No attribution requiredReal estate leaders vote on which trends to ride in 2019
At the 2019 GRI Chairmen’s Retreat, around 90 participants shared their insights into the trends shaping real estate.
February 5, 2019Real Estate
Real estate industry leaders gathered in St Moritz in mid-January for the GRI Chairmen’s Retreat 2019, as they have been doing every year since 2002. A total of 90 participants attended this year’s Retreat, drawn principally from Europe and the USA, but coming also from India and Brazil, and representing investors, fund managers and developers at the most senior levels, including CEOs and managing partners.
Henri Alster, chairman of the GRI Club, describes how the Chairmen’s Retreat has evolved into very much a family over the last 18 years: “It is a place where people come not only to talk to venture partners, but also to see people that have become friends in the industry over the years and with whom they not only compete, but with whom they often do deals together”.
The relevance of such events may be questioned in today’s digital age, but if anything, says Alster, face-to-face interaction has become more important than ever: “The trust that one can build via personal interaction simply cannot be duplicated via digital communication. People need occasionally to size each other up, to develop chemistry, to get a feeling of each other and whether they are comfortable dealing with each other. And this often takes place at get-togethers such as the Chairmen’s Retreat. Ironically, the necessary by-product of the high-tech revolution is the low-tech, face-to-face interaction that helps make up for the alienation that digitisation fosters..”
Annual survey
That said, the Chairmen Retreat does use technology to conduct an annual survey of participants’ outlook on the industry and their views on current trends. In the latest survey, 37% of participants said that they felt optimistic about the industry in the next 12 months, while 3% felt highly optimistic: that represents a fall in terms of total optimism, down from 65% in 2018 to 40% at the start of 2019.
Alster is himself “cautiously optimistic” about the industry’s future. His sober assessment is based on the continued rise of populism in the wake of the 2008 financial crisis: “Populism is the manifestation of people that are angry, and to some extent that are right to be angry. The fact that governments have chosen to save the banks and save the system and, in the process, save the rich, has left a lot of people behind. Whereas any hardworking professional that wanted to buy a house 20 years ago had a reasonable possibility to do so, for most young people today that possibility no longer exists. That is a scandal that many governments and countries will suffer from for years to come”.
Besides populism, the strength of the financial system - the very system that was rescued after the 2008 financial crisis - also provides room for concern. “Not only do the conditions that existed in 2008 still exist, but in many ways, they are worse,” continues Alster. “There is more debt outstanding than there was in 2008. Interest rates are still lower than they were at the time. Banks that were too big to fail are even bigger now. And some of the excesses that were committed in lending at the time are being committed today. This should make any sober observer pause for thought. The only bright spot on the horizon is that banks are better capitalised, especially in the US, and so they should be in a better position to withstand any shock.”
Retail woes
The survey, in addition to providing a regular and comparable industry outlook from year to year, also drills down into specific sectors and trends. And if there was a dark cloud here, it was in retail.
Faced with a range of scenarios for the retail sector, 45% of participants voted that retailers would ‘reach a new, lower plateau than in their heyday, after losing ground to the internet for strictly functional purchases and then grow gradually from that new base.’ 35% voted that retailers would ‘continue to wither under the onslaught of online retail and only a few formats where physical interaction is required will survive.’ However, 10% voted that the sector would ‘experience a renaissance as retailers learn to make physical shopping a superior if different experience than clicking online will ever be.’
Co-living potential
Amongst emerging trends, co-living was examined more closely. There was a recognition that it was still too early to draw definitive conclusions on the model: in a vote on where co-living might take off, 42% opted for just cities, and just for younger people under the age of 30; 35% thought that co-living was suitable only for very expensive global cities (London, New York, Tokyo), while 17% considered it to be really limited, with just niche potential.
In the room, there was a view that co-living might attract more than just younger customers - the parents of attendant chairmen as well.
