Real estate is going through changes that belie its proverbial characteristics as one of the most stable of all asset classes. The PwC/Urban Land Institute report Emerging Trends in Real Estate: The Global Outlook 2018, emphasises continuously that real estate’s state of flux is partly driven by technology and changing business models (such as clicks-and-mortar e-retailing or Airbnb-style “cloud hospitality”), and partly by increasingly sophisticated and complex ways to extract value from real estate. Those new investment models are part of the reason why real estate is retaining its appeal despite high prices in many popular locations. The report quotes one asset manager evaluating real estate in the widest macro and social context: that “real estate as a productive part of the economic equation is changing”.
Institutions will not be short of intermediaries and product purveyors offering to navigate those changes, and to offer easy bridges to the new sources of value. Real estate investment trusts and exchange-traded funds have stacked up to Burj Khalifa altitudes to offer institutions and individuals exposure to real estate. But all the volume of product and all the efforts of the marketing departments of vendors aren’t enough to silence the doubts about whether these really capture the qualities of real estate which dictate why an institution should decide to invest in it in the first place, instead of just any other listed equity on a particular bourse.
In such uncertain times, institutions need to be very careful, and very clear-eyed, about what they’re looking at when they consider taking a new position in real estate. Once an asset class has mutated enough, once it has attracted enough oblique means of access and other accretions, is it really the same asset class any more? Is it really going to deliver the kind of advantages and have the same kind of unique characteristics that the investor originally sought from it? Institutions that were heavily invested in private equity were faced with these questions in the aftermath of the global financial crisis, when they discovered that their supposedly uncorrelated alternative asset class was correlated after all. Real estate could go the same way, despite its supposed enduring characteristics as an inflation hedge and a stable reservoir of value.
Institutions seeking to invest in real estate may be on to a good thing. Yet, as with any asset class, but especially now and at this juncture, they are liable to be punished if they skimp on resources or intellectual labour in coming to grips with exactly where real estate is now. This is not your mother’s real estate. And you’re liable to get returns out of it only in proportion to the effort you put into it.