This article is sponsored by PATRIZIA SE.
Secondary cities were all the rage during the era of cheap money. Too much capital chasing too few opportunities forced investors to look beyond the borders of familiar major cities to locations often overlooked in the past.
Fast forward to 2023, and investors are facing highly challenging market conditions. Higher inflation, more expensive money and falling values in many sectors mean that the equation of what makes a good investment has changed dramatically, notes Marcelo Cajias, investment strategy and research, head of data intelligence at PATRIZIA SE.
Some cashed-up investors are returning to superstars like Berlin, London and Paris to take advantage of substantial price discounts ushered in by declining capital flows and softening yields.
Others are seeking good returns in smaller tertiary cities experiencing post-covid population surges. Yet, better ways exist to identify long-term investment opportunities beyond following broad trends.
Applying predictive power to real estate
When probability and statistics guru Nate Silver published the bestseller The Signal and the Noise over 10 years ago, analyzing large amounts of data was not yet a topic in real estate. With its classic credo of “location, location, location,” the industry relied on processes proven over decades. Investment firms prepared recommendations based on their localized expertise and issued exposés to investors with valuations listed on manually prepared Excel spreadsheets.
Now, advanced technology enables the real estate industry to apply to property the predictive powers Nate Silver successfully pioneered with baseball and politics. Digitalization, machine learning, tokenization and the Internet of Things are some disruptive trends creating a new era of data-driven real estate investment strategies.
At the heart of this shift is the unprecedented ability to harness, process and analyze vast arrays of data to provide an understanding of factors that could affect the value of properties. One particularly crucial development has been the digitalization of spatial data through platforms like OpenStreetMap and Google Maps.
These maps break the industry’s traditional, location-centered perspective and enable a thorough analysis of the dynamic relationships between a location and its surroundings. An example of the benefits is the PATRIZIA Amenities Magnet, a tool reshaping how investors identify locations offering potentially high returns on property investments.
Linking quality of life to location
The truth of real estate is that value will always be local, and demand will vary substantially by neighborhood and city. A top-tier city residential address may offer little growth if the area is characterised by dense office space, expensive housing and large employers in the knowledge economy. Conversely, smaller cities may offer undiscovered potential if prices are affordable and demand for rental property – driven by post-covid population lifestyle changes – is strong.
The power of the PATRIZIA Amenities Magnet is its ability to harness spatial data to traditional valuation methods by integrating a concept known as ‘externalities.’ Externalities range from positives, like parks, schools and transport links, to negative ones, such as proximity to industrial zones, highways or prisons. Externalities reflect quality of life factors linked to a particular location and influence where people and businesses will locate.
At PATRIZIA, we capture externalities as Points of Interest and have a proprietary database of over 25 million POIs. The crux of the tool lies in its ability to provide a comprehensive valuation of real estate based on these POIs, thereby assisting investors to pinpoint locations offering high returns and significant potential for value growth.
Changes in the urban fabric can be quantified
Despite its underlying algorithmic complexity, how the Amenities Magnet works is straightforward. POIs are grouped into seven broad well-being factors – commuting, enjoying, providing, educating, working, caring and living – so a robust urban life analysis can be achieved. When given a street name or address, the tool provides a score from 0 to 100, which reflects the quality of POIs in and around that location.
The higher the score, the greater the range of positive amenities and the more attractive the location. This ranking reflects tenants’ willingness to pay more if a property is close to value-adding POIs as they offer quality-of-life benefits and time and transport cost savings.
Yet, it is not only residential POIs that the Amenities Magnet captures. Depending on an investor’s objective, it can identify attractiveness based on various criteria, including office requirements, logistics, senior housing and urban living.
Identifying future opportunities
One report we also generate is the PATRIZIA Amenities Magnet Dynamic, which calculates historical and current scores and quantile values based on the POI databases of 2017 and 2021. This enables us to compare the development of amenities over the last four years and gives an impression of which parts of a city experienced an upswing and which have lost attractiveness, relative to the rest.
Such analysis allows us to understand if we are in the right location and with the right strategy. It can also help determine the level of fit-out needed at a potential investment location. Such capabilities are becoming crucial for long-term investment strategies.
With the PATRIZIA Amenities Magnet, we can directly benchmark cities across Australia, Europe, Japan and the United States based on the locations and quantifying their impact on rents. We can also conduct intensive analysis on areas that are likely to experience an upswing. In our view, this approach to location analysis and pricing is a decisive competitive advantage for portfolio construction in the age of data intelligence.
Our analysis indicates that as European cities grow demographically, there is a corresponding rise in amenities that enhance household well-being. Generally, larger cities, in terms of household numbers, offer more amenities. Yet, amenity growth seems constrained when cities have undergone significant densification in recent years. In essence, cities with lower densities offer greater flexibility in introducing and shaping new urban amenities.
What is significant from this analysis is that the increase in amenities is more notable in cities with lower household densities than in densely populated cities. This suggests that household density directly limits the potential for modifying urban amenities. For instance, Brussels, one of Europe’s most densely populated cities with nearly 3,500 households per square kilometer, saw an amenity growth of about 35 percent. In contrast, Madrid, with a density of around 300 households per square kilometer, experienced a 90 percent surge in amenities.
In the larger picture, as real estate investors navigate the shifting sands between first-tier, secondary and tertiary cities, the role of technology in making astute, data-driven decisions cannot be understated. The real estate sector is at a juncture where amalgamating local expertise with a data-centric approach is essential for success.
The PATRIZIA Amenities Magnet epitomises this, showcasing how a nuanced understanding of macro- and micro-level externalities can lead to a more fruitful real estate investment strategy. From an investor’s point of view, such a data-focused analysis helps reduce uncertainty.
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