Co-working distinctions
In co-working, while some have expressed doubts about the sustainability of WeWork’s growth, there was no concern about the sector as a whole. A resounding majority of 85% of participants voted that, in five years, between 1% to 25% of generic office space would eventually be like today’s co-working concept (characterised by flexible leases, shared spaces, community amenities), as a new generation of office occupiers came to expect more from their space. In addition, some participants suggested that a growing distinction should be made between genuine co-working and serviced offices.
Technology and disruption
Thought was given to technology and deeply disruptive trends. Given that 10% of global GDP is expected to be on blockchain in the next ten years, blockchain demands attention: if nothing else, it might enable trustworthy ways of conducting frictionless trade and perhaps provide a solution to Brexit. Artificial intelligence appears to promise greater change, and as for quantum physics, the scale of potential disruption is hard to imagine.
Right now, however, 61% of participants voted that proptech (excluding online retail and AirBnB) was simply going to be a better asset management tool within the real estate industry; only 12% saw proptech as a major investment opportunity at present; another 12% recognized that proptech had an impact on property values
Opportunities and approaches
Going into 2019, core investments appear to be less favoured, being overpriced, while there is a greater focus on core plus and opportunistic investments. Invited to give their views on the cycle in Europe over the next two years for opportunity funds, 41% of participants voted that the cycle was ‘sort of OK, but competitive and with a lower level of deal volumes and lower returns’. 17% voted that the cycle was ‘getting better all the time, given value breaks, Brexit woes and political pressures’, while 12% went so far as to say that the cycle was ‘excellent, time to load up’. However, 29% voted that the cycle in Europe over the next two years was ‘damn difficult due to low cap rates, low interest rates and low growth’.
Asked whether development in USA and Europe made ‘money sense’, 36% voted for the option that it did in residential, ‘as the backlog is endless - just mind the costs’. 20% voted ‘No thanks - we are at or past peak - it’s a good time to take a breather’, while 16% voted simply to ‘Bring it on - it’s the best way to achieve proper returns.’
As for working with local operating partners, 71% of participants voted that it was a good approach as you needed ‘horses for courses to get expertise with skin in the deal, although 14% were more wary, voting that a ‘local partner disappears when losses appear’.
The Chairmen’s Retreat continues during the year, with two meetings reserved for Retreat members immediately before British & Irish GRI 2019 on 15-16 May in London, and immediately before Europe GRI 2019 on 11-12 September in Paris.
Henri Alster, chairman of the GRI Club, describes how the Chairmen’s Retreat has evolved into very much a family over the last 18 years: “It is a place where people come not only to talk to venture partners, but also to see people that have become friends in the industry over the years and with whom they not only compete, but with whom they often do deals together”.
The relevance of such events may be questioned in today’s digital age, but if anything, says Alster, face-to-face interaction has become more important than ever: “The trust that one can build via personal interaction simply cannot be duplicated via digital communication. People need occasionally to size each other up, to develop chemistry, to get a feeling of each other and whether they are comfortable dealing with each other. And this often takes place at get-togethers such as the Chairmen’s Retreat. Ironically, the necessary by-product of the high-tech revolution is the low-tech, face-to-face interaction that helps make up for the alienation that digitisation fosters..”
Annual survey
That said, the Chairmen Retreat does use technology to conduct an annual survey of participants’ outlook on the industry and their views on current trends. In the latest survey, 37% of participants said that they felt optimistic about the industry in the next 12 months, while 3% felt highly optimistic: that represents a fall in terms of total optimism, down from 65% in 2018 to 40% at the start of 2019.
Alster is himself “cautiously optimistic” about the industry’s future. His sober assessment is based on the continued rise of populism in the wake of the 2008 financial crisis: “Populism is the manifestation of people that are angry, and to some extent that are right to be angry. The fact that governments have chosen to save the banks and save the system and, in the process, save the rich, has left a lot of people behind. Whereas any hardworking professional that wanted to buy a house 20 years ago had a reasonable possibility to do so, for most young people today that possibility no longer exists. That is a scandal that many governments and countries will suffer from for years to come”.
