Government activity and policy in three main areas – fiscal policy, climate change, and technology and infrastructure systems – is set to have an increased impact on the commercial real estate markets and how investors allocate capital in 2020 and beyond. We will see allocations to real estate taking into account locations where governments have fiscal headroom to spend, into asset types that have priced in and fully understood the impact of climate change, and diversification being achieved by investing in real estate on both sides of the technology divide between the west and China.
Fiscal policies and infrastructure investment
The European Central Bank announced in late January it was keeping the main deposit rate at minus 0.5 percent, but not all central banks are following suit. Sweden’s Riksbank, for example, ended its experiment with negative rates in December 2019 citing side effects from nominal negative rates, and other commentators are starting to question whether negative rates do more harm than good.
Calls are growing for governments to draw up fiscal policies to spend on infrastructure and climate change-prevention projects. Governments can finance investment projects at negligible costs to promote investment and consumption.
In Australia, government-co-ordinated investment is being undertaken in rail and road systems in Sydney and Melbourne, which is leading to development opportunities in real estate. ‘Sydney Central’, next to the central train station at the southern end of the CBD, is attracting technology occupiers due to the enhanced Sydney metro and Sydney Light Rail projects. Infrastructure upgrades and enhancements will move desirable locations within cities. This has the potential to benefit real estate by opening up opportunities in both new locations and new product types, such as new mixed-use with city center living apartments.
This is an area of government spending that will likely meet with popular approval. Governments can point to a requirement to spend to avoid financial instability, such as the recent paper by the Bank of International Settlements titled ‘The Green Swan’, which discussed the physical risk from climate-related damage and the transition risk from the repricing of assets that become obsolete.
In a recent review of trends for 2020, PERE also noted that climate change is set to become “an economic issue” for the sector citing, for example, advisory firm Park Madison Partners, which has projected that under a new carbon tax law in New York City, high-emitting properties could see properties cost $20 or more per square foot to operate. While that law will not take effect until 2024, it should be seen as an example of things to come for private real estate and its investors.
5G rollout and technology ecosystems
The risks from uncertainty faced by investors are complex and uncertain, hence the need for diversification. The biggest shift in divergence underway today is in the 5G rollout with governments in the US and China both rejecting technology produced by the other country, with others, such as the UK, becoming embroiled in the issue. This is leading to a clear split in technology ecosystems.
In the Asia-Pacific market, the sheer size of China’s tech and mobile industry is likely to impact local markets. In India, about half the country has reliable access to the internet with the other half likely to connect via Chinese-made mobile phones.
Real estate is increasingly a data-dependent industry. For instance, tracking real estate users from their phone locations will allow the dynamic pricing of real estate based on number of users. Being invested in China real estate, to provide exposure to an alternative technology ecosystem, will bring diversification benefits to large global investors.