When thinking about what lies ahead, the past, as well as the present, influences our expectations for the future. The near future is typically shaped by recent events and trends. Indeed, many forecasters are trend-spotters following the latest trends to formulate views about the future and prepare for tomorrow’s world.
Naturally, real-time preoccupations with inflation, interest rates, recession, energy security and, of course, war will shape expectations for the immediate future. There are also more fundamental trends that will influence investment markets. KR&A believe alternative datasets can help us identify those trends to different degrees of granularity. Access to this information can unlock new insights into property markets and assets and contribute to a better understanding of current and future performance.
The KR&A database future challenge
Investors’ real estate investment and portfolio management processes are becoming increasingly data-driven. Processes rely on more complex data about people and places in the expectation of identifying the key trends that will shape future opportunities. Consequently, investors need quicker, more relevant and unique information and access to precise off-market intelligence to improve their underwriting.
KR&A’s services acknowledge this trend and are designed to improve the flow of relevant data for real estate investment decision-making by providing a myriad of alternative data sources via a user-friendly platform. The platform offers off-market data from bespoke European research that gives management teams relevant information about the country and regional submarkets and a deeper understanding of the real estate assets they own and the markets they invest in, in both commercial and residential sectors.
EPRA Conference 2022
The conference agenda encouraged participants to challenge their official future and asked how and where we will:
- produce and distribute,
- work,
- consume and experience,
- live.
KR&A took up the challenge to identify some of the most interesting city and regional markets that match the strategies addressed in the conference workshops. The database contains many alternative datasets allowing comparisons and rankings of European regions and cities. The main variable headings are education, innovation, consumer income and wealth, tourism, infrastructure and transport, e-commerce, labour market, economy and demography. The system rates real estate sectors based on the underlying data under each headings on a normalised 1 to 6 (highest) score.
The analysis below picks out some of those cities and regions in the top quintile suggested by the alternative dataset and looks at the characteristics behind their relative rankings.
1. How and where will we produce and distribute
The best future locations for logistics real estate will be determined to a significant degree by the sector’s demand drivers. Management teams will want to know the characteristics that will determine not only the most attractive countries and regions which will be the winning locations for distribution operations, but also the relevant submarkets. The location has become critically important for businesses that rely on efficient supply chains for a competitive advantage.
Economic growth, urbanisation, digitisation and e-commerce are the key factors behind optimal logistics real estate markets. The growth in e-commerce penetration and its importance in the revolution in consumption has been a major driver of logistics markets over the last decade. Clearly, structural developments in the broader economy, like demographic factors, the overall strength of an economy measured by industrial production and expected growth, international and regional trade, and the levels of inventories held by companies will have a major bearing on determining the best logistics growth markets. Table 1 shows three of the top European markets according to the database, demonstrating the factors influencing the relative attractiveness of these logistics locations. Healthy demographics and strong underlying economies are noteworthy features of all the markets, while e-commerce is an essential aspect behind Oslo and Dublin’s ratings.
| Region | Country | Logistics | Electronic Commerce | Infra & Transport | Consumer Income & Wealth | Economy | Demography |
|---|---|---|---|---|---|---|---|
| Oslo | Norway | 5.6 | 6.0 | 3.4 | 5.7 | 6.0 | 5.9 |
| Dublin | Ireland | 4.7 | 4.9 | 3.8 | 2.6 | 5.9 | 6.0 |
| Budapest | Hungary | 4.6 | 4.5 | 4.2 | 5.0 | 5.4 | 4.1 |
Source KR&A August 2022
2. How and where will we work?
The current tension between Work from Home (WFH) and Return to Office (RTO) can be seen in the utilisation rates in major office markets, with a full RTO yet to be seen as companies seek the right solution for their workforces post-COVID-19.
Relationship office use and job growth in transition
The relationship between office use and future job growth is in a time of transition. Not surprisingly, hybrid options are gaining ground as the likely preferred solution for many businesses. Despite all the uncertainty, the likelihood is investors will continue to have a relationship with the office sector, as offices remain a feature of modern economies. Therefore, assets that are attractively priced offer a younger generation of employees and businesses modern space in growing urban and suburban employment markets. Also, assets that have the capital to ensure their properties can meet demands around sustainability are likely to continue to interest occupiers and investors.
Alternative data can assist in the vital task of identifying the best assets in critical submarket locations, recognising the markets where demand will be strongest and where new office supply is added to the stock. The labour market and particularly growth in office-using jobs are among the main determinants of office market demand. At the same time, demographic factors and the education level of the labour force also play an important role in gauging the attractiveness of office locations. Markets with higher levels of tertiary educated workforces rate as more attractive, illustrated by the three markets shown in Table 2.
