Date
21 October 2017
With the continuous growth in technology, the Fourth Industrial Revolution is likely to happen sooner than we think. Photo: Bloomberg
With the continuous growth in technology, the Fourth Industrial Revolution is likely to happen sooner than we think. Photo: Bloomberg

Should we fear or embrace increased digitalization?

The world has witnessed significant advances in technology over the past few years.

As one might have noticed, the use of artificial intelligence (AI), big data, robotics etc. have impacted on various industries and disciplines all over the world.

Imaginary products and systems that once appeared only in the movies can now be found in reality.

With the continuous growth in technology, the “Fourth Industrial Revolution” is likely to happen, bringing the physical and digital world even closer to each other.

In general, increased digitalization is a positive development. For example, robots designed for routine or dangerous jobs save us time and money which we may use for other important tasks.

Big data enhances research and thus innovation.

However, the benefits are not balanced. Developed countries, with stronger economies and highly skilled human resources, tend to be better predisposed to technological advances than developing countries.

Business owners, being able to replace workers with robots or AI and boost productivity, are likely to gain a larger share of the development.

All these changes would reflect on various classes of the real estate sector.

Offices are going to face a new group of tenants. Job functions with more physical attributes or lower social/cognitive requirements are likely to be automated.

Increased office automation, digitalization, shared platforms and collaborative work encourage resources sharing and development of shared workspace providers.

The demand for office space, traditionally taken up by white-collar workers, tends to decrease and location becomes less important.

Instead, office nodes serving high-technology companies may choose business parks and campus-style districts as alternatives.

Retail shops, on the other hand, are already meeting challenges from the virtual world.

Digitalization further encourages integration between online and offline retail channels, making store fronts more as marketing and experience shopping platforms rather than just points of sales.

Malls or store owners, therefore, have to emphasize customers’ experience. Experience-based business such as food and beverage, entertainment and education becomes a popular trend on tenant mix.

Meanwhile, 3D printing also allows customized products to be made at the point of sales. This will encourage malls and stores to reduce inventories and storage space while raising sales per floor area.

Despite such developments, overall rental income may not fall as expected because part of the rent is treated as advertising spending.

Furthermore, the increasing use of autonomous vehicles and adoption of 3D printing will most likely lead to changes in the logistics network and consolidation of warehouses.

This would give rise to fewer but larger warehouses in more remote areas. Improved automation of logistics network will also lead to a new round of investment in IT infrastructure and software, thus a new development cycle for modern warehouses.

Advancement in e-commerce is also a major demand driver for logistics properties as global penetration is still relatively low in most countries.

Regardless of industries, the growth of technology would naturally stimulate a stronger demand for computing power and data services.

As a result of development trends such as the Internet of Things, increased digitalization, blockchain technology and cyber security, there is a pressing need for data centers. We believe that data centers will be the most clear-cut winner of technology changes.

While governments may try to defend their own economies against the technological trends and affect the real estate market in the process, the development is overwhelming and changes are already happening in some aspects.

Some of the major technological advances discussed in this article may materialize in the next three to seven years, which is well within the time scale of one investment cycle.

We believe the impact of technology development on real estate would be long-term and structural while other factors such as economic cycle, capital market conditions, government policies, and specific sector and industry dynamics will affect the near-term real estate outlook.

There are pockets of opportunities amid all these changes. Thus, investors in real estate and other assets should incorporate the likely impacts of technology in their investment analysis.

– Contact us at [email protected]

BN/CG

Chief Investment Officer, Admiral Investment Ltd.

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