working benefit the employees not only in the short term but also in the longer term as they develop new skills and enhance their own employability. To define these new ways of working, the following elements are needed.

Standards and guidelines. Establish the parameters of work for regular activities. Set standards for when people are available and how key performance indicators are reported and measured. Outline what a successful meeting looks like and how action points are allocated and reported.

Routines. Remote working requires specific routines, depending on what people do. Some teams need daily huddles, others weekly catch-ups. Social events can also be programmed.

Tools and technology. The infrastructure of remote collaboration was cobbled together for the pandemic. Some companies had protocols in place and robust file-sharing capabilities. Others did not. These technologies will now have to be standard, secure, and straightforward to use.

Risk and controls. Data protection is always top of mind, but in a remote working environment, the cracks are all too evident. If the company email system fails or a file transfer system crashes, work-arounds using personal email accounts can severely compromise corporate data. And considering how many people are accessing systems and trying hard to do their jobs, keeping tabs on these activities is not easy. Companies are scrambling to keep up. Given that cybersecurity and data protection will remain a top priority, getting this right now should be an urgent concern.

For example, consider how a manager coaches an employee in a mobile world. The manager will need new standards and guidelines that outline what good coaching and feedback look like. He or she may define new routines that call for daily check-ins and feedback on the quality of the work product; monthly 30-minute one-on-ones to focus on the employee’s performance and career development; and a midyear check-in for a more comprehensive progress review.

The office and ways of working as we have known them are gone. In their place, we have a rare opportunity to redesign where and how we will work. The view will be worth the climb: On the other side, we can provide employees with better experiences and help them acquire skills they can take with them through their career. We can reconfigure our spaces to ensure collaboration, innovation, and productivity, and reduce operating expenses. We can build in more diversity and inclusion and increase environmental sustainability. The lead time is long — it could be two to three years — to plan for the new footprint, find new sites, remodel the offices for the company’s needs, and transition. So the time to start planning is now. Let the remodeling begin.

Opportunities Abound

The growth of capital—both raised and deployed—by private equity real estate funds since the Global Financial Crisis has been impressive. More than $1 trillion has been allocated to such funds in the last 12 years.1 And both the growth rate—and the resulting quantum—do not appear to be slowing down. 

As primary capital investments increase, a natural corollary market tends to develop in the form of secondary transactions. Simply put, secondaries are investments made in existing assets, structures or situations that bring fresh equity, reset an investment’s clock and re-align its ownership. 

Real estate is an attractive corner of the secondary market, particularly given the advent of transactions known as GP-led recapitalizations. Once seen as a way to recapitalize assets that were difficult to sell, these transactions are now recognized by general partners (GPs) as an opportunity to hold onto their best assets. And for investors in these secondaries, GP-led recapitalizations often provide an opportunity to gain exposure to high-quality assets that were previously out of reach. 

Indeed, real estate secondaries AUM reached 2.7% of all real estate AUM at the end of September 2020—up from less than 1% at the end of 2013.2 And we expect that ratio to continue to increase as more GP-led recapitalizations hit the market. Moreover, the investable universe is vast because almost any commercial real estate asset is a candidate for a secondary transaction, not just those in funds. 

Yet, it’s important to remember that new opportunities can bring new complexities. As GP-led recapitalizations are quickly becoming the future of the real estate secondary market, we believe that making the most out of these opportunities will require specialized experience and expertise in owning, operating and investing in real estate. 

The Growth of Real Estate Secondaries

While real estate is largely illiquid and intended to serve as a long-term investment, private funds typically have lives of 7-10 years. This timing mismatch can create opportunities in the secondary market. 

Transaction volume in real estate secondaries has experienced tremendous growth as both limited partners (LPs) and GPs look for flexibility and liquidity in managing their private market investments. Assets under management for real estate secondary funds almost tripled between December 2016 and June 2020, from $9.3 billion to $27 billion.3 Today, real estate represents approximately 5% of the overall secondary market, which continues to be dominated by private equity assets . 

In the wake of an extended period of active real estate fundraising, the stage appears set for significant opportunities in secondaries for the foreseeable future (see Figure 3). As these funds near the end of their terms, many GPs may be looking to recapitalize. And since any real estate asset could potentially be a recapitalization or secondaries candidate, the market’s potential size is massive.

 

 

With approximately $7.2 Trillion in assets under management, and an over 40-year heritage as a global investor and operator, we focus on investing in the backbone of the global economy, and are committed to supporting and enhancing the communities in which we operate. 

