With plenty of change coming in 2018, here Emmanuel Lumineau and Thomas Schneider, Founders of BrickVest, delve deep into the future of real estate for the coming year, prospects of growth and challenges ahead.

2017 was a strong year for the real estate industry. Despite a number of external factors that could have easily affected market performance, low interest rates remained stable and demand in real estate investment products continued to rise.

Brexit

Brexit has clearly had an effect on the UK but we believe that across Europe, there remains strong deal flow levels and investment opportunities. Our recent research¹ showed that one in three (33%) commercial real estate investors highlighted Germany as their preferred region to invest in. This is the first time that Germany has been chosen as the number one region to invest in and ahead of the UK which was selected by a quarter (27%).

The UK saw a drop from 31% in the last quarter and from 32% in the same Barometer 12 months ago. The Barometer also revealed that UK, French, German and US investors are now less favourable towards the UK since last year. 45% of UK, nearly a quarter (21%) of US, a fifth (19%) of French and 18% of German investors suggested they favour the UK this quarter, representing a decrease from last year across the board from 46%, 26%, 28% and 21% respectively.

Despite investors seemingly focussing away from the UK, there has been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.

Moreover the average risk appetite of BrickVest’s investors continues to rise to 52% from 49% last quarter and from 48% this time last year, meaning a sentiment shift from low to balanced risk

Interest rates

The Bank of England’s decision to raise interest rates in the UK in November was momentous for the economy and should signal the start of a series of gradual increases. The Bank decided that inflation is potentially getting out of control and the economy now requires higher borrowing costs. In contrast, the ECB’s decision to unwind its QE programme to €30 billion a month is a glowing endorsement of healthy Eurozone growth and falling unemployment, which will more than likely mean that interest rates will stay at historic lows until at least 2019 in order to help financial markets adjust.

Increasing interest rates has a direct impact on real estate. Higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. In a low interest rate environment, European real estate yields will continue to look attractive and real estate serves as a good alternative to fixed income.

Value in 2018

We expect to see increasing demand for real estate in 2018. Indeed our research² showed that two in five (40%) institutional investors plan to increase their allocation to European commercial real estate while 44% expect commercial property yields to increase in the next 12 months, just 22% believe they will decrease.

We believe that the best value can be found in real estate deals that are not too sensitive to price erosions. Investors should keep a close eye on the risk of high leverage and DSC ratios. We believe that the best investment options for 2018 will most likely be found in value-add real estate in combination with a conservative financing policy.

Investment strategy 2018

Given the fact that we believe demand will remain relatively high in 2018, one of the main challenges will be to find good deals.

Investors will have to find the right balance of higher leverage (due to continually low interest rates) and being able to handle potential price corrections in the event that the market cools off due to external factors such as Hard Brexit, escalation in the US vs. North Korea conflict, etc…

Institutional investors are investing in less liquid secondary and third level cities to achieve acceptable going-in cap rates (cap rates in major markets such as Paris are historically low). Investors will also be forced to look at less traditional investment products such as student housing, services apartments, and senior housing or industrial to get better returns. The overall risk of these investment is that they are in general less liquid and if the market bounces back, cap rates will also increase much faster than in downtown Paris.

In order to manage this problem, some institutional investors are now investing in real estate debt products so that they a.) have their exposure to real estate but b.) also have an achievable exit (i.e. when the loan maturity is reached). We think this might be smart strategy in 2018 given real estate prices are already very high and might fall in the long term (so no upside opportunity but also no real downside risk).

Sectors to watch

We continue to see the highest level of volatility from the office sector as many international firms put decisions on hold over their long-term office space requirements. Our research² with institutional investors highlighted that more than a third (34%) believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.

Three in ten (31%) thought the industrial sector would present the biggest commercial real estate investment opportunities over the next 12 months while one in five (19%) cited the retail & leisure sector.

Mifid II

When implemented in January 2018, revisions to the EU’s Markets in Financial Instruments Directive (MiFID II) will radically change the regulation of EU securities and derivatives markets, and will significantly impact the investment management industry. It will have a significant impact for wealth and asset managers on profitability, product offer and their distribution across Europe, operating models and pricing and costs.

As a consequence, we expect MIFID II to widen the gap between global, infrastructure-based players, and local players. Crowdfunding platform may be affected by these changes.

General Data Protection Regulation (GDPR)

GDPR comes into force on 25 May 2018 and represents the biggest change in 25 years to how businesses process personal information. The directive replaces existing data protection laws and will significantly tighten data protection compliance regulation.

Like other industries, real estate companies will have to conduct a risk analysis of all processes relevant to data protection.

The answer is that they are so much more. In a study released today, Dun & Bradstreet revealed data that uncovers the changing role finance leaders play in stewarding their organisation’s customer experience, a mandate traditionally viewed as one of the chief marketing officer. Because positive business results are often fuelled by great customer experiences, chief financial officers are increasingly using data and analytics to become customer-obsessed to ensure their organisation’s customer strategy is rooted in insights that will drive favourable outcomes.

The Customer-Obsessed Finance Leader, a study commissioned by Dun & Bradstreet and conducted by Forrester Consulting, found:

• 36% of company finance executives surveyed were identified as customer-obsessed Leaders, making customer-focused initiatives a top priority this year and reporting increases in customer acquisition, retention, and satisfaction.
• Customer-obsessed finance Leaders reported year-over-year increases in revenue, profitability, and cash-flow at a rate of 10 to 30%age points greater than their less advanced peers.
• Data and insights-driven companies are 39% more likely to report year-over-year revenue growth of 15% or more.
• 79% of customer-obsessed Leaders indicated that their organisation will likely increase spending on technology applications to support customer engagement.
• Implementation of a customer-obsessed strategy requires mastery of seven data competencies that must be aligned across people, processes, and technologies.

CFOs, with their leadership position, cross-organisational perspective, and ability to understand complex sets of data, are uniquely positioned to implement insights-driven behaviours and processes within their organisations. Investing in the right tools and technology, as well as augmenting internal data with third-party data and analytics are some of the key actions leading finance executives are taking.

Challenges to becoming truly customer-obsessed persist; disconnected strategies within the organisation, disparate data, inconsistent metrics, and a lack of investment in technology are among respondents’ most cited obstacles.

The study further outlines seven critical data competencies to master, qualities and resulting metrics that set customer-obsessed finance leaders and followers apart, and how-to strategies to focus efforts around using data and analytics to become a customer-obsessed organisