June 21, 2016

From artificial intelligence to virtual reality, the real estate sector, like many other industries, is seeing huge disruption caused by rapid technological advancement. Having spent more than 24 years in Asia-Pacific, 10 years of them in China, I believe we’re reaching a tipping point that will transform the industry.

Nowhere has technology driven more change than in China.

Baidu, Alibaba Group Holding and Tencent Holdings have become global leaders in online services, in part thanks to their success in the enormous Chinese market. Going forward, a question many are asking is: How will technology impact the future growth of Asia-Pacific’s biggest economy?

Experts have been warning for years that China’s next wave of productivity must come from innovation now that its maturing economy is, like many in the West, beginning to show the fatigue that follows success – a shrinking domestic workforce, higher labour costs and growing competition from cheaper overseas manufacturers.

While China’s economic growth has slowed, the government has been pushing for new technologies and innovations. One goal is to advance social progress. Another is to develop a prominent, innovative and sophisticated economy.
Through preferential funding and regulatory reforms, the Chinese government has placed science and technology front and center of its policy to improve the socio-economic development of the country and increase national prestige. It has made rapid advances in areas such as education, academic publishing, registering patents and developing high-tech manufacturing.

One key sector where China is leading the world is e-commerce. Recent industry forecasts see the mainland accounting for more than half of the global retail e-commerce market by 2018. Whether it is buying a car, a new pair of shoes or even an apartment, trading on the internet is an everyday part of life for many Chinese.

While China’s e-commerce market continues to grow and evolve, two areas of the real estate industry are seeing major effects. Firstly, on the retail side, property developers and operators as well as retail brands are fearful that online sales growth may come at the expense of in-store purchases. But this fear is increasingly unfounded as traditional brick-and-mortar retail is fighting back with innovations such as click-and-collect, by providing banking and credit card services and increasing use of customer loyalty and big data strategies.

Staying in the brick-and-mortar world for a moment, China’s newest malls look completely different from those built just five years ago. Entertainment to entice shoppers – climbing walls, trampolines, brand new food and beverage concepts – can now take up 40 percent to 50 percent of a mall’s leasable area, testament to how quickly China has adapted to changes impelled by technology.

Secondly, developers of logistics properties have seen demand for warehouses skyrocket, in particular among e-commerce companies seeking distribution space. Investors clearly have taken notice and are now aggressively pursuing higher-yielding logistics opportunities.

Another radical change taking place within China is the concept of co-working. Technology has helped to accelerate and enhance the connectivity of different businesses, enabling greater collaboration and changing the nature of “office” real estate.

For example, several shopping centers in Shanghai plan to introduce “makerspaces” – areas that entrepreneurs can rent in less prominent areas of a mall. Developments such as these will redefine what we think of as “mixed use” developments. Going forward, we may see larger floor plates in buildings that are developed and designed to push connectivity and collaboration, evidence that real estate must adapt to keep up with China’s innovation push.

A key indicator of this push is spending on research and development. Annual growth in R&D spending across the democracies and market economies that make up the Organization for Economic Cooperation and Development was 1.6 percent during the period of 2008 to 2012, half the rate of 2001 to 2008. Public R&D budgets in many countries stagnated or shrank, and business investment was subdued, with companies retaining cash rather than investing in innovation. Meanwhile China’s R&D spending doubled from 2008 to 2012. In fact, according to the OECD, China is on track to be the country with the highest level of R&D spending in the world by 2019, overtaking the United States.

The implications for China’s real estate sector cannot be overstated. The future of the industry is inextricably linked to the technological transformations afoot, and that’s an exhilarating prospect for those of us who work in it.

This article was first published in the Nikkei Asian Review.

Anthony Couse, Asia Pacific CEO at JLL
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