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Francois de BruinGlobal Equity Fund Manager @FrancoisdeBruin
We may only be at the start of the digital age, but it is already exerting a significant influence over real estate, explains Francois de Bruin.
3 minute read
The world is more connected than ever, with information being created and changing hands at such velocity that it has earned its own label: Big Data. Traditional ways of doing things, from social interactions to how we do business, is evolving and there is a profound sense that technology is reshaping our lives.
Real estate, traditionally a slow moving industry, is rising to the challenge and embracing the digital world. The sheer scale and speed of change, however, means supply has struggled to meet demand and created a favourable backdrop for the real estate sector. Unsurprisingly, asset prices in real estate sectors that benefit from the digital-driven demand wave have risen dramatically, and traditional valuation measures are no longer appropriate for such properties. Below we examine some of the key ways in which the digital revolution is influencing the listed real estate sector, including data centres, towers, logistics and storage.
The staggering numbers behind Big Data
There are roughly 7.5 billion people living on the earth today, of which 4.9 billion own mobile phones, and 3.7 billion use the internet. 2.7 billion, or over 36 per cent of the total population, are active social media users, who like to interact on the move.
According to IHS, the information and analysis business, the Internet of Things market currently stands at 20 billion installed devices, outnumbering the total human population by almost 3 to 1. That number is forecast to reach 75 billion by just 2025, equating to 10 devices for every person on the planet.
While those numbers are impressive enough, they pale in comparison to the amount of data being produced. According to the IT and computer storage company Reduxio, the world generates 30 billion terabytes of data every second. Four hundred thousand square feet of space would be required to store that second’s worth of data; twice the size of Los Angeles International Airport, or over six times the size of the Walkie Talkie skyscraper in London.
Data Centres: where the cloud touches the earth
The technology firm Intel says cloud adoption has grown three-fold in the last year alone. It predicts that over the next two years, more than 70 per cent of enterprises will have adopted a multi-cloud strategy, up from less than 10 per cent today.
While the Cloud is a fluid, often obscure concept, the real estate in which it is housed is made of tangible bricks and mortar. Data centres are inconspicuous from the outside and resemble standard offices or industrial buildings. Yet they are highly specialised, technology-laden properties that provide an abundance of power and communications fibres and are critical to the IT infrastructure of the Internet and corporate world.
High demand, low supply and extraordinary performance demands means data centre real estate is an expensive commodity. According to Green Street Advisors, the implied price per square foot for the network-dense, data centre-specialist REIT, CoreSite Realty, is $2,130 per square foot. REITs that own network-dense data centres have been in high demand, and total returns have been robust for early adopters. Leading network-dense, data centre REITs CoreSite and Equinix have outperformed the S&P 500 by 22.3 per cent and 8.4 per cent per annum respectively over the last five years.
Logistics and storage
Conducting business over the internet has grown in leaps and bounds over the last decade. In the United States, e-commerce accounted for 11.7 per cent of total retail sales last year, up 15.6 per cent over 2015 according to the US Department of Commerce. Total online sales reached $395 billion and accounted for 42 per cent of the nation’s overall retail sales growth. This demand creates increased demand for warehouse and logistics facilities.
Compared to traditional brick-and-mortar retail, e-commerce users require less total space but require three times the logistics space. Clearly the strong online sales growth has major implications for demand for industrial facilities.
While technology has created outsized demand for certain property types such as data centres and logistics facilities, less obvious winners, such as self-storage REITs, have also emerged.
Self-storage is a highly fragmented real estate sector by ownership, and REITs have used technology to gain a competitive advantage and scale quickly.
The strong forces driving demand have also created pricing discrepancies between property sectors. In the United States, in particular, REIT sectors that benefit most from digital-driven demand trade at large premiums to their underlying net asset values, while traditional sectors such as offices, apartments and retail properties trade at meaningful discounts.
Investors have a chequered history when it comes to investing in opportunities that benefit from apparent thematic tailwinds. It is therefore prudent to consider premium valuations in light of the cash flows generated, regardless of the asset class.
For investors looking to align their long-term capital allocations to the digital age, but appropriately demand cash flow generation as the basis for valuing investment opportunities, real estate may prove a useful home for those who know where to look.
