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Value drivers are shifting as real estate becomes more customer- and service-orientated. At the same time, the sector is coming under increasing pressure to face up to its impact on society and the environment. How can businesses address these demands and excel?
This year is going to be a testing one. Real estate CEOs’ confidence in both the global economy and their own growth prospects over the coming year have fallen sharply since 2019, according to PwC’s 23rd Annual Global CEO Survey. This was before the uncertainty created by COVID-19.
Yet, three-year confidence is holding up remarkably well: 40% of respondents are very confident of their company’s prospects for future revenue growth over that time frame, while 51% are somewhat confident. The financial fundamentals support this optimistic outlook. Should interest rates remain low (and any economic downturn makes this more likely), institutional and sovereign wealth investors will continue to target the real estate yields that few, if any, fixed-income alternatives can match. The big questions are who’s going to be first in line for this investment, and how will they optimise the returns from it?
As the margins available through ownership alone continue to be squeezed, the active service and operational elements of real estate are coming to the fore, heightening the need for market visibility, customer understanding and responsive capabilities.
These developments are reflected in the fact that building value and a recognisable brand is one of the top investment priorities for the real estate CEOs in our survey, with 58% of respondents identifying it as such. While critical, this is a huge task given the sector’s lack of public profile and people’s limited understanding of its impact on their lives. Attracting talent with the key skills to gain customer-centricity is also a top investment priority. And although key enablers to a customer-focused culture include well-developed engagement and tech skills, less than 20% of real estate CEOs report significant progress in defining the skills needed to drive growth strategies. With almost a third of real estate CEOs extremely concerned about lack of trust as a threat to their growth prospects, this is also a question of building public trust.
In turn, service demands are increasing the cost of real estate while heightening operational and obsolescence risks. It’s important to ensure that development and management plans reflect the new realities.
Building and construction activities account for more than a third of global energy use and energy-related carbon dioxide emissions. Investors are increasingly aware of this. In addition to sustainability, investors’ growing focus on environmental, social and governance (ESG) factors is intensifying the spotlight on real estate’s role in creating and sustaining viable communities. The survey findings on attitudes about climate change suggest that the message is beginning to get through, with 80% of real estate CEOs acknowledging stakeholders’ “reasonable expectations” regarding their companies’ approach to climate change. However, real estate CEOs still tend to see this as more of a reputational issue than as a strategic opportunity.
Societal and political pressures heighten the need to put ESG at the forefront of business strategy. A clear sign of this is that geopolitical and policy uncertainty top the list of concerns that are keeping real estate CEOs awake at night, specifically in relation to government policy. PwC research points to particular worries over negative business impacts on rent control. Real estate companies’ limited visibility means that they have little political clout and can become easy targets for tax increases and disruptive regulation. If companies can strengthen their public profiles and position themselves as a force for good within society, they would not only be less vulnerable to attack but also land in a better position to harness government support for development plans.
Rather than being isolated priorities, service and ESG are two sides of the same coin. For example, occupiers are becoming ever more conscious of a building’s environmental quality and carbon footprint, and incorporating this into their contract specifications. And within neighbourhoods, the availability of transport, affordable housing and other social amenities is increasingly critical to the approval of, and value delivery from, development.
How then can real estate companies get up to speed? Drawing on the survey findings and our work with clients, we believe there are four key priorities for keeping pace with changing stakeholder demands and turning these developments to the advantage of real estate firms:
1. Act as a force for good rather than as an easy target. Build a recognised brand, emphasising your role within society and your alignment with policymakers' goals.
2. Be first for service. Develop the talent and technology needed to get closer to customers and move quickly to meet their growing expectations.
3. Live up to promises on ESG. Recognise sustainability and social inclusion as key contributors to the value of real estate and as opportunities to cement stakeholder ties. Innovation is essential in meeting stakeholder demands, while rigorous governance is needed to ensure that companies are living up to them.
4. Understand the true costs and risks. Financial plans and operational capabilities should take full account of the changing risk and cost profile.
Winning investment and securing target returns are becoming more challenging. But if your business can get out in front on service, ESG and brand awareness, you can capitalise on huge opportunities for innovation, differentiation and value creation.