The world’s largest store of value is rapidly aging.
The world’s real estate stock is worth almost USD 300 trillion, making real estate the world’s largest store of value. Worth more than the equity and bond markets combined, it is also rapidly aging, especially in Europe and the US.
This creates a unique opportunity as renovations, new building systems and processes will be increasingly required. Unsustainable buildings are also becoming increasingly undesirable, boosting the demand for new or retrofitted buildings. This not only impacts building or homeowners looking to futureproof their properties, but large institutional investors as there has been a marked shift of interest towards sustainable real estate.
Renovating buildings to beat climate change
As buildings are a key contributor to greenhouse gas emissions, decarbonising them will be crucial in the fight against climate change and achieving net-zero targets. To meet the goals of the Paris Agreement, all buildings need to be net zero in terms of carbon emissions by 2050, and currently less than 1% of buildings are meeting this target.
While this represents an incredible challenge, it is also a clear opportunity for companies offering solutions that can contribute to the decarbonisation of buildings, providing opportunities for both real estate owners, investors and companies providing solutions in the building technology and efficiency spaces.
Five ways to invest in future cities
1. Sustainable building materials
Around a third of a building’s emissions can be referred to as ‘embodied carbon’, as they relate to carbon generated during the production of building materials, such as concrete, glass and steel, as well as the materials used for the actual construction process of the building.
Embodied carbon can be reduced by choosing lower-carbon alternatives in terms of the raw materials, reusing materials, and minimising construction waste.
2. Building operations
The other two-thirds of a building’s emissions are the result of the way it operates, including the electricity consumed and the heat generated.
Improving insulation, upgrading heating and cooling systems, and sourcing electricity from clean energy are among the ways that ‘operational carbon’ can be brought down.
3. Structural trends
Over the past few years, many structural trends have emerged that will continue to grow in the future as they have changed the way we live and work. Two major trends include the shift to online shopping and working from home, which were accelerated by the Covid-19 pandemic.
With lower demand for office space due to the transition towards remote and hybrid work, building owners will need to up their game to both retain tenants and win new ones, and for that they need to offer high-quality office space that meets specific sustainability standards and provides features workers cannot get in their home offices such as communal meeting spaces.
4. Livability
Currently, more than half of the world’s population lives in cities. This share will increase in the foreseeable future, reaching 70% by 2050. At the same time, the number of megacities with a population of more than 10 million people is expected to climb from 33 to 50.
As a result, cities will need to upgrade their infrastructure. Sizeable investments in infrastructure are required over the coming years to make our cities fit for the future. These investments target both classical infrastructure, such as roads and railways, as well as digital infrastructure.
Redesigns will need to take into account the ’livability’ of cities as populations grow and become more urban. There are many aspects of a city’s livability, and this includes access to drinking water, power supplies, transport, healthcare, and education, which also provide investors opportunity in multiple sectors.
5. Shifting lifestyles
As the global population is expected to reach 9.7 billion by 2050, with the number of adults aged 65 and over expected to grow to more than 25 percent of the population in Europe, North America and Asia-Pacific, future cities will have to be built around these shifting lifestyles. This includes investment in seniors facilities, multigenerational living and providing greater accessibility in buildings.
What does this mean for investors?
Decarbonisation and structural changes not only have implications for real estate owners, investors and companies operating in the real estate space, but will impact everyone. In our view, the segments that stand to benefit the most from the Future Cities theme are electrical engineering; insulation; heating, ventilation, and air conditioning; and broader building technology solutions. When considering the broader livability factors and future trends, segments such as digital infrastructure, seniors living and healthcare will grow as well.