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24 October 2016 — Real Estate

How digitalisation is shaking up the real estate market

Under the effects societal and digital revolutions, residential and business real estate is entering into an era of multi-use. Inès Reinmann-Toper, Associate Director at Edmond de Rothschild Corporate Finance explains the impacts.

Olivier Litzka
Inès Reinmann-Toper
Associate Director Edmond de Rothschild Corporate Finance

Inès Reinmann-Toper, who joined the group in 2014, has over 30 years of experience in the real estate market. She provides our clients with personalized advice on investing in assets which can evolve and adapt to the sweeping changes in the sector. Before any given transaction, her team carries out a detailed analysis of the long-term needs as well as potential revenue streams, tax implications and transfer projects.

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How do the digital and societal changes influence the real estate sector?

Inès Reinmann-Toper: The world is changing. The 21st century is being defined by shared resources and utilities and by sustainable development. It is a century centered on human connections, a search for a sense of purpose, social ties and community. We are going back to traditional values. Under the effect of digitalisation, all these societal factors are profoundly impacting the real estate sector, which is moving toward mixed-use developments. Consequently, the real estate industry must adapt.

How did mixed-use developments come about?

IR: This revolution started around 15 years ago with startups in the Silicon Valley. Many of them chose to share their offices in order to reduce costs. They found this arrangement fostered creativity and debate, allowing for regular exchanges of best practices and information. The most advanced mixed-use buildings in the world are still located in California where co-working spaces are designed from A to Z with fiber optic systems, adjustable partitions and innovative furniture which offer all the necessary flexibility and confidentiality. Mixed-use projects have spread all over the world, and now are gaining traction in residential property. In France, co-working is developing quickly in all types of buildings.

What is causing this to go mainstream?

Offices are occupied between 27% to 50% of the time...digitalisation is now making it easier to optimize and rent or sell empty spaces. end

IR: The growth in mixed-use properties is directly linked to reduced salaried employment and an increasingly independent workforce. A large number of small companies are looking for cheap, temporary offices. Offices are occupied between 27% to 50% of the time, which constitues an excessive overhead expense for many small companies.

Furthermore, digitalisation is is now making it easier to optimize and rent or sell empty spaces. Mobile apps let you sublet meeting rooms, parking spaces, offices, and more, for a few hours at a time (for example: Zenpark). Accor, for example, is transforming some of its bedrooms into offices during the day.

The very notion of single-use ownership is being turned upside down. A primary residence is no longer just a place to live in, or a symbol of social status. In addition to helping prepare for your retirement, it has become a profitable investment and a recurrent source of revenue. Certain real estate agencies promote homes in Paris by showing clients how an Airbnb-type rental would reduce their mortage payments. New assets classes are also springing up such as mixed-use buildings developped specifically to be co-working offices and hflatshare residential properties.

Investors are buying big houses (large fitted kitchen and bedrooms with ensuite bathrooms) to convert them into house share rental properties. Different kinds of renters can be found in them: students, young professionals, professionals with low purchasing power, etc.

While flatsharing was mainly reserved to young people in the past, it is now becoming inter-generational.  For example, the elderly are cohabiting with others or renting a part of their apartment in order to reduce their costs. This is organised in a very structured way. This global phenomenon will grow.

Mixed-use in real estate

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These digital and societal changes are thus changing investment criteria

IR: Location remains strategic with a premium for proximity to public transportation and areas that allow for live, work and play. Nevertheless, conventional scenarios which were limited solely to these criteria are no longer in play. The notion of location is changing and becoming segmented in commercial real estate. It remains a key element in attracting top-notch employees. For example, a startup may choose to set up shop in the center of town if it is looking to recruit innovative programmers and launch its project. On the other hand, if a company needs to bring together its front-line sales staff and its back-office personnel, it may set up on the outskirts, in offices equipped for high-speed data transmission. New working conditions and an increased reliance on independent contractors are alleviating the need for companies to have spacious head offices. These changes make for more optimal and more pleasant working conditions outside of large cities, all the while reducing costs. Both of these scenarios are made possible by high-speed broadband.

 

How are players in the real estate market going to be affected by this new state of affairs?

IR: Digitalisation is an ongoing revolution that will continue to impact our lives. All real estate professionnals will be affected. Architects and builders will have to design mixed-use projects and improve the quality of their materials for better sustainability. Real estate agents will adapt their offering and improve their knowledge of products and client movements.

Similarly, with the probable digitalisation of transactions and the emergence of decentralised systems (Blockchain), notaries and solicitors may need to specialise in advisory services for families and for acquisitions. Also, businesses may transform their approach to commercial rental agreements, by negotiating sub-rental rights in the case of a possible drop in business for example. In addition to upgrading their buildings to technological and environmental standards, landlords will have to plan significant investments and budgets for other upgrades such as the installation of ultra high-speed fibre optics.

 

How must real estate adapt to ecological expectations?

IR: Real estate is in the leading group of polluting industries. The sector produces, for example, more carbon dioxide than farming. Since building a new property has an environmental cost, it is often preferable to renovate than build to limit emissions. This awareness will continue to grow over the next 10 to 15 years. A certain number of abandoned properties will be converted into refurbishable properties and “carbon negative” surfaces will increase in value.