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Decade of Disruption: Global Real Estate CEOs Plan for Industry Transformation

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The real estate industry needs to transform to serve the needs of people and cities in the next decade, according to a new report released today by the World Economic Forum. COVID-19 has revealed vulnerabilities throughout the real estate industry, ranging from indoor air quality problems to excess supply and accelerated underlying demand drivers, which need to be addressed for buildings and cities to be healthier, prosperous and more sustainable.

The new World Economic Forum report, “A Framework for the Future of Real Estate,” acts as a road map for industry change. Developed with global real estate chief executives, the framework provides a pathway to transform buildings and cities to become liveable, sustainable, resilient and affordable.

“Real estate stands at a crossroads as cities adjust to the new realities of a post-COVID era, climate change and the Fourth Industrial Revolution,” said Jeff Merritt, Head of IoT and Urban Transformation at the World Economic Forum. “This transformation of real estate – and the market disruption that comes along with it – is long overdue but, if fully embraced, promises to help us all live healthier, happier and more connected lives.”

“Today the real estate industry is facing challenges and consequently is given a chance to do better, to take more steps towards a healthier future and to make a global sustainable impact,” says Coen van Oostrom, Founder and Chief Executive Officer, EDGE, OVG Real Estate. “To optimize buildings, not only should we rethink spaces, users’ behaviours, and energy efficiency but we should also bring a stronger focus on redevelopment opportunities, circular economy, and digitalization. Let us stop waiting for others to set the example and start today, by committing to everyday incremental changes. Ultimately, we must keep a close eye on the bigger picture to be leaders in the transition to a more sustainable way of operating.”

For more than a decade, the real estate industry has experienced tremendous profitability with successful growth rates and rising investment volumes with +14% compound annual growth rates. Initially, this success put less pressure on industry leaders to innovate, but now the industry is coming under pressure from consumers, investors and regulators to better serve the health and resilience of their communities. At the same time, the lasting effects of the pandemic and the acceleration of existing trends have brought the industry to a tipping point.

“The pandemic has accelerated changes in work and lifestyles that had already been gathering pace over recent years, driven in large part by new technology,” said Christian Ulbrich, Global Chief Executive Officer and President, JLL. “As we plan for a sustainable global post-pandemic recovery, this World Economic Forum framework shows how our industry has a vital part to play in coming together to shape the future of real estate for a better world.”

The Future of Real Estate Framework identifies key enablers real estate leaders can use to ensure they are working throughout the industry to provide real estate options that are liveable, sustainable, resilient and affordable.

Key enablers

  • Accelerating digitalization and innovation to address everything from construction costs to the occupant experience
  • Value-proof business cases that are transparent and demonstrate a clear return on investment in relation to technology, sustainability and affordable housing
  • Prioritizing talent and knowledge by upskilling existing workers and attracting talent dedicate to areas of innovation while ensuring diversity and inclusion
  • Engaging stakeholders, throughout the industry value chain and within the local community, to ensure projects are mutually beneficial
  • Ensuring regulatory frameworks effectively address supply challenges, sustainability goals and provide proper zoning and density

The framework also includes case studies from various real estate companies and exemplify the vision of the four key pillars of liveable, sustainable, resilient and affordable buildings and cities.

Industry action

Industry leaders have already taken decisive action towards transformation throughout the real estate industry. Gensler’s GC3 Commitment aims to achieve net zero by 2030 in all Gensler projects and JLL’s work with the Washington Metro will provide clean energy to more than 1,500 homes.

Swire Properties has joined the Business Ambition for 1.5°C campaign and Lendlease has pledged to harness digitization to be net carbon zero by 2025 and absolute carbon zero by 2040.

Majid Al Futtaim has become the first and only conglomerate in the world to achieve LEED Platinum certification for its entire portfolio of hotels.

Signify has embraced sustainability and resilience by developing and deploying UV-C disinfection systems, an energy efficient and chemical-free way to sanitize buildings.

Schneider Electric has set clear, measurable 2025 targets around sustainability to achieve 80% green revenues, deliver 800 million tons of saved and avoided emissions to their customers and have 1000 of their top suppliers reduce emissions by 50% from their operations.

Learnings from these companies’ initiatives and many others were used to help develop the Future of Real Estate Framework which aims to accelerate these types of transformation across the industry.

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Capabilities fit is a winning formula for M&A: PwC’s “Doing the right deals” study

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Ensuring there is a capabilities fit between buyer and target is key to delivering a high-performing deal, according to a new PwC study of 800 corporate acquisitions. . The study finds that capabilities-driven deals generated a significant annual total shareholder return (TSR) premium (equal to 14.2% points) over deals lacking a capabilities fit.