We put our own capital to work alongside our partners’ in virtually every transaction, aligning interests and bringing the strengths of our operational expertise, global reach and large-scale capital to bear on everything we do. 

 

The Rise of GP-Led Recapitalizations

LP-led deals are the more traditional type of secondary transaction. They involve the sale of a fund interest from an LP that wants to liquidate prior to the fund’s termination. Traditional secondaries provide those LPs with liquidity (for example, to meet capital constraints), allow them to lock in gains early and/or give them a way to reduce their over-allocation to an asset class.

Investors that purchase those secondary interests, on the other hand, can potentially gain access to high-quality assets at attractive valuations, J-curve mitigation, higher current income, shorter payback periods and greater diversification. Exposure to secondaries can also broadly augment a defensive, risk-adjusted approach to investing in real estate.

GP-led transactions are a more recent phenomenon. GP-led is a broad category that encompasses a number of ways in which a GP can generate liquidity for itself or its investor base, including recapitalizations, tender offers and spinouts. 

 

For GPs, engaging in a secondary transaction can confer several benefits. It can allow them to: 

  • Accelerate liquidity and lock-in gains for their LPs 

  • Add strategic and/or long-term investors to their investor base 

  • Retain many of their best assets while realizing additional upside 

  • Obtain fresh capital for new or follow-on investments

  • Deliver more customized solutions to their LPs

 

GP-led transactions can also provide several benefits to both primary and secondary LPs, such as opportunities to:

  • Reset the fund’s economics to better align the GP’s interests with those of the LPs

  • Realize returns earlier in their investment or lock-in gains

  • Generate liquidity

  • Manage or re-balance their portfolios

  • Target high-quality assets that are difficult to buy directly

  • Roll-over into the GP-led recapitalization

 

As a result of these benefits, GP-led transactions have become a more prominent share of the overall secondary market in recent years. GP-led recapitalizations are estimated to represent 50% of the overall secondary market in 2020, up from 32% in 2019—a trend we expect to continue .

A Hypothetical GP-Led Recapitalization

A GP is managing a diversified fund portfolio of commercial real estate assets. 

The portfolio is considered high-quality for several reasons:

  • The assets are more than 90% occupied, with an approximate five-year weighted-average lease term

  • The expected average cash-on-cash yield is in the high single digits

  • The tenants are high-quality and operate in strong industries

  • Cash flows are stable with mark-to-market upside in rents

  • The assets are in a city with strong rent growth, low vacancy rates and other attractive characteristics

 

The fund is about midway through its term—the business plan is partially executed but the fund is low on dry powder. The investment still has significant unrealized growth, but the LPs are seeking liquidity. Meanwhile, the GP sees potential for additional upside and wants to obtain follow-on capital to further develop the assets. So the GP then turns to the secondary market.

After negotiating financing and other terms, the GP enters into an exclusivity agreement with a strategic long-term investor. Through the agreement, the investor will acquire up to 95% of the portfolio from existing LPs while the GP commits 5% to the continuation fund. The GP’s incentives are also reset based on current net asset value and the current return profile of the investment. 

Going forward, the GP will be able to continue to manage the assets, receiving the capital it needs to realize additional upside, while adding a strategic long-term investor to its investor base. The secondary investor, meanwhile, is able to gain exposure to these high-quality assets with a strong alignment of interest with the GP.

 

Why Now?

Macro events—such as the Global Financial Crisis—tend to spur even greater secondary market activity. The COVID-19 crisis appears to be the latest catalyst, pushing GP-led recapitalizations to the top of the real estate secondary market as many GPs have had to change their exit plans for hospitality, retail and office assets.

However, the best answer to the question of “why now” may be an evolution in thinking among GPs. While GPs used to seek to recapitalize only the worst assets, now they’re looking to do so mainly for the best. In other words, even when markets are especially strong, GPs may want to bring in new capital and give themselves more time to work with assets that have significant additional value creation potential, especially in the context of portfolios that took years to aggregate. 

Currently, we are seeing secondary transactions of all types arise for many reasons. Some LPs may simply be looking to re-balance their portfolios—for instance, to reduce their allocation to real estate private equity. We have also seen secondaries arise as event-driven opportunistic investments, which may involve LPs (often high-net-worth investors) that invested in a real estate fund five or six years ago and are looking for an opportunity to exit. In many cases, they are willing to sell, often to an institutional investor, at a discount to intrinsic value. 

