CONFIDENCE AND CAUTION COMING OUT OF THE SHADOW
Real estate is becoming an increasingly consumer-oriented business and by connecting more effectively with customers, pioneering new ways of living and working, and developing innovative solutions to the challenges facing urban communities, your business could transform its brand image and boost its market value.
The real estate sector continues to deliver strong returns around the world. Although there have been some late-cycle jitters and divestments over the past 12 months, money continues to flood into this sector.
That’s one key finding of PwC’s report Emerging Trends in Real Estate: The Global Outlook for 2019.
It would therefore be reasonable to ask ‘Why change a winning formula?’
The answer: Because the rules of the game are changing.
1) Real estate businesses are competing more consistently as customer-oriented enterprises.
2) Businesses see the real estate they occupy as critical to attracting and retaining talent and increasing productivity.
3) Awareness of tenant well-being and the social and environmental impact of real estate is increasing.
4) Quality of service (amenities) and of place (infrastructure as well as setting) are becoming more important than the size and design of the space.
5) The risk of rapid obsolescence, prevalent in retail, is now creeping into other areas of real state
The challenge for many real estate businesses is that brand recognition engagement and loyalty with the occupier of a building have never been priority areas in the sector. This may eventually change, but few people currently know who owns the building in which they work, learn or shop. This detachment means that customers seldom make the connection between their daily lives and the real estate industry, despite interacting with it almost every moment of the day. This has implications that ultimately affect your business’s ability to meet key priorities, such as nurturing strong loyalty amongst occupiers and ‘sticky’ tenants, winning support for further development from policymakers and planning authorities, and avoiding the overregulation that comes with being misclassified as a financial enterprise.
Related concerns centre on reputation and trust. In PwC’s CEO Survey, three out of five real estate chief executives were worried that lack of trust would affect their growth prospects.
Technological advances are also raising the profile of real estate companies in ways that can seem challenging at first glance — but could lead to opportunities.
For example, increasingly advanced data analytics are giving people more information about a building’s health and environmental impact, and social media has allowed negative stories to quickly spread. This greater level of transparency is often seen as a threat to the industry, but it actually represents a fundamental shift in the value proposition of a real estate business.
For example, what if the people who worked in an office building became increasingly aware of the air quality in the property? This could affect the amount that a tenant would pay to occupy space there.
From a sustainability perspective, real estate businesses have started over the last decade or so to embrace the challenge of reducing their impact on the environment, with a focus largely on energy use and carbon emissions. The catalyst behind many of these efforts has been pressure to report and demonstrate good governance to investors. Although reporting and transparency have improved, the level of sophistication hasn’t yet reached a point where operational excellence in reducing energy usage or carbon emissions, for example, translates to higher performance recognised by investors. Now, with access to data, investors will be able to target their decisions more precisely, and real estate enterprises will be able to address concerns and raise the quality and appeal of their property much more effectively.
This will affect the standing that real estate companies have in their local regions. “Because of the way these things have worked,” Craig McWilliam, chief executive of the property business Grosvenor Britain & Ireland, has said, “communities think development is something that happens to them.” But that contentious way of managing relationships in the industry, he says, is poised to change.
Viewed together, these developments underline the extent to which tenant welfare and social and environmental awareness are no longer ‘tick box’ corporate exercises, but bottom-line imperatives that can’t be ignored. Tackling these issues thus becomes a huge opportunity for reinvention and differentiation. If your business is associated with creating greener, safer and more vibrant cityscapes and solving the problems facing urban communities, such as shortages of affordable housing, customers are much more likely to become advocates for your brand — and your standing with policymakers and development opportunities will reflect that. There are also opportunities to create a new seam of value. Just as the costs of material and manufacturing represent a fraction of the full value of a smartphone to a consumer (especially when you add in the facility of its design, its range of possible apps, and the value of its community of users), the move to a more customer focused, service-oriented and brand conscious real estate business model could boost market multiples to many times the value of the physical asset.
FINGER ON THE PULSE
So how can your business gain the customer recognition, insight and trust to prosper and exploit the long-term value opportunity within this evolving marketplace?
Real connection: Think about which parts of the value chain you want to own and serve directly (e.g., tenant/occupier) and where you would prefer to assign someone else to do this on your behalf. Although a service company might be well equipped to engage with customers, it’s important to think about how many layers you want to put between you and the ultimate consumer.
Real innovation: Data is clearly important and the technology to harness it is advancing rapidly in areas regarding environmental quality and the efficient use of space. Focus on the consumer touch points that enable you to pick up on the social, cultural and technological trends that are shaping demand. And you don’t have to respond only to emerging trends — you can also shape tastes and lead the market. This ability to understand and influence consumer needs could be a game-changer for the real estate industry, in which huge investments are committed up front to develop buildings that will be meeting the occupation needs of customers many years into the future.
Real inclusion: To develop a relatable brand and confident vision, it’s important to ensure your workforce has the diversity and inclusivity to reflect and understand the customers and communities you serve. As real estate evolves into a truly customer-driven business, it will require a more sophisticated approach to understanding the complex needs of different customers. And as the range of services and opportunities increases, business with diverse talent — staff from different backgrounds with a wider range of skills — are more likely to thrive. This represents a cultural shift — although the people coming into the industry are increasingly diverse, senior management is less so.
SEIZING THE PRIZE
Real estate is at a crossroads. The more conscious people are about the owners and managers of the buildings they spend their lives in, the greater their expectations will be. And the more real estate comes to be seen as a consumer product with a profound influence on the quality of people’s lives, the higher the rewards will be for businesses that get the connections and outcomes right.
If you as a real estate company executive can create a trusted brand that is synonymous with quality, tenant well-being, environmental awareness and support for the community, whilst maintaining the traditional strengths of an asset backed business, this would be a huge source of differentiation and value.