Looking to 2021: Reducing Uncertainty In The Next Normal

Looking back on the year that was, it’s surreal how drastically and quickly the world changed. Disorienting, disturbing and unsettling for many Australians, for many, the end of 2020 can’t come fast enough.

However, the Covid-19 pandemic is not the first time we’ve suffered a crisis and odds are it won’t be the last. In the 20th century alone, we endured two world wars, the Great Depression, the Global Financial Crisis and the Spanish influenza.

If it’s any consolation, this too shall pass. But we would be completely remiss if we were simply waiting around for that time to come.

The unprecedented economic challenges wrought by Covid-19 are still being felt – increased debt levels, rising unemployment and geopolitical tensions. For the commercial property industry, these are clear impacts that are already being reckoned with. Though as the new year approaches, it’s important that we’re also thinking ahead about “the new normal.”

We don’t know what that looks like for sure, but one thing’s for certain: 2021 will be filled with uncertainty, volatility and unpredictability, and will continue to be a process of navigating the uncharted – rental vacancies, tenant cash flow problems and an anxious retail market.

We’ve seen significant growth in rental vacancy rates – Melbourne’s CBD reached a new all-time high of 10.8% in September (up from 10% in August)[1] and more than eight percent across the greater Sydney area.[2] Tenant demands for immediate rent relief have dominated the national news agenda, and retail precinct formats are only just bouncing back from declines in footfall, ranging from 32-87% in April.[3]

Creating value and enhancing returns for investors is always a top priority and the good news is that this is possible in a time of heightened uncertainty. We cannot predict what 2021 will bring but we can prepare, and those who succeed will be the ones who have their growth efforts deep-rooted in technology.

For institutional investors, property technology – Proptech – must be seen less as a crystal ball and more like a compass. There’s no way to predict the future but technology remains the industry’s best bet in being able to anticipate and prepare for disruption. It’s reshaping the nation’s $7.8 trillion real estate market in two main ways.

Reducing risk whilst maximising returns

Big data is stepping up the pace because there’s a huge need for informed risk management throughout the decision-making process, in real time. Modern investors can no longer afford to solely rely on traditional ways of studying the market (e.g. spreadsheets and the old ‘gut feel’ approach) and must use data sets to generate well-informed and current ‘risk-return’ ratios for every transaction.

Data-driven investment platforms like EG’s PRISMS® provides competitive advantage by giving you a sense of heat in the kitchen. In addition to having huge amounts of data available, you also need to be able to quickly interpret such information to generate a market risk score. With PRISMS®, you can draw on 20,000 different data series to identify and measure 50 risks in real estate, leaving no stone unturned. It provides for an astute approach to investing to keep industry players ahead of the game in a time where anything can change in an instant, and ensures you’re always asking the right questions about where the big alpha is generated.

Managing complex assets with industrial automation

Managing complex real estate and infrastructure assets is entering a new era with dynamic, digital twins, often hailed as the panacea for developers to break out of the gridlock of rising costs and declining productivity.

Though not an entirely new concept (NASA kept a mirrored system of Apollo 13 on earth), the use of digital twins has recently gained new ground as the industry has started to apply artificial intelligence (AI) and machine learning (ML) to the analytics being used.

From automating design to cost scheduling to the entire supply chain, digital twins are being used where possible to improve ongoing operations. Technology is also only as good as its user so as it evolves, so too must its foundations. Willow is one Aussie start-up doing this well, so much so it’s caught the eye of Microsoft CEO Satya Nadella.

Digital twins help create autonomous buildings where problems are fixed by Artificial Intelligence (AI) before they occur. Australian companies such as Willow, which EG co-founded in 2018, are winning mandates globally using IoT data to help landlords better manage their buildings and tenants in real time. This is one space definitely worth watching more closely, with digital twins set to become the new standard for managing complex real estate and infrastructure assets.

A reliable navigation tool for risk and opportunity

Ahead of us is a bathtub recovery – longer and slower – for all. McKinsey & Company is going further to advise that there is “a need to raise your sights even beyond 2021 and to lead a Covid-19 exit in 2022,”[4] but by the same token, investors need to keep one eye on the present and the other on what’s ahead.

Economic uncertainty is traditionally seen as the enemy of real estate investment, which is why PropTech has never been so important. Technology is no longer the way of the future, but the way of the present as investors are required to stay ahead, rather than just being able to keep up. Evaluate your innovation and investment strategies with a technology lens to set your investors up for success in the new year.

[1] SQM Research, National Rental Vacancy Rate Remains Stable In September

[2] Mitchell Institute, International Students Vital To Coronavirus Recovery

[3] KPMG, Beyond Covid-19: The shifting foundations in retail property

[4] McKinsey & Company, Here’s how to set your business on the right track for 2021 and beyond

As published in the Australian Property Journal, November 15, 2020