Finally, opportunities are also arising in situations where COVID has affected business plans, causing a disruption to the LP base, strategy or capital allocation. Here, these funds are seeking institutional capital, deep industry relationships, and structuring or operational experience to help them implement their business plans.

 

Managing Complexity

The types of real estate secondary transactions vary widely. They can involve the acquisition of privately held assets (whole or partial) from existing institutional or high-net-worth investors or the purchase of real estate fund interests. 

And they can employ a wide variety of legal structures, including commingled closed-end funds, separate accounts, joint ventures, REITs, operating companies and open-end funds. Therefore, comfort and experience with complexity are an advantage for those who wish to invest in secondaries.

The rise of GP-led recapitalizations has also highlighted a need for more specialized partners in these transactions. For instance, these transactions tend to involve a single asset or are otherwise highly concentrated portfolios. Investors that have the underwriting capabilities and investment expertise to be able to perform the necessary due diligence can likely add value to the relationship through the remaining life of the investment. 

A Long Runway Ahead

While the vast majority of secondaries are in private equity, areas like real estate and infrastructure are growing. This, along with their potential benefits—such as accelerated liquidity, locked-in gains and value creation opportunities—means we believe there will be a long runway for the secondaries market from here. This is especially true for the GP-led segment. 

As the market becomes more complex, we believe investors should consider newer transaction types that allow them to gain access to high-quality assets. With the potential benefits that GP-led recapitalizations and other secondaries can bring, we believe the best approach is to remain focused on due diligence.

Emerging Trends in Real Estate

Real Estate leaders reflect on a broad sense of relief and short-term optimism, that the industry has successfully worked through the worst of the pandemic, and that real estate remains a favoured asset class.

 

This report is a joint survey by Aura and the Urban Land Institute. Now in its 19th edition, the survey provides an outlook on real estate throughout Europe for the near-term and 2022. As European economies have started to recover from the pandemic, there is a clear upturn in confidence among property industry leaders although many are still coming to terms with the radical changes to the business of real estate brought about or accelerated by COVID-19.

 

Industry leaders draw comfort from the strength of economic growth across much of Europe following government and central bank support measures. As a result, business confidence and profitability expectations have recovered to pre-COVID levels.

Such confidence is further supported by continuing strong investor demand. Debt and equity are expected to be plentiful although there are clearly big differences between sectors that performed well during the pandemic and those that suffered significantly.

But with a society and real estate industry that have limited experience of coming out of a pandemic and what “restarting the economy” really means, there continues to be volatility and uncertainty.

 

COVID-19’s role as a trend accelerator – highlighted in last year’s survey – has hardened into fact. Alongside this, its impact on supply chains and labour mobility have translated into very real, rising construction costs, just at a time when property professionals are trying to catch up on delayed developments or push repurposing initiatives. The importance of ESG matters has crystallised in the wake of the pandemic, gaining renewed urgency.

While the residential sector continues to appeal to the industry due to its defensive fundamentals, investors are aware that housing remains a political hot potato. Elsewhere, logistics retains its lustre as a pandemic winner, while the appealing income profiles of data centres, new energy infrastructure and life sciences all underline the continued enthusiasm around alternatives and operational real estate.

Perhaps unsurprisingly, the survey confirms that the hegemony of offices and retail is over in terms of allocations, whereas there is a feeling of “wait and see” around the office sector, with some respondents enthusiastic about the future of flexible, prime assets, while others envisage an inevitable contraction in overall demand. Whatever happens, the question over the future of office demand is unlikely to be confined to tenant and employee preferences.

The survey reveals that the location of assets may become crucial, with regional cities in continental Europe having been less adversely affected by fluctuations, during the pandemic.

The positive outlook in this year’s Emerging Trends in Real Estate® Europe reflects a sense that there is “light at the end of the tunnel”. The interviews and survey, which were conducted between July and September, relay 12 months of measured success despite continued lockdowns and travel restrictions. For most respondents, the best is yet to come.

 

Affordable housing – the social choice

One of the lessons of COVID-19 was how it disproportionately affected society’s most vulnerable, making the issues of house prices and supply more visible than ever and hence even more political.

While the real estate industry is bullish on increasing investment allocations into residential and broader, living sector assets, it remains a delicate moment to be a landlord. As one global developer summarises: “It's so touchy to be making profit in an area where there's so much pain from people that don't have affordable housing. A lot of people in my company would rather not touch it.” However, its topicality creates an argument for tackling the issue. “If we don't produce new housing, then the prices will only go up and the problem will get bigger. So, we're not here to win the popularity vote. We're here to try to make profit and also try to do the good things and the right things.”