The “Doing the right deals” study looks at the 50 largest deals with publicly-listed buyers in each of 16 industries and evaluates the characteristics that delivered superior financial outcomes for the buyers, as measured by annual TSR.

A capability is defined as the specific combination of processes, tools, technologies, skills, and behaviours that allows the company to deliver unique value to its customers.

Two types of deals were found to outperform the market: capabilities enhancement deals – in which the buyer acquires a target for a capability it needs — and capabilities leverage deals – in which the buyer uses its capabilities to generate value from the target. These represent a true engine of value creation, delivering average annual TSR that was 3.3% points above local market indices. Deals without these characteristics – limited-fit deals – had an average annual TSR of -10.9% points compared to the local market indices.

While 73% of the largest 800 deals analysed sought to combine businesses that did fit from a capabilities perspective, 27% were limited-fit deals. The analysis shows that for every dollar spent on M&A, roughly 25 cents were spent on such limited-fit deals that in many cases destroyed shareholder value.

Alastair Rimmer, Global Deals Strategy Leader, PwC UK said: “Our analysis confirms that deals where the buyer is focused on enhancing its own capabilities or leveraging its capabilities to improve the target can result in a substantial TSR premium. Whether a deal creates value depends less on whether it is aimed at consolidation, diversification or entering new markets. What matters is whether there is a solid capabilities rationale between the buyer and the target.”

Capabilities fit delivers shareholder value across industries

The capabilities premium was found to be positive across all of the 16 industries studied. The share of capabilities-driven deals was highest in pharma & life sciences (92%), an industry where deals often combine one company’s innovation capabilities with another’s strength in distribution.  Other leading industries in capabilities fit deals were health services and telecommunications (both with 90% capabilities-driven deals) and automotive (86%).  Limited fit deals were found to be most prevalent in the oil & gas industry (62%), where asset acquisition can play an important role in addition to capabilities fit.

The analysis shows that the stated strategic intent of a deal, as defined in corporate announcements and regulatory filings, has little to no impact on value creation. Whether a deal fits or not depends less on stated goals of consolidation, diversification or entering new markets. What matters is whether there is a capabilities fit between the buyer and the target.  Deals aiming for geographic expansion notably stood out as performing less well than others, largely because many of them (34%) were limited-fit deals.

The M&A playing field has shifted due to COVID-19

More than ever, companies must be clear in defining which capabilities they can leverage to succeed, and which capabilities gaps they need to fill.

Hein Marais, Global Value Creation Leader, PwC UK added: “Deal rationales have shifted in a COVID context, reflecting the heightened need for new and different capabilities if an enterprise is to generate value and create sustained outcomes.  The need to move quickly increases the pressure to do deals at pace – and thereby the risk of failing to evaluate capabilities fit with enough care. Ensuring such capabilities fit, however, dramatically increases the chances of your deal creating value.”

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Companies may be overlooking the riskiest cyber threats of all

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A majority of companies don’t have a handle on their third-party cyber risks  – risks obscured by the complexity of their business relationships and vendor/supplier networks.  This is the finding of the PwC 2022 Global Digital Trust Insights Survey.  The survey of 3,600 CEOs and other C-suite executives globally found that 60% have less than a thorough understanding of the risk of data breaches through third parties, while 20% have little or no understanding at all of these risks.

The findings are a red flag in an environment where 60% of the C-suite respondents anticipate an increase in cyber crime in 2022. They also reflect the challenges organizations face in building trust in their data — making sure it is accurate, verified and secure, so customers and other stakeholders can trust that their information will be protected.

Notably, 56% of respondents say their organizations expect a rise in breaches via their software supply chain, yet only 34% have formally assessed their enterprise’s exposure to this risk. Similarly, 58% expect a jump in attacks on their cloud services, but only 37% profess to have an understanding of cloud risks based on formal assessments.

Sean Joyce, Global & US Cybersecurity & Privacy Leader, PwC United States said: “Organizations can be vulnerable to an attack even when their own cyber defenses are good; a sophisticated attacker searches for the weakest link – sometimes through the organization’s suppliers.  Gaining visibility and managing your organization’s web of third-party relationships and dependencies is a must.  Yet, in our research, fewer than half of respondents say they have responded to the escalating threats that complex business ecosystems pose.”

Asked how their companies are minimizing third-party risks, the most common answers were auditing or verifying their suppliers’ compliance (46%), sharing information with third parties or helping them in some other way to improve their cyber stance (42%), and addressing cost- or time-related challenges to cyber resilience (40%). But a majority have not refined their third-party criteria (58%), not rewritten contracts (60%), nor increased the rigor of their due diligence (62%) to identify third-party threats.