Table 2: Future work locations
| Major city | Office | Education | Innovation | Infra & Transport | Labour market | Economy | Demography |
|---|---|---|---|---|---|---|---|
| Berlin | 5.9 | 5.8 | 4.8 | 3.8 | 4.4 | 5.1 | 5.7 |
| Stockholm | 5.4 | 6.0 | 5.6 | 4.0 | 4.3 | 5.8 | 5.0 |
| Paris | 5.1 | 6.0 | 5.5 | 4.2 | 4.6 | 5.2 | 4.2 |
Source: KR&A August 2022
3. How and where will we consume?
The COVID pandemic dealt a devastating blow to retail landlords already struggling to cope with the rapid expansion in e-commerce after the Financial Crisis. The sector began to emerge in late 2021 from the impact of lockdowns. Still, the economic impact of Russia’s war in Ukraine adds to the increased uncertainty facing European malls, shopping centres and high-street property owners.
The forces determining demand in shopping centres and malls are understandably similar, but there are important nuances. The underlying strength of the economy will have more meaningful impacts on the relative attractiveness of high street and regional mall locations than convenience centres, with high street and mall locations also being more influenced by the impact of tourism. At the same time, convenience store locations will, on balance, be slightly less sensitive to e-commerce penetration. However, online retail sales are unquestionably a negative factor across the retail spectrum. The markets identified in Table 3 are not necessarily the best in each category but are illustrative of the underlying importance of good demographics, strong economies and, in the case of high-street retail, a healthy consumer balance sheet. Population growth in the vital 20-39 age group is, for example, a notable feature of a market like Helsinki, making it a relatively attractive region for a regional mall operator.
Table 3: Future retail locations
| Major city | Retail segment | Score | Consumer Income & Wealth | Tourism | Infra & Transport | Labour market | Economy | Demography |
|---|---|---|---|---|---|---|---|---|
| München | High str retail | 5.2 | 4.4 | 3.8 | 4.4 | 4.4 | 5.4 | 5.7 |
| Madrid | Conv. centers | 4.8 | 3.8 | 3.7 | 5.2 | 4.8 | 4.8 | 5.4 |
| Helsinki / Helsingfors | Regional Malls | 4.5 | 3.5 | 2.2 | 4.4 | 4.1 | 5.7 | 4.9 |
Source KR&A August 2022
4. How and where will we live?
The forces shaping future demand for the different segments of the residential sector will be similar, albeit the individual residential categories will have differentiating characteristics. Demographics are a fundamental feature underlying stronger residential markets, particularly population growth and migration, as well as household formation rates. The strength of the regional and national economy, including the state of consumer income and wealth, will also have a significant effect on residential market performance. Finally, the vitality of the labour market is an important variable, with employment levels historically associated with residential market health. Not surprisingly, some of the stronger residential markets, shown below in Table 4, exhibit outstanding demographic and economic characteristics.
As with all the other sectors, the interaction between housing supply and demand will impact the attractiveness of residential markets. Additionally, investors will need to consider home ownership and rental affordability rates, which are not measured by the KR&A database today.
Table 4: Future residential locations
| Major city | Residential | Consumer Income & Wealth | Labour market | Economy | Demography |
|---|---|---|---|---|---|
| Frankfurt am Main | 5.0 | 4.2 | 4.6 | 5.4 | 6.0 |
| Stockholm | 4.7 | 3.8 | 4.3 | 5.8 | 5.0 |
| København | 4.7 | 3.7 | 4.0 | 5.3 | 6.0 |
Source KR&A August 2022
The challenges ahead
Undeniably the challenges for each of these strategies are considerably more complex than the brief analysis suggests here. Investors will consider the supply dynamics in each of these sectors and capital market conditions. Equally, there will be the policy challenge imposed by the potential ESG risks presented in different geographies. There will also be increasing governance and regulatory risks faced by investors and property owners in different countries. These risks could become increasingly regional and market-based. For example, public authorities implement localised rent regulation policies across the EU. Much of this information is also available via the KR&A data platform.
Alternative datasets with access to historic drivers can tell us which geographies offer the best prospects for real estate investors in the future, adding valuable insights and removing biases from opinions on European cities and regions and supporting us in preparing for the challenges of the future. The analyses above are focussed on regional and city data, which are excellent for market selection and address the questions posed by the EPRA agenda. Further due diligence requires data on a more granular level, including micro-data. This can help identify, for example, the flooding risk of individual assets and the gentrification of neighbourhoods. We will address these insights in future articles.