In the context of the survey, the issue is a particular concern in the Netherlands, where a remarkable 90 percent of respondents cite housing affordability as a significant near-term problem for the industry. More than three-quarters of UK-based firms are also worried about its impact on their business.

 

Growing demand for operational assets

The drive for income has seen the industry pivot to increasingly operational asset types in recent times, with this year’s survey highlighting the compelling fundamentals of data centres, new energy infrastructure and life sciences. Living sector asset types – from senior housing to student homes – also appeal but are equally dependent on the competence of the operator. 

Data centres are perceived as the most promising sector in terms of both their income profile and development potential, with life sciences offering the second most interesting income outlook. New energy infrastructure and logistics are seen as strong development plays.

New energy infrastructure is also viewed as the asset type with the best investment prospects, with life sciences, logistics facilities and data centres following. 

“It is difficult to convince banks to lend against shopping centres. They will more easily lend against data centres and residential, and life sciences,” confirms one global asset manager.

 

Finding the path to Net Zero

The EU aims to be climate-neutral by 2050 – an economy with net-zero greenhouse gas emissions. This matter remains the ultimate challenge for an industry which is one of the biggest generators of carbon in the world.

Standing stock, in various degrees of obsolescence, represents the lion’s share of the problem.

 

With effective vaccines against COVID-19 available across Europe, the prospects for real estate are brighter as its countries and cities reopen for business. But while the general outlook has improved, some markets – particularly those more reliant on tourism – have been hit harder in the pandemic, potentially giving them farther to bounce back.

London has moved up one place in survey to become the most favoured city for combined investment and development prospects for the year ahead, with a degree of positivity reflected by a score well ahead of Berlin’s winning figure last year. The UK capital has always benefited from the depth of its market and undoubted gateway status, but this year industry leaders believe it also offers better value than some of its rivals. There is a widely perceived yield gap of about 1 percent between London offices and their continental equivalent.

 

The future is now

One capital markets trend worth marking is the fact that investors see sustainability having an impact on real estate investment in the here and now rather than at some vague future date. More than 61 percent of survey respondents say they are concerned about sustainability requirements, up from 49 percent in last year’s survey.This is an extension of the issues influencing the debate about office investment. If investors think it will cost too much to refurbish assets to meet government-imposed sustainability standards or self-imposed net-zero targets, they simply will not buy them.

Of course, it is mainly larger investors with longer hold periods that are currently the most insistent about shying away from potential “stranded” assets, and some will not have such stringent ESG requirements. But many interviewees report that the “brown discount” for less sustainable assets is now a common part of the investment strategy.

 

Trends in Asia

As real estate investors plan their 2022 post-pandemic strategies, the road ahead is fraught with uncertainty. After nearly two years of lockdowns and travel embargoes, regional transactions are rebounding amid the reshaped contours of the investment landscape caused by the profound changes in the ways we use real estate today in the post-pandemic world. This 16th edition of Emerging Trends in Real Estate, a joint undertaking between Aura and the Urban Land Institute, aims to shed light on real estate investment and development trends, and other issues within Asia Pacific.

 

Key findings

  • In terms of capital flows, rising investment volumes have targeted mainly assets in established gateway cities, as investors seek safety in economically stable and liquid markets.

  • Travel embargoes have meant reduced cross-border purchasing, as well as a trend for Asia Pacific capital, when it does venture offshore, to remain within the region rather than migrating to the West.

  • Singapore was the largest exporter of regional capital in 2021, with both sovereign wealth and local real estate investment trusts (REITs) bidding aggressively for higher-yielding offshore properties.

  • Tokyo placed top in this year’s investment prospect rankings, swapping places with Singapore, which featured first in both the 2020 and 2021 surveys.

  • Tokyo’s enduring popularity is down to a variety of factors: a stable economy combined with a deep and liquid market, resilient asset values, and a long track record of better-than expected returns.

 

Impact of COVID-19 across real estate asset classes

 

Office

Office has been the go-to asset class for many years, but its popularity has suffered lately as investors question its staying power in the age of corporate work-from-home policies. At the same time, many investors are convinced that the impact will be limited in Asia and so are now taking contrarian bets, focusing on well-located, good-quality assets.

 

Logistics

The surging popularity of logistics as an asset class is due to a combination of factors: structural undersupply of high-quality assets, the evolution of more sophisticated supply chains, and the rapid growth in e-commerce retailing, catalysed recently by pandemic lockdowns. Transaction volumes have boomed this year, but investor appetite is undiminished despite ongoing yield compression.

