Why listed real estate faces Amazon-like disruption

Investors have recently focussed on the impact of Amazon’s plan to roll out its full retail offering in Australia on local retailers. But fewer investors have been considering the impact of Amazon-style disruption - and other global social trends - on real estate.

Global listed real estate has been a lynchpin of investor and client portfolios, generating strong income yield and capital growth. 

But just as has happened in retail, major social trends are demolishing the old model of malls and motorcars that delivered strong returns for real estate investors. A more disrupted and dynamic market is emerging,

If global listed real estate is going to continue as a strong investment, investors and advisors will increasingly need to understand the winners and losers from these trends. And they will need to invest with asset managers with the skills and flexibility to not only protect against losers, but to also seize opportunities.

We have identified 3 major trends that are particularly redesigning real estate as an investment. All three trends have the potential to dramatically change the way real estate is used and valued.

Car sharing and self-driving cars

The first social trend disrupting real estate is car sharing and self-driving (autonomous) vehicles. Car ownership already seems to be falling as the young and affluent, particularly, turn to car sharing. In 2015, 15 per cent of adults used ride-sharing cars. The University of Calfornia, Berkeley, estimates that for every ride-sharing car, there are 9 to 14 fewer cars on the road. But an even bigger trend looms: Driverless cars. 

Driverless cars, for a start, could mean the value of billboards may decline if fewer drivers are looking out the window in traffic. And if access to public transport is no longer as crucial, residential real estate with great transport links may not attract the premium it does today. 

Driverless cars are also likely to trigger higher density in urban ‘cores’ and drastically cut the space allocated to parking, one of the key features of retail outlets and malls. The number of parking spaces required could fall by as much as 90 per cent, though Green Street Advisers says a 50 per cent reduction in the next 30 years seems more reasonable. 

Automating the last mile

The second major trend is automating the last leg of delivery to the customers’ door, known as the ‘last mile’. Large warehouses are too remote from consumers expecting extremely fast delivery. So retailers are experimenting with various solutions.

Buyers often aren’t home when a delivery arrives so retailers are trying to make it more efficient to leave packages. But retailers also want more buyers to pick up their own goods through the likes of ‘click and collect’. The most radical, futuristic delivery experiment, however, is the drone. Amazon, logistics player DHL, and drone tech start-ups, Matternet and Flirtey, all have drone trials underway. Safety and operational concerns will limit adoption for urban delivery, but drones may well form part of a large warehouse/distribution centre in roles just like robots are fulfilling today.

Automation of the last mile will change the type and location of warehouse space required in the future. Local distribution and warehouse facilities and hubs will be in greater demand, as will consumer collection centres, 24-hour lockers, and dark stores (online warehouses where online orders are picked and fulfilled) will increase. The demand for particular sizes of warehouses will change.

Multi-channel retail

In mid-June this year, Amazon announced the acquisition of upmarket American grocery store chain, Whole Foods, for $US13.7 billion, its largest acquisition to date. The buy shocked the market: the world’s largest online retailer was going offline and buying a bricks-and-mortar competitor.

But the acquisition highlights perhaps the biggest social trend affecting real estate – multichannel retailing. Retailers are selling through many channels, both online and offline. The internet hasn’t destroyed shops and retailers. Online retailers will have bricks-and-mortar outlets; and traditional retailers will increasingly move online.

Multi-channel means retailers need to provide more ‘click and collection’ centres where shoppers can order online and then pick up their goods in person. To attract shoppers and compete against the ease of online buying, stores will also have to become more experiential wow ‘destinations’, akin to showrooms, much like Apple’s iconic store on New York’s Fifth Avenue. 

And multi-channel will also mean fewer stores. (Some 15 per cent of the 1,050 shopping malls in the US will close in the next decade, according to the World Economic Forum, with lower-grade malls most at risk.)

Traditionally, rent has reflected ‘foot traffic’ or lead generation – the likes of malls attracted shoppers who then bought at retail outlets. How will real estate owners price rent for stores that are collection points? If in-store sales shrink, but foot traffic stays the same, we can expect downward pressure on rents.

But, most importantly, multi-channel means investors need real estate assets that are ‘hot’ and have a focus on ‘placemaking’ through fantastic environments, catering and entertainment. They’ll need to be destinations customers will go out of their way to visit and where retailers will pay to secure a spot.

A new real estate model

These three trends mean the traditional model of large malls in suburban areas serviced by giant warehouses, a model that has helped underpinned global real estate returns in the past, will end. Investors will need to imagine a more dynamic and fragmented retail and real estate landscape. 

Some listed real estate managers, such as AMP Capital, are deeply integrating the impact of these social trends into their investment process and asset selection. In this dynamic and disrupted environment, those asset managers with a deep understanding of the likely winners and losers will be best placed to construct an attractive, resilient investment portfolio. And they will be able to ensure that global listed real estate continues to deliver strong income streams and returns as it has in the past.