THE REAL ESTATE INDUSTRY 3 PERSPECTIVES

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1 THE REAL ESTATE INDUSTRY 3 PERSPECTIVES When someone says the word real estate what typically comes to mind is physical property - one thinks of houses, an apartment building, commercial offices and other land based assets. In this introduction we will expand this perspective and view it from three distinct lenses, and how this might develop into an integrative model of the industry, which then can be used for many purposes. A LEGAL VIEW For the matter of law, things are always considered from the vantage of rights. That is, looking at a building, the physical structure is just that - an object. What makes it significant legally are the rights that are attached to that building. Therefore, it becomes essential to consider the relationships of the people attached to that property and any transactions within and around it, because technically a building or an object cannot have rights. People have rights and therefore real estate is a bundle of rights between people, in relation to the physical object, land or building. Understanding this is essential, because it puts real estate into context. Take for example, the difference between the rights of a tenant, versus the rights of a spouse. In the eyes of the law, the relationship structure matters. Generally when we are looking at the bundle of rights, they can be viewed as possession, usage and rights of disposition. While these can take many forms depending on usage, this can be summed up into two categories: (i) the right to control and (ii) the right to benefit from that property. Therefore, the allocation of rights can ask: who controls what in relation to the property and who gets to benefit and in what way, in relation to the property. This, for example, is what is allocated in lease agreements, in the case of an owner-tenant relationship. An important aspect of the right to control, is the right of exclusion. As suggested in its name, the right of exclusion is the right to exclude others from your property, and therefore enforce boundaries. It provides right and protections against trespass, in a way that is legally enforceable. This is what makes rights significant - they give you rights and protections that are enforceable by law and therefore have substance in their effect. The utility of a right, then, hinges on its enforceability. 2 //

2 AN ECONOMIC VIEW If all land had the same properties, if it were unlimited in quantity and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of a situation. It is only, then, because land is not unlimited in quality and uniform in quality, and because in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. The theory of real estate value begins with the classic concept of Ricardian rent, which predicts that more desirable real estate will command a higher rent and market price as users compete for land. It s economic theory hinges on two essential characteristics: (i) heterogeneity and (ii) immovability. 3 // Image by ALBA-BALAMAND [GFDL ( or CC BY-SA 4.0 (

3 CHARACTERISTICS Heterogeneity means that there is no perfect substitute for property. It simply acknowledges the uniqueness of each property, based on identifiable features such as location, structure and design, and, as such, creates a market structure that is wildly diverse and differentiated. Inherent in such a market structure are value, pricing and development strategies that require focused and property-specific analysis. In contrast, the immoveable characteristic of real estate means that there is an inherent influence based on surroundings, and real estate is therefore uniquely subject to externalities. Accordingly, any analysis conducted for value, pricing or development purposes, must also include a broader and location-specific spatial analysis. A market structure of differentiated products will have a lower elasticity of demand, meaning that in the absence of substitutes, demand will react only marginally to a price change. However due to the spatial effect of the market, that differentiation will be either magnified or reduced based on its location, and on the positive or negative externalities within that spatial proximity. These factors are so important that they tend to outweigh the differentiation principle - we all know that real estate is all about location, location, location. Therefore, analysis is most effective when done with location-specific spatial analysis first, and then subsequently move to the focused, property-specific analysis. 4 // Image by ALBA-BALAMAND [GFDL ( or CC BY-SA 4.0 (

4 A COMMERCIAL VIEW By 2020, real estate managers will have a broader range of opportunities, with greater risks and new value drivers. As real estate is a business with long development cycles from planning to construction takes several years now is the time to plan for these changes. From a commercial perspective, the paradigm of real estate has also evolved into... something that is less about ownership and more about access - or services and outcomes. What this means is that the industry of real estate is shifting from a static to an increasingly dynamic state and it is increasingly important to view an asset as a fully integrated business offering. The industry has become highly competitive, and as emerging markets continue to produce an upsurge of high net worth individuals, therefore increasing foreign presence in the industry, this will only continue to grow. Reports from PWC and Deloitte see upward pressures on the economy and on prices, calling for new approaches and strategies. We approach these changes with two areas of commercial analysis. These are: (i) strategic decisions and (ii) efficiency targets. 5 //

5 THE STRATEGIC DECISIONS THE EFFICIENCY TARGETS According to the 2018 research conducted by PWC, improved decision making was stated as a core strategic objective by many industry players. Economic pressures are pushing companies to be more efficient and focus on operational excellence in order to improve profitability. Of this included not only better decisions, but swift decisions, to respond to the increasingly competitive marketplace and oversupply of investment capital. That is...having capital is no longer an advantage. Advantage comes from being able to move quickly, deal with more complexity, and leverage strategic partners. This objective can be reached through the intersection of information and technology, specifically what information to collect and how to structure that information into strategic information in order to... improve deals and investments, mitigate risk, better understand tenants and their needs, and open up new profitable possibilities. Of course, with the big data economy now in motion, this is a common objective. The exact structure of this information will vary by context and objective, but if done intelligently, can set the pathway for effective and profitable decisions and actions. Thus, this should be done with both care and prudence. Energy efficiency is frequently stated as a core operating imperative, and how to better realize energy efficiency gains. This can be paralleled with shifts to both green and smart buildings, and ways to use technology to move towards both of these gains. The good news is that these efficiencies are becoming... continually more advanced and affordable, and the nature and speed of technology itself lends to the conclusion that this will only continue to progress. This efficiency is important not only from an operational standpoint, which is always a business essential, but introduces the importance of space efficiency and using smaller spaces in efficient ways. Developers need to be more innovative about how they design and develop these properties, balancing these needs with the appropriate level of quality, given the spatial conditions. We call this efficiency spatial maximization. 6 //