New technology is about to change the way we research, rent, buy and manage real estate, writes Zsolt Kohalmi in an essay for finews.first.
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In today’s high asset prices environment real estate investing remains appealing, especially as the market can offer interesting entry points at times of volatility in the property sector. Where some asset owners see a reason for concern and decide to exit certain markets at all costs, there can be opportunities to benefit from attractive below-market entry pricing driven by non-rational decisions to sell.
Take the example of the U.K. today: a cautious stance towards not taking on idiosyncratic risk is the way to go, but Brexit-triggered irrational exits, can lead to interesting acquisition opportunities.
«Demographic and technology trends are redefining the way we use space today»
Today we are at a turning point in real estate investing. With cap rates having compressed, pushing up the prices of assets, value-creation strategies are now more compelling. Value-add can be created through improving a real estate asset from a bricks-and-mortar perspective, or by improving the asset’s use and operational efficiency, i.e. «sweating» the asset more.
In effect, even in volatile times, a value-add strategy’s long-term investment horizon allows for intrinsic value creation independent of market swings as performance is driven mainly by two components: current income of 3 to 7 percent cash-on-cash annually, and alpha generation through active asset management.
Demographic and technological trends are reshaping the way we use real estate today, leading to new opportunities in the sector that overall has seen limited development since the great financial crisis a decade ago.
«Millennials today prefer to live alone and rent rather than buy»
For example, household formation is evolving: millennials today prefer to live alone and rent rather than buy, giving rise to a need for smaller sized, modern, for-rent homes designed for single young professionals. At the other end of the spectrum, the world’s aging population requires specialized senior housing stock.
In the office sector, the flexible workspace model is gaining ground, calling for modernization of old office stock to meet the needs of 21st-century occupiers. In retail, growth in new logistic hubs has trailed the shift in consumption patterns and traditional retail is generally suffering from the rise of e-commerce.
«Real estate is one of the last industries to be disrupted by tech innovation»
Irrespective of our macro view, there are micro-opportunities to be found given how opaque real estate is. We do expect short-term volatility as economic growth starts to waver, to which real estate will not be immune – which makes buying at below-market prices all the more crucial.
We also cannot disregard the impact of regulatory and technological disruption on the asset class. Real estate is one of the last industries to be disrupted by tech innovation. But proptech, a set of cross-industry technologies that is changing the way we research, rent, buy and manage property, is set to have a significant impact going forward.
Take the example of energy consumption: today, proptech solutions are allowing for an in-depth analysis of real estate assets’ environmental performance, making it possible for asset managers to become efficient, responsible investors. And when it comes to ESG investing, what differentiates real estate from other asset classes is that a responsible investment approach has an immediately tangible and measurable impact on the well-being of the property’s tenants and surrounding communities.
Zsolt Kohalmi is Global Head of Real Estate and CO-CEO of Pictet Alternative Advisors. He brings over two decades of pan-European investment experience and has invested in excess of $20 billion into all real estate asset classes in more than 20 European countries. Previously he was Managing Director and Head of European Acquisitions at Starwood Capital, one of the top three firms in global private equity real estate. Prior to joining Starwood Capital in 2013, he was Chief Investment Officer at Meyer Bergman for eight years, a European real estate investment firm that he co-founded. Before that he was a Director at GE Capital, where he acquired financial platforms as well as loan portfolios across Europe. Kohalmi, who is fluent in nine languages, holds an M.S. degree in economics from the University of Budapest and an MBA from Insead.
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