Simplifying the way to cybersecurity

Nearly three quarters of respondents said the complexity of their organization poses “concerning” cyber and privacy risks. Data governance and data infrastructure (77% each) ranked highest among areas of unnecessary and avoidable complexity.

Simplification is a challenge, but there is ample evidence that it is worthwhile.  While three in 10 respondents overall said their organizations had streamlined operations over the past two years, the “most improved” in our survey (the top 10% in cyber outcomes) were five times more likely to have streamlined operations enterprise-wide.  These top 10% organizations are also 10 times more likely to have implemented formal data trust practices and 11 times more likely to have a high level of understanding of third party cyber and privacy risks.

CEO engagement can make a difference

Executive and CEO respondents differ on how much the support the CEO provides on cyber, with CEOs seeing themselves as more involved in, and supportive of, setting and achieving cyber goals than their teams do. But there is no disagreement that proactive CEO engagement in setting and achieving cyber goals makes a difference.  Executives in the “most improved” group, reporting the most progress in cybersecurity outcomes, were 12x more likely to have broad and deep support on cyber from their CEOs.  Most executives also believe that educating CEOs and boards so they can better fulfill their cyber responsibilities is the most important act for realizing a more secure digital society by 2030.

Sean Joyce concluded: “Our survey shows that the most advanced organizations see cybersecurity as more than defense and controls, but as a means to drive sustained business outcomes and build trust with their customers.  As leaders of organizations, CEOs set the tone for focusing their cyber teams on bigger-picture, growth-related objectives rather than narrower, short-term expectations.”

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Are we on track to meet the SDG9 industry-related targets by 2030?

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A new report published by the United Nations Industrial Development Organization (UNIDO), Statistical Indicators of Inclusive and Sustainable Industrialization, looks at the progress made towards achieving the industry-related targets of Sustainable Development Goal (SDG) 9 of the UN 2030 Agenda for Sustainable Development. The report is primarily based on the SDG9 indicators related to inclusive and sustainable industrialization, for which UNIDO is designated as a custodian agency, showing the patterns of the recent changes in different country groups.

Six years after the adoption of the 2030 Agenda for Sustainable Development and its 17 SDGs, there has been increasing demand for information on whether the SDG targets could be reached, and what actions should governments take to accelerate progress. The UNIDO report introduces two new tools developed by UNIDO to help countries measuring performance and progress towards SDG9 industry-related targets: the SDG9 Industry Index and SDG9 progress and outlook indicators. The SDG9 Industry Index benchmarks countries’ performance on SDG-9 targets over 2000-2018 for 131 economies. In addition, the report develops two measures to answer the main questions:

  • Progress: how much progress has been made since 2000?
  • Outlook: how likely is it that the target will be achieved by 2030?

The global COVID-19 pandemic has inevitably had a negative toll on the progress towards reaching the SDG9 indicators, but the extent of the long-term impact remains to be seen. Industrialized countries continue to dominate global manufacturing industry, but their relative share has gradually declined over the past decade. In 2010, industrialized economies made up 60.3% of global production, which has decreased to 50.5% in 2020. China has been the largest manufacturer, now accounting for 31.7% of global production. This is a trend that has been reinforced by the pandemic.

Progress for the least developed countries (LDCs), at the heart of the 2030 Agenda, is a different story. While economic theory and countries’ experiences across the world have established that industrialization is an engine of sustainable growth, progress among LDCs remains very diverse. Asian LDCs are poised to double their share of manufacturing in GDP and thus meet SDG target 9.2, but African LDCs have stagnated.

SDG9 Industry Index

The SDG-9 Industry Index, consisting of five dimensions, covers three targets and five indicators and assigns a final score to countries. In 2018, the top ten consisted of exclusively industrialized economies, with Taiwan, Province of China, Ireland, Switzerland, the Republic of Korea and Germany making up the top five. In general, industrialized economies perform best in all dimensions of the Index.

The countries at the bottom of the ranking are LDCs, in particular those located in sub-Saharan Africa. Although some African countries have been displaying impressive growth rates, growth has been driven by an extended commodity boom and foreign capital inflows, while industrialization and structural transformation have stagnated. Additionally, substantial data is lacking for a significant amount of the countries. In the SDG9 Industry Index, only 24 out of 54 African countries are included, from which only eight are LDCs. It is clear that national statistics offices need strengthening, as data availability helps countries formulate, review and evaluate their development plans and programmes.

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