Real estate market uncertainty highlights crucial importance of industry education

A deep understanding of market forces and modelling of financial cash flows can provide the edge to investors, developers and real estate practitioners.

Learning to make better real estate investment decisions
Learning to make better real estate investment decisions

Understanding the changing face of the city - and those urban trends accelerated by the impact of Covid-19 - is central to the future of real estate, according to a leading expert in the field.

Gabriel Ahlfeldt, Professor of Urban Economics and Land Development at The London School of Economics and Political Science, who leads the LSE Real Estate Economics and Finance online certificate course, says a deep, current knowledge of shifting demand and changing use is crucial to success for real estate professionals.

He says: “The market currently faces a sizable degree of uncertainty as it is hard to foresee how long the impact of the pandemic will last. Transaction volumes are down, particularly in the commercial sector and it is clear that many asset owners and operators in the commercial sector face reduced operating income due to higher vacancies.

“Understanding how such shifts in demand translate into changes in market prices and expected cash flows is at the very core of the course.”

A shift away from big cities?

The course integrates economics theory and financial modelling closely and effectively - thanks to LSE’s concentration of highly-skilled researchers and teachers specialising in finance and urban and real estate economics, which is unique in Europe, if not globally.

Some commentators have predicted significant movements of people from larger to smaller cities or even rural areas, and an increased demand for residential space at the expense of demand for commercial space as the pandemic accelerates the transition to telecommuting.

Prof Ahlfeldt thinks this is possible, but not inevitable: “If the pandemic sustainably lowers the net-benefits of density, the trend towards increasing concentration in ‘superstar cities’ could be reversed. [superstar cities are high-income, globally- connected metropolitan areas diverging from the rest of their respective countries, like New York, Paris, and London].

“The case, however, is far from clear. Telecommuting may lower the economic returns to being in superstar cities. However, there is evidence that access to a variety of local non-tradable goods such as restaurants, pubs, art galleries or theatres, play a major role in shaping the attractiveness of cities.”

Prof Ahlfeldt continues: “Reverse-commuting (people living in city centres and working in suburbs), has been on the rise before the pandemic. By their very nature, local non-tradable goods are typically hard to consume online. Hence, they will remain an important attraction force – to the extent that the current pandemic is perceived as a temporary and singular event.

“Successful city centres will be those offering a visually attractive, intellectually stimulating, and diverse environment for social interaction where ‘experience’ is a distinctive feature of consumption. The combination of boutique shopping, gastronomic amenities, and social gathering does not yet have an online substitute.

Managing the transition of retail centres into urban centres of consumption is a challenge, but one that offers many opportunities.”

Online shopping vs the High Street

Prof Ahlfeldt believes that shifting patterns of demand will require the retail sector to reshape itself fundamentally.

“The transition to online retail had already gained momentum before the pandemic,” he says, “but it is likely that the crisis acts as a catalyst that further accelerates this transition. Many retail centres will have to reinvent themselves to remain attractive.”

This is because many basic consumer needs, such as grocery shopping, can be satisfied online, Prof Ahlfeldt argues.

While the traditional High Street will struggle against the cost and convenience of online retail, he thinks centres that can rebrand themselves as attractive destinations will thrive.

According to Prof Ahlfeldt the successful urban centres of the future will be “experience cities” with a combination of shopping, eating and meeting that cannot be replicated online.

“The desire for social interaction is unlikely to disappear in the foreseeable future, and many people value an exciting experience in a stimulating environment, maybe more so after the pandemic than ever.” he says.

The case for sustainable real estate

The course also has a strong focus on another key trend shaping the future of real estate - sustainability.

“Real estate is one of the major contributors to carbon emissions and as such, it can make a major contribution to climate change mitigation,” says Prof Ahlfeldt.

“Sustainable real estate has social benefits and private benefits. In many cases, investments into the energy efficiency of buildings pay off quickly through higher rents, which generate asset value.

“The case for sustainable real estate is only going to get stronger as there is a strong push to internalise the social cost associated with a building’s carbon footprint, such as via carbon taxes.

“Our course provides the necessary tools for a rigorous evaluation of the profitability of investments into sustainable real estate.”

Learning to make better real estate investment decisions

The LSE Real Estate Economics and Finance online certificate course is aimed not only at existing real estate professionals but also those considering a career change.

The typical online cohort is global and diverse in terms of professional backgrounds, with many students sharing one of two motivations for joining the course.

The first group has been working in the real estate investment sector and would like to underpin their professional experience with deeper knowledge of theory and methods.

The second group is looking for a career change, having perhaps worked in a consulting, finance, or business role.

Prof Ahlfeldt says both groups share the same aspiration: to become better at making real estate investment decisions. He concludes: “Our course helps them achieve the aspiration by enabling them to have a solid understanding of theories and become proficient in using appropriate valuation and modelling techniques.”

Interested? Find out more about LSE Real Estate Economics and Finance online certificate course