SA commercial real estate is ripe for merged propcos, opcos & techcos
A race is taking place at the world's leading commercial real estate companies. And the winners of this race will shape the future of real estate.
The industry is experiencing a dramatic transformation. Commercial real estate investment is an area ripe for technology transformation beyond the innovation of actual physical spaces.
Real estate was able to rest on its laurels for a long time, sticking to traditional ways of doing things. But things are shifting. Simply acquiring and providing a space to tenants no longer cuts it. Around the world, real estate owners are increasingly required to ensure that space is sustainable, healthy, engaging, and offers more than space leased out by the square metre.
The commercial property sector will be forced to move towards a value-added service mindset
South Africa's commercial property sector, valued at over a trillion Rand, will be compelled to follow international trends of insourcing its property management functions and offering various tech-enabled solutions to its tenants.
Tech-enabled customer experiences have transformed interactions between providers and consumers of most products and services. Real estate has been slow to adapt. For real estate to remain an attractive investment class, technology will have to influence how properties are constructed, designed, and leased. Property owners impervious to changing dynamics and rising customer expectations will lose out to market disruptors.
Emerging real asset classes are being unlocked by the combination and integration of opcos, propcos, and techcos
Investing in new and emerging real asset classes requires a delicate balance of property investment (through the "propco") while incubating and cultivating strong property management (through the "opco") to execute through property technology offerings (the "techco").
The "opco/propco" discussion has been around for quite a while. Many South African REITS no longer outsource their property management to external companies. Leading local REITS like Growthpoint, Redefine, Equitus, and Stor-Age insourced their interactive client functions years ago. They directly handle their day-to-day customer and facility management functions.
One of the reasons that many property investors opted to own and manage their portfolios was to up their game on customer-centricity. The term 'customer' in annual reports of many listed property companies is higher than it was a few years ago. 'Customer-centricity' is now interwoven into the language of many listed property groups. Meanwhile, the feudal term "landlord" has declined in a world of customer service.
Among the barriers to customer experience excellence is restricted access to reliable customer data. Property owners who still outsource property management, and with it, key customer interface points (facilities, leasing, collections etc.) are getting left behind. A hotel doesn’t outsource its front desk, and a retailer doesn’t outsource its tills. Real estate companies who own the full customer experience will be the winners in the race to provide a complete customer journey.
Real estate companies will need to reappraise their business models to get closer to their customers, gain and act on insights and deliver a connected experience.
Far from four walls and a roof, today's real estate providers, will need to offer space as a service. Many will mimic the hospitality real estate sector and focus on becoming more customer-centric by turning interactions into positive customer journeys.
Today's commercial real estate customers are informed, tech-savvy and vocal.
Commercial real estate has experienced rapidly changing trends. The Covid pandemic sped many up. As an example, reduced lease periods and lease flexibility have become a common trend. The days of inflexible 10-year leases are largely limited to corporate leases. In a world of uncertainty, that may change too.
Real estate companies will be forced to move towards a value-added service mindset. This can create new revenue streams. While data and insights hone strategy, technology can also unlock new revenue streams. Last year, the world’s largest REIT, US-based Prologis, generated USD 75million (14% of its revenue) from peripheral non-rental income.
Property owners in multi-let buildings are now providing additional spaces to existing tenants (known as flex-space) and driving revenue according to on-demand usage. They are offering other services such as helping their customers move in and out of spaces and bolstering revenue through extras like solar power, logistics tech and more.
The tenant of the future will be treated like any retail customer (even if the tenant is a business). And If tenants don't get what they want from their rented space, with shorter flexible leases, they will opt for alternatives and options elsewhere.
Property owners need technology like never before. Investors striving to maximise ROI will demand it to inform their decision-making.
As in other sectors undergoing customer-led and technology-enabled transitions, real estate companies that are slow off the mark will fall behind in the race. The retail and financial services sector already leads on customer experience; the leisure and hospitality industries are hot on their heels. The trend is coming to commercial real estate.
The critical component in providing customers with a seamless customer experience comes through technology. Property technology ("proptech") is the component that drives a customer-centric model. In advanced economies, prop-tech has already achieved significant scale and penetration into the real estate ecosystem.
Technology assists with better understanding and tailoring to reduce the risk of obsolescence and costly retrofitting. Technology will pinpoint the criteria behind customer churn and identify what they can do to increase loyalty. Like every other service business, technology mines data. Real estate owners must understand how buildings are used and what consumers most want from their rental experience.
When the South African commercial property sector moves to a merged propco, opco and techco strategy, the industry will regain its position as a first-rate investment class that can thrive into the future.