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Real Estate Investment: Its Evolving Purpose and Future Considerations

Wherever there are people, there will always be a need for real estate – though its purpose evolves over time. Consider the period from 2010: workplace attendance was unquestioned, leading to stronger office demand driven by economic growth. Shopping centres were the main distribution hub for people to acquire their daily needs, from groceries to clothing. Logistics networks and consequent industrial real estate were designed and located around ports and shopping centres for optimum efficiency. At the same time, real estate values were supported by a low interest rate environment, increasing the attraction of the asset class.

Technology was about to play a significant role in the evolution of real estate. The rise of the smartphone led to the increasing convenience and popularity of online shopping. As people shopped from their couches, shopping centres were adversely impacted while at the same time, industrial real estate demand boomed due to the expectation for quicker delivery timeframes. Interestingly, while video conferencing technology promised to change the way we work and travel for business (Zoom was founded in 2011), offices remained an important part of our daily working lives.

Fast forward to the COVID-19 pandemic, where we saw already visible trends rising. With mandated lock downs, many shifted to work remotely by leveraging collaboration and video conferencing technology. The take up of online shopping surged given the general inability to be in a shopping centre, resulting in further demand of industrial real estate. The COVID-19 period displayed a significant level of volatility in real estate valuations, as well as a higher inflation and interest rate environment. This impacted market participants, including investors, bankers and tenants, and their consideration of real estate’s role in their portfolios.

The future evolution of real estate remains uncertain but will ultimately be driven by how the population chooses to use it. This level of uncertainty will require investors, real estate managers and tenants to invest capital intelligently to develop or repurpose real estate stock. In doing so, considerations should be made to meet the needs of the local population to attract them to use the space. This will need to occur with sustainability in mind, given the increasing focus on ESG impacts. Offices, for example, are increasingly purposed as collaboration spaces to promote greater levels of connectedness, information transfer and productivity. Shopping malls are turning into experiential, service-oriented community centres to buy, eat, drink, socialise and satisfy health needs (e.g. gyms, health insurance, medical services, etc). It would therefore be wise for real estate investors to look for demographic growth spots, identify usage trends and find appropriate opportunities to fulfil local demand.

Real estate after all, is simply a supply and demand game.


Author: Mark Lee, Senior Portfolio Manager, Global Real Assets – Real Estate, Australian Retirement Trust


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