Concrete Analysis

Technology trends and their impact on real estate

PUBLISHED : Tuesday, 23 May, 2017, 5:11pm
UPDATED : Tuesday, 23 May, 2017, 7:53pm

Over the past few years, the world has witnessed significant progress in technological development, especially in areas such as artificial intelligence, big data and robotics.

Further progress on technology is likely to converge into “the fourth industrial revolution”, with a range of new technologies fusing the physical, digital and biological worlds, and impacting all disciplines, economies and industries.

Technological advances are leading to disruptive changes to society at large, especially on the issue of employment. Increased automation, advanced robotics and artificial intelligence put large numbers of job categories under pressure of disappearance, going from lower skill jobs such as drivers, secretarial and office administration to middle skill jobs such as legal, insurance and financial services.

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Such disruption will affect not only the lower working class but also the middle class that have lived under the tenet that higher education and confirmation to social norms would lead to personal prosperity. Reactions against such disruptions may lead to significant changes against the expected path of technological advances driving social advances, with examples such as Brexit and the ascendency of Donald Trump to the US presidency.

We may see government attempts to counter such development with different government policies, e.g. trade protection, tax policy, etc to defend against technological trends and affect the real estate market in the process.

Technological progress will affect both the demand and the requirements on real estate but have different impacts on different types of real estate. We will discuss how various advances in technologies affect the office, logistics and retail property sectors differently separately.

Offices are going to face a new group of tenants. Job functions with more physical attributes or lower social/cognitive requirements are likely to be automated. Increased office automation, digitalisation, shared platforms and collaborative works encourage resources sharing and development of shared workspace providers.

Overall rental income may not fall as expected by the market, as part of the rent is treated as advertising spending

The demand for office space, traditionally taken up by white collars, tends to decrease and location becomes less important. Instead, office nodes serving high technology companies may choose business parks and campus style districts as alternatives.

Retail shops, on the other hand, are already meeting challenges from the virtual world. Digitalisation further encourages integration between online and offline retail channels, making store fronts more as marketing and experience shopping platforms, rather than just points of sale.

Malls or store owners, therefore, have to emphasise more on customer experience. Experience-based business such as food and beverage, entertainment and education becomes a popular trend on tenant mix. Besides, 3D printing also allows customised products to be made at the point of sale. This will encourage malls or stores to reduce inventories and storage space but raise sales per floor area. Despite such developments, overall rental income may not fall as expected by the market, as part of the rent is treated as advertising spending.

Furthermore, the increasing use of autonomous vehicles and adoption of 3D printing will likely lead to changes in logistics networks and consolidation of warehouses. This would give rise to fewer but larger warehouses in more remote areas.

Improved automation of logistics networks will also lead to a new round of investment in IT infrastructure and software, thus a new development cycle for modern warehouses. Advancement in e-commerce is also a major demand driver for logistics properties as global penetration is still relatively low in most countries.

Regardless of industries, the growth of technology would naturally stimulate a stronger demand for computing power and data services. As a result of the development of trends such as internet of things, increased digitalisation, blockchain technology and cybersecurity, there is a pressing need for data centres. We believe that data centres will be the most clear-cut winner of technology changes.

We believe the impact of technology development on real estate to be long-term and structural whilst other factors such as economic cycles, capital market conditions, government policies, and specific sector and industry dynamics will affect the near-term real estate outlook.

Society and government reactions against the downside risks of technology development also affect the real estate market.

We have outlined the mega trends of the upcoming “fourth industrial revolution” and how they may affect different classes of real estate. Office and retail properties face more challenges ahead under the same force of technological advances while logistics and industrial properties are more positive to it. We try to add technological change as a factor in evaluating the real estate market and finding investment opportunities within the real estate market. As our analysis suggests, while technological advances may have significant impact on different types of properties, it is not a straight forward development and we believe pockets of opportunities arise amid all these changes.

Victor Yeung is chief investment officer at Admiral Investment