Alternative assets, including real estate, have benefited in recent years from high valuations for bonds and equities. However, with the same pressures of cheap and plentiful cash feeding into alternatives, returns are tightening and investors are having to be more inventive. A recent report by PwC ‘rediscovering alternative assets in changing times’ considers this further. For real estate a common theme in the past year has been traditional investors looking for ways to move up the risk curve by taking operational positions on real assets – an area previously dominated by private equity. PwC describe this as “less about ownership and more about access” as space-as-a-service becomes mainstream. A key challenge around this change is the skills and platform requirements needed to build an operating business. This doesn’t happen at the flick of a switch, and suitable skills within the industry are typically scarce. However, with operational exposure creating additional returns and often a positioning advantage, the ‘do nothing’ scenario increasingly leaves investors behind the curve. With greater exposure to less secure income also comes risk, and an industry shift towards property as a service is likely to result in greater diversity of fortunes in the years to come.
Real estate is a three-dimensional asset that we value using two-dimensional metrics. Strange? For certain sectors such as offices, measuring the floorspace is a fairly-accurate indication of the number of employees that can fit on the floor and hence the productivity that can be generated in the space, (albeit double decker desks are technically possible…). However, when it comes to warehouses, where pallets are stacked on top of each other, measuring the space purely by square feet looks increasingly insensible. On an earnings call last week, Amazon’s CFO, Brian Olsavksy stated that they are ‘debating whether the dynamics of the warehouse are changing, so that square footage may not be the main indicator – [it] might be cubic feet’. The growing demand for next or same day delivery from e-commerce companies is driving a requirement for urban logistics, where land costs are higher and the need to use space more intensively is hence greater. In these circumstances, the dimension of height is more relevant. Of the top 10 largest buildings in the world by floor area, only two (the Great Mosque of Mecca and the Boeing Everett factory) would make it into the top buildings by volume. The majority of those with large volumes are for construction of large vehicles, whereas those with large areas are typically for distribution. If the commercialisation of distribution formats changes to better account for volume, might this create a shift to fewer, taller sheds?
The above is written by Richard Pickering, Cushman & Wakefield’s Head of Futures Strategy, and originally appeared on Cushman & Wakefield UK’s Futures blog.