How to keep ahead of technology disruption in real estate
11 April 2018
In Sydney on Valentine’s Day 700 bunches of flowers were delivered from an unused car park floor in the CBD.
If you want to make money in real estate, you need to understand why this seemingly banal titbit of information is important.
Old asset classes are evolving into new asset classes – today’s car parks could be tomorrow’s logistics hubs. In fact, they might already be.
Every day we pick up newspapers and see a new entrant in the technology business that is changing the way we do things. Whether it’s taxis, hotels, or the way we consume food; technology disruption is changing the way we live.
Understanding where to be in the real-estate technology disruption era is important, particularly in a rising interest rate environment.
When I analysed what made many of the big technology firms such as Google, Uber and Airbnb successful, I was able to boil it to down to three key ingredients for success: They are customer driven (bottom up), they unlock unproductive gaps in their respective markets, and they force their competitors to adopt their approach, creating a new norm.
When you look at companies like Amazon, it realised moving goods efficiently meant it could create more value through the supply chain. The result has been billions of dollars in revenue for Amazon and many traditional retailers have failed.
As investors in commercial real estate, understanding technology disruption can have value-added benefits for assets. It helps us manage those assets more efficiently, and it helps us measure the use of those assets more effectively.
A good example of this is things like Beacon technology. The beacons use mobile devices to give people better connectivity to things around them, such as finding and paying for nearby carparks, reviewing and buying retail items, and tracking staff usage and timings at various locations in buildings.
As we move it into an environment where income growth is going to be critical, with the likelihood the Reserve Bank of Australia will raise rates early next year, we want to ensure we are maximising the efficiency of the assets we own.
Real estate is already grappling with the early stages of these changing conditions. A good example of this is the increasing demand for more flexible leasing arrangements in the office market.
The cost of not being an early adaptor to these technology changes will be high. Landlords are already surrendering retail margins of up to 150% by leasing their spaces to companies that embrace flexible, technology-enabled space use.
In the office sector, co-working or ‘third spaces’ are starting to take up large sections of the market. They provide customers with flexibility and community, enabling companies to scale quickly.
The industrial sector is starting to undergo massive changes too. I believe the growing need for last-mile logistics close to urban locations will inspire vertical warehouses. These warehouses will be designed to enable multiple transport forms such as vans, cars, and bikes to move goods to customers faster.
In the retail sector, tenancy mixes are transforming away from fashion and electronics towards ‘experiential’ offerings such as, food and beverage and cinemas. Social infrastructure such as childcare, medical and education services also becoming more common.
These evolutions will be driven by technological change that’s already occurring in the sector. That means that there is value to be captured.
As investors we need to ensure we are at the cutting edge of these changes to capture value through higher rental growth, and also higher asset value growth moving forward.
Luke Dixon – Head of Real Estate Research, AMP Capital
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.