Shifting perceptions

More broadly, perception around the role of real estate investing appears to be shifting. Linked closely to the real economy as a real asset, a simplistic depiction of real estate investing positions landlords as beneficiaries of economic growth through rent increases. However, there is growing recognition of the fact that real estate is an integral part of the economy. This is visible through the high-quality rented housing private capital is helping to deliver, as well as the multitude of other buildings that economies need to function well. Our UK logistics platform, Active Growth Logistics Partnership (AGLP), houses 630 small and medium size businesses, for example, serving communities across the country.

In reality, the asset class can be an effective enabler of economic growth, as well as a beneficiary. This can be evidenced through the multiplier effect of large scale, development-led regeneration projects. According to a study by the Urban Regeneration Alliance, for every £1 invested in regeneration, an average of £4.23 is generated in the wider economy¹. This comes in the form of job creation, increased local spending and business growth.

Governments particularly are recognising the renewed importance of private capital as a catalyst for and enabler of growth. Many mature Western economies are facing significant pressure to stimulate economic growth, particularly when viewed in comparison to President Donald Trump’s pro-growth agenda. 

Investing in the built environment and infrastructure is a tried and tested way to drive economic growth, often funded by government borrowing. However, many governments lack the fiscal headroom to respond, exacerbated by today’s higher cost of capital. As a result, there is now more urgency to partner with long-term private capital to stimulate growth. 

For real estate investors, this subtext is likely to be consequential as we step into a new cycle, creating new, scalable opportunities to invest in the homes and buildings our society needs. 

Reimagining city centres

Real estate markets have reached a place of stability, with growing investor activity, following a period of disruption in markets globally. With changes to the way we live and work, the use of our cities – particularly our city centres – is changing. At the same time, renewed urbanisation – especially the growth of capital cities – brings increased dynamism and competing demands for space.  

This creates a historic opportunity to reimagine city centres, to create urban environments that meet demand today and in the future. The investment opportunity ranges from developing new buildings to repurposing and upgrading older ones, as well as more ambitious regeneration projects. Private capital has a major part to play in funding this change, with the potential to make a material difference to local economies. 

M&G’s funding of the Rochdale Riverside development in Greater Manchester, for example, through a 35-year inflation-linked lease to Rochdale Borough Council, has helped to reverse a long-term downward spiral of reduced footfall and consumer spending in the town centre. Following its completion in April 2020, the council has estimated that the development will bring in an extra 2.1 million visitors and £150 million in retail expenditure each year.  Overall, the development has created 1,450 local jobs and an estimated net additional £22 million gross value added over a five-year period for the local economy. Furthermore, around 40% of construction labour was sourced from the local borough.  

Equal to the role of private capital, is the importance of the right public policy framework to support investment decisions. This can be seen in the UK, where the government has signaled its intention to reduce red tape around planning consents, which should help to bring forward more housing and other significant development projects, sooner. In Australia, new tax incentives have been introduced to encourage Build to Rent developments, acknowledging real estate investing as a solution to the societal and political challenge of housing a growing population.

Meeting occupiers’ needs

Redesigning the built environment to make cities more pedestrian and bike-friendly, and to include more residential and leisure space, is an integral part of cities’ transition. Providing office space that meets modern occupiers’ needs is another cornerstone element. 

Though office markets generally have faced challenging conditions in the last few years, particularly in the US, occupier demand has remained robust in many cities for best-in-class offices with a focus on quality and scope of amenities, as well as collaborative space. 

High specification prime office assets like our landmark Centropolis office tower in Seoul have continued to perform strongly, supported by high office attendance rates in Asia Pacific markets. The Leadership in Energy and Environmental Design Gold certified building provides various amenities that promote health and wellbeing, including separate wellness areas for men and women, a nursing room and access to shared roof space, as well as electric car charging points and a shared car service. The building also adds to its local environment by helping to preserve the city’s heritage, displaying the remains of 16th and 17th century houses that were uncovered during the building’s construction in a public museum at basement level. 

With increasing occupier demand supported by a rising wave of mandates for minimum office days in many markets, repurposing well-located older city centre office buildings offers a significant opportunity to create value. In other cases, converting older offices to new homes or other productive uses can provide the best solution for people’s needs – and the best potential return for those investors with the capability to reimagine and repurpose assets. In Paris, the restructuring of an under-occupied office building, following a successful change-of-use building permit by BauMont Real Estate – in which M&G acquired a majority stake in November – allowed for the building’s refurbishment into a dedicated specialist educational space. The entire building was subsequently leased and sold to a leading educational group, delivering strong returns for investors.

The shape of cities’ transition also incorporates facilities to support our growing demand for ever-faster deliveries. Exponential growth in this area is already visible through delivery robots on the streets of Milton Keynes, and now drone delivery testing in Darlington, North East England. Takeaway deliveries alone require a network of ‘dark kitchens’, close to residential areas. However, parcel delivery companies are struggling to find suitable accommodation close to city centres, given swathes of industrial property have been redeveloped for residential use. As cities evolve, the opportunity to provide solutions – and thereby leverage these underlying trends – will be a key focus for investors.   
 

Tapping into the opportunity set

When we look at the market today, we see a number of opportunity areas underpinned by structural trends. Providing more housing, in all forms, remains a key priority for private capital, underpinned by chronic supply and demand imbalances in markets globally. Lifestyle trends, such as a rise in international students seeking English-taught higher education programmes, are also driving growth in particular subsectors such as purpose built student accommodation, particularly in Europe, driving scope for increased private investment. Leveraging local market knowledge, as ever, remains vital in order to execute these opportunities.  

Following significant disruption in real estate markets, there are some interesting developments unfolding in the asset class, creating an attractive set of opportunities for investors. Starting at this point in the market, investors could therefore stand to generate some potentially compelling returns while also playing a big part in driving economic growth and providing solutions to broader society.