Digitisation ushers real estate in a new direction
In terms of trade and business flows, 2020 saw a mass migration of commerce to an online environment. Businesses will need to continue this focus in 2021 and adapt to a digital-first landscape, a trend that will have multiple implications for businesses and engagement with customers and clients. Ramifications for the office and the broader real estate sector are potent, as patterns of life will see permanent change – affecting the use of, and investment in, residential and commercial property.
There is uncertainty around what this all means for property investment in the short term. A COVID-19 induced softening in demand for large ‘HQ’ style ‘big’ office space is already manifesting as businesses pivot to a new working from home landscape. Clear consequences are stemming from this in the residential market too. Forecasting how this will play out will present challenges in evaluating large floor plate commercial office space.
In the longer term, the picture is far more positive. The changes we see are likely to stick, underpinned by rapid technology adoption. Health and safety and future-proofing will gain in significance in a post-pandemic era.
It's useful to note that, according to the JLL Global Premium Office Rent Tracker, technology firms are playing a pivotal role in driving premium office occupancy costs. They are second only to banking and financial services in the high-end markets in terms of demand.
Real estate innovation
Some commentators see this as a once in a lifetime opportunity to innovate - to try new things, and to bring exciting new ideas to market. McKinsey estimates the world has vaulted forward five years in the space of a few months in 2020, in terms of digital adoption, whilst a survey published in October 2020, found that companies are three times likelier to conduct at least 80 per cent of their customer interactions digitally.
It's clear that 'the office' will look very different in 2021, as innovative models emerge. Concepts such as 'third space' and 'hub and spoke' look set to complement straightforward home working, with Capital Economics estimating around 50% of office-based employees will work from home at least once a week in the wake of the pandemic.
Thinking will need to evolve beyond real estate as bricks and mortar. Office infrastructure will be considered holistically, including critically, the digital infrastructure, connectivity, access to work systems, and employee interaction, all aimed at enabling and boosting productivity and safeguarding resilience.
Within the retail and logistics arenas, digital adoption will also be pivotal in enabling infrastructure and real assets to not only survive but also to thrive. One of the pandemic repercussions was its impact on forcing the retail sector to adapt to a far more online environment. Of course, online shopping has been a long-term trend – since the late 1990s, double-digit rates of eCommerce growth have been typical across most developed economies (Capital Economics).
However, McKinsey report that in a survey of 13 major countries, at least two-thirds of consumers say they tried new kinds of shopping during the pandemic, with 65% of those saying they intended to continue to do so. These developments have transformed how businesses move goods around efficiently and quickly – virus-driven demand will likely increase industrial demand by 15% in the UK and US (Capital Economics) – and logistics and retail property assets will need to adapt and respond accordingly.
Investment in the retail and logistics sectors' digital capabilities will enable them to maintain the demand they have seen over the past year and create new opportunities. It could also propel new entrants to the market, backed up by technology. For instance, in the third quarter of 2020, there were more than 1.5 million new-business applications in the US—almost double the figure for the same period in 2019, whilst France saw 84,000 new business formations in October, the highest ever recorded.
A focus on healthy environments
Property investment will also need to pivot to acknowledge the new focus on health and well-being to put in place safeguards for the future. The reality is that COVID-19 will present tail risks for some time. Even when vaccinations have played their part in reducing transmission in the current pandemic, businesses will want to integrate thinking around future potential public health-related disruption into their real estate plans.
Office owners and their occupants will carefully weigh up considerations around airflow and open space. As the public health crisis abates, new regulatory requirements surrounding these issues could well emerge. Hospitality, hotels, attractions and other leisure premises will have to rethink how they can offer a safe, welcoming environment in an era where health and safety are high priorities for visitors.
An accelerating ESG agenda
Then there are the changing environmental attitudes. Property development and investment will need to reflect the shifting cultural norms related to ESG, energy efficiency and carbon footprint requirements. The pandemic has accelerated expectations in this space. It is not going away – the UN climate conference in November 2021 will likely further energise efforts and policies in this area. The real estate space has an imperative to reflect that.
All of this has significant implications for investment opportunity into real estate, in both new constructions and through adapting existing properties. The sector has become central to the ongoing functionality of safe, healthy and prosperous communities, which is why it is so fundamental to those centres, like the Channel Islands, BVI and Cayman that have significant experience in supporting cross-border real estate. As AREF note, institutional capital will be fundamental to shaping the real estate landscape, ensuring it is suitable for a post-pandemic era - and institutional capital is the bread and butter of IFCs like these.
But these centres also have robust digital strategies in place. They nurture fintech innovation, and champion digital adoption and could find themselves very well placed to provide valuable insights into this new era of real estate investment. Suppose they can assert their authority and knowledge in these areas and successfully demonstrate their capabilities in bringing digital and real estate together. In that case, the prospects for business flows in these IFCs is very good indeed.
In 2021, there will be plenty of opportunities to invest, and the key will be investing in the right areas and acknowledging digital technologies' role as the sector faces up to a whole new era. IFCs can support that movement.
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About Mourant
Mourant is a law firm-led, professional services business with over 60 years' experience in the financial services sector. We advise on the laws of the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and Luxembourg and provide specialist entity management, governance, regulatory and consulting services.