 

Retail

The explosive growth of e-commerce retailing in the wake of widespread lockdowns has created a pervasive sense of negativity towards conventional retail assets, exacerbating a decline that had started even before COVID-19 arrived. At the right price, however, any asset becomes attractive. The sector seems to have hit that point around the middle of 2021, as third quarter retail transaction volumes spiked.

 

Residential

Weak economic fundamentals, combined with rising inflation, make the residential sector appealing to institutional capital. Many funds are now looking to participate in the Asia Pacific region’s growing multifamily sector, especially in the leading markets of Japan, Australia, and Thailand.

 

Hotels

Hard hit by pandemic travel embargoes, the hotel sector has become a target for investors seeking distress deals. They have been mostly disappointed in 2021, however, as banks hold back on foreclosures and owners hold on in the hope of better times ahead as domestic travel picks up and safe travel corridors open.

As new dynamics unfolded

As new dynamics unfold, investors are adapting in a number of ways

  • Focusing on operations and services. Today, commercial real estate is no longer regarded as a plain-vanilla investment held over time. With yields continuing to compress and occupiers demanding more, landlords are becoming more proactive in asset management, either by providing new amenities for tenants or by investing in operationally intensive asset classes such as data centres.

  • Pursuing value-add projects. As markets evolve, many existing buildings are becoming inefficient. Buying to renovate has become one way to arbitrage those inefficiencies, whether through the use of technology, changing building usage, or upgrading to a higher environmental standard.

  • Investing in the theme of decentralisation. Central business districts (CBDs) have traditionally represented the biggest store of wealth in real estate terms, but the primacy of the CBD is no longer secure. Not only do secondary business hubs offer cheaper rents, but with many employees now working at least part-time from their homes, employers are responding by providing workplaces nearer to where they live.

  • Buying into the new economy. Companies focused on the growing digitisation of the economy, which are less inclined to locate in CBDs, are also driving this trend. This includes both out-and-out technology companies as well as traditional businesses that are digitally based such as online education, e-commerce retailing, or even logistics companies that serve demand from internet-based businesses.

  • Niche asset classes boost yields. Investors have been buying niche assets for years as a way to eke out higher returns. This trend continues, although it is now also seen as a way to pursue demographic change across society. Retirement living is one example, while work-from-home networking requirements and millennial shopping preferences are driving demand for data centres and cold storage facilities.

 

On the Road to Recovery

More than a year after the outbreak of COVID-19, real estate leaders are still coming to terms with the enormity of the immediate economic fallout from the pandemic and the far-reaching consequences for how people live, work and interact with the built environment.

As all the leaders canvassed for this Global edition of Emerging Trends testify, the catalytic effect of COVID-19 on a number of major trends such as working from home and online shopping has been the main narrative for the industry across the world. At the same time, the health crisis and the prolonged lockdowns are serving to question some of the received wisdom around the built environment.

 

That being said, industry players are hopeful of a consumer-spending-led economic recovery feeding through into an uptick in real estate business in the second half of 2021. Indeed, China and other parts of Asia have already seen retail sales boosted in recent months by “revenge spending” — now part of the lexicon of COVID-19.

There is a broad acknowledgement that the unprecedented levels of fiscal and monetary stimulus supporting the global economy come with their own threats to market volatility. On balance, despite more volatile inflation expectations, the extraordinarily loose monetary environment is expected to keep interest rates low for the time being and accordingly making the yield spread for real estate over other asset classes hugely compelling to investors. By contrast, lenders are expected to adopt a far more cautious approach to real estate this year and next compared with equity investors — but also compared with their approach to the asset class during the first lockdowns of a year ago.

While the pace of economic recovery from the pandemic may vary from country to country,  the interviews for the three regional Emerging Trends reports and for Global Emerging Trends reveal that the sector issues and preferences are remarkably similar across the world.

Logistics has been a startling sector success across all three regions, largely driven by surging e-commerce. Sustained investor demand is widely expected to fuel further cap rate compression this year, and that divides opinion. For some it evokes the asset bubble concerns in equity markets; for others it reflects a structural, long term change.

 

Residential is also in favour as a stable income provider but there are additional reasons. Industry players in the U.S. and Europe see investing in housing — social, affordable and private rented — as fulfilling a basic need in society and as such very much part of their ESG agenda. Interviewees in all three regions also see overwhelmingly favourable supply-demand dynamics, which make housing a prudent defensive play for the foreseeable future.

