Report urges property sector to take advantage of 'Smart Buildings' revolution

By Paul Norman - Wednesday, November 30, 2016 13:39

Three out of four property professions expect to achieve financial gain from the "smart revolution" but fewer than a quarter have taken action, according to research by law firm Charles Russell Speechlys.

The report also finds that Britain is 10 years from realising the benefits of tech-enabled real estate, with significant challenges yet to be overcome.

While six in ten (59%) property professionals think smart buildings will deliver business gains beyond energy efficiency, three quarters (74%) think it will be "up to a decade before challenges in capturing and accessing the data that fuels such developments can be resolved".

The findings are revealed in The New Real, a report by Charles Russell Speechlys and Longitude based on quantitative and qualitative interviews with more than 270 senior developers, landlords, occupiers, advisers and investors.

For 40% of those interviewed, the opening of new revenue streams will be one of the most significant gains from smart buildings over the next ten years, with three quarters (72%) expecting to achieve financial gain from using data collected by the built environment. However, a quarter are yet to take any form of action to adapt to the development trend.

Just 14% claim to have taken ‘significant’ action, with the majority (61%) either only just now considering what they might do, or taking small steps.

Four main legal and commercial challenges were identified by the research as potential obstacles to a smart building revolution in Britain.

1) Valuing the future of smart buildings

While more than 70% see opportunity for revenue growth through the data that smart buildings can provide, half remain unable to quantify it. Further, almost three in five landlords and developers are experiencing challenges in delivering a return on investment from their smart real estate assets. Changes to valuation models and leasing structures are predicted as a result.

• Two in three, (65%) say smart buildings’ ability to capture valuable data will increasingly be factored in to valuation models, including three in five investors and three in four landlords.

• Almost two thirds believe that new ‘public benefit’ metrics, such as in relation to peoples’ health, will be factored into investment decisions. However nearly three in four (73%) find it challenging to quantify the gains smart buildings provide for improved employee health/wellbeing.

• 67% of funders and advisers think they will need more data about buildings’ technology capabilities in future to assess investment and lending risk.

• Two in three landlords, occupiers and developers believe all-in-one fees for rent, utilities, business and technology services will grow more and more popular, and over half, (55%) think that there will be an increased demand for more flexible lease terms from occupiers over the next five years. 68% of occupiers, landlords and developers say future leases must be more flexible about co-sharing and subletting space.

2. Developing new partnerships and collaborations

In order to get to grips with the prospective ‘smart’ benefits on offer, some 56% see a need for new collaborations, with indications that we may see a significant rise in associated M&A activity. However, there are broader concerns about the future role of innovative technology businesses in the property sector.

• Half of respondents say that acquiring businesses with ‘smart’-related skills is an important part of their growth strategy, while, specifically among those already taking action, some 65% are currently seeking to establish new partnerships with technology providers.

• Among those taking action to adapt to smart buildings, 85% are concerned about the legal risks of such partnerships,

• Half (50%) think multinational tech giants, such as Google, will have a disruptive impact on commercial real estate in the next 10 years by taking business away from traditional property businesses.

3. Managing building obsolescence

A staggering 80% of industry is worried about building obsolescence as a consequence of the smart building revolution, rising to 91% among landlords.

• Changing technological needs will be the driving factor of building obsolescence among existing stock according to 59% of industry who consider technological change more impactful than energy needs.

• “Trophy” headquarters will become less desirable for future tenants according to 54% of occupiers and 52% of developers.

• 63%, nearly two thirds, think pre-21st century office and retail buildings will struggle to retain value. This is highest among developers at (72%).

• One third (33%) of funders are seeking to future-proof their investment portfolio to mitigate building obsolescence and as many as 40% are actively considering how best to respond to the risk.

• Over one third (37%) of developers are actively considering how to respond to the risk of obsolescence, with a further third (31%) already taking action to future-proof their business.

4. Managing data privacy and cyber security risk

Data security of businesses in smart buildings is identified as a significant risk.

• Nine in ten (87%) occupiers and building owners are concerned that the increased use of smart systems in buildings may increase the risk of businesses being hacked through the building.

• More than half (55%) of those interviewed say data protection issues arising from increased use of smart systems is a significant risk for their businesses over the next five years. This concern is highest among landlords at 69

• Half of property professionals (49%) think there is no clear understanding on the ownership of data among the different organisations involved in capture, processing and analysis.

James Carter, Managing Partner of Charles Russell Speechlys said: “Whether you are an owner or occupier, a builder or developer, or a technology provider, the built environment offers real opportunities for the forward thinking. In this report, we have explored the gains on offer and how they are likely to be exploited in coming years. Through a combination of deep sector expertise and clear legal insight, the report analyses the gains and opportunities and shows where some of the key legal pressure points lie.”

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