Besides populism, the strength of the financial system - the very system that was rescued after the 2008 financial crisis - also provides room for concern. “Not only do the conditions that existed in 2008 still exist, but in many ways, they are worse,” continues Alster. “There is more debt outstanding than there was in 2008. Interest rates are still lower than they were at the time. Banks that were too big to fail are even bigger now. And some of the excesses that were committed in lending at the time are being committed today. This should make any sober observer pause for thought. The only bright spot on the horizon is that banks are better capitalised, especially in the US, and so they should be in a better position to withstand any shock.”
Retail woes
The survey, in addition to providing a regular and comparable industry outlook from year to year, also drills down into specific sectors and trends. And if there was a dark cloud here, it was in retail.
Faced with a range of scenarios for the retail sector, 45% of participants voted that retailers would ‘reach a new, lower plateau than in their heyday, after losing ground to the internet for strictly functional purchases and then grow gradually from that new base.’ 35% voted that retailers would ‘continue to wither under the onslaught of online retail and only a few formats where physical interaction is required will survive.’ However, 10% voted that the sector would ‘experience a renaissance as retailers learn to make physical shopping a superior if different experience than clicking online will ever be.’
Co-living potential
Amongst emerging trends, co-living was examined more closely. There was a recognition that it was still too early to draw definitive conclusions on the model: in a vote on where co-living might take off, 42% opted for just cities, and just for younger people under the age of 30; 35% thought that co-living was suitable only for very expensive global cities (London, New York, Tokyo), while 17% considered it to be really limited, with just niche potential.
In the room, there was a view that co-living might attract more than just younger customers - the parents of attendant chairmen as well.
Co-working distinctions
In co-working, while some have expressed doubts about the sustainability of WeWork’s growth, there was no concern about the sector as a whole. A resounding majority of 85% of participants voted that, in five years, between 1% to 25% of generic office space would eventually be like today’s co-working concept (characterised by flexible leases, shared spaces, community amenities), as a new generation of office occupiers came to expect more from their space. In addition, some participants suggested that a growing distinction should be made between genuine co-working and serviced offices.
Technology and disruption
Thought was given to technology and deeply disruptive trends. Given that 10% of global GDP is expected to be on blockchain in the next ten years, blockchain demands attention: if nothing else, it might enable trustworthy ways of conducting frictionless trade and perhaps provide a solution to Brexit. Artificial intelligence appears to promise greater change, and as for quantum physics, the scale of potential disruption is hard to imagine.
Right now, however, 61% of participants voted that proptech (excluding online retail and AirBnB) was simply going to be a better asset management tool within the real estate industry; only 12% saw proptech as a major investment opportunity at present; another 12% recognized that proptech had an impact on property values
Opportunities and approaches
Going into 2019, core investments appear to be less favoured, being overpriced, while there is a greater focus on core plus and opportunistic investments. Invited to give their views on the cycle in Europe over the next two years for opportunity funds, 41% of participants voted that the cycle was ‘sort of OK, but competitive and with a lower level of deal volumes and lower returns’. 17% voted that the cycle was ‘getting better all the time, given value breaks, Brexit woes and political pressures’, while 12% went so far as to say that the cycle was ‘excellent, time to load up’. However, 29% voted that the cycle in Europe over the next two years was ‘damn difficult due to low cap rates, low interest rates and low growth’.
Asked whether development in USA and Europe made ‘money sense’, 36% voted for the option that it did in residential, ‘as the backlog is endless - just mind the costs’. 20% voted ‘No thanks - we are at or past peak - it’s a good time to take a breather’, while 16% voted simply to ‘Bring it on - it’s the best way to achieve proper returns.’
As for working with local operating partners, 71% of participants voted that it was a good approach as you needed ‘horses for courses to get expertise with skin in the deal, although 14% were more wary, voting that a ‘local partner disappears when losses appear’.
The Chairmen’s Retreat continues during the year, with two meetings reserved for Retreat members immediately before British & Irish GRI 2019 on 15-16 May in London, and immediately before Europe GRI 2019 on 11-12 September in Paris.