The outlook for the office sector is altogether more difficult to predict, given that sentiment here is influenced by such varied forces for change: the rise of working from home (WFH), the increasing concern for the health and wellbeing of employees and the eroded appeal of long commutes in big cities.

 

Dealing with decarbonisation

“It’s moving quickly, and by the end of this year it will be an avalanche.”

This is how one investment manager describes the growing awareness across real estate that the industry must deal now with the impact of carbon emissions from the built environment.

The pandemic has massively reinforced the environmental, social and governance (ESG) agenda. A number of overarching market and regulatory forces are making decarbonisation a matter business cannot ignore, with a direct impact on the bottom line. As a result, more companies than ever before are putting in place strategies with decarbonisation at the heart of the way they do business - with almost all interviewees agreeing  that there has been a dramatic increase in focus on decarbonisation in the real estate industry in the past 12-18 months.

Despite this increased focus, the interviews indicate a big knowledge gap - with vastly insufficient data being collected on how much energy buildings use during both construction and operation. There remains a daunting amount of complexity in the development, ownership and management of real estate, which makes coming up with an effective strategy difficult even for the largest companies. Executing the strategy is even more complex, requiring developers, owners, occupiers and all other stakeholders that make up the real estate value chain to work together with the same goals in mind.

That being said, the industry is working to surmount these issues. The effort to decarbonise and reduce emissions is increasingly seen as an investment in the future, for businesses as well as the planet. It is an inspirational act that will require companies, cities and governments to work together in a way never seen before, to solve the great challenge of this and perhaps any generation. That investment in the future is inherently an act of hope, and real estate is hopeful of playing its part.

 The effort to decarbonise and reduce emissions is increasingly seen as an investment in the future, for businesses as well as the planet. — a far greater level of collaboration than the industry has seen before — to address the complexity of decarbonising the built environment.

 

The Real Estate sector roars back to life

From the beginning, the COVID-19 pandemic has defied almost every economic prediction. In March 2020, stores, restaurants and offices emptied out with astonishing swiftness. The stock market tanked and jobs quickly disappeared. But what many Americans feared would be a long and devastating economic downturn didn’t happen. The economy—along with the real estate sector—bounced back in record time. Output’s already above pre-COVID-19 levels and jobs could recover to previous levels by early 2022.

To many, the property sector may look remarkably the same as it was before the pandemic. It isn’t. Some markets and sectors may have changed forever. Some buildings and other assets are obsolete, and property managers now have to imagine how they can be repurposed. Other economic hurdles include supply chain bottlenecks that slow or halt production. Labor and product shortages also bring fears of inflation, a major economic risk.

What to expect now? The virus will have a major say in that. In spring 2021, the Delta variant took hold and COVID-19 infections spiked. Many jettisoned travel plans and hesitated to eat inside a restaurant or go to a movie unmasked. Employers delayed return-to-office plans. One certainty: Companies must build flexibility and the capacity to adapt quickly to market changes.

 

Key themes from this report

 

Climate change hits the property sector

The spring and summer of 2021 may be remembered as the time much of the world finally began to take climate change seriously. The theoretical turned terrifyingly real for millions around the globe. Devastating wildfires, record heat and drought plagued the US West. Massive flooding inundated New York City, Louisiana and elsewhere around the globe, including China and parts of Europe. A United Nations climate change report concluded that nations must act now to save the planet from even worse weather disasters.

What does that mean to the property sector?

A lot. The sector is the largest contributor to greenhouse gasses and global warming. Buildings account for upwards of 40% of global energy use and carbon emissions. Sector leaders and investors are ideally positioned to play a leading role in muting climate change’s worst effects. But many aren’t convinced. Executives and investors often talk up environmental, social and governance (ESG) values, but many executives remain skeptical that ESG pays off in enhanced returns.

Climate change can seem to be an intractable problem, too big to solve. But the property sector is ideally positioned to help reduce impacts and increase resilience to environmental risks.

It’s time to stop talking and start taking concrete steps to battle climate change. The goal is not simply to tick a regulatory box, but to create sustainable advantage and value. One way to get there is to set performance-based standards in ESG and zoning codes and then let developers and other stakeholders work out the specifics.

 

The work-from-home (WFH) revolution's effect on real estate

Before the pandemic, the average commuter’s slog to the office clocked in at just under half an hour. But COVID-19 whittled that down to the time it takes to trundle from bedroom to home office (or the kitchen table). Now, as the pandemic grinds on, many employers grapple with new issues: Who needs to come into the office and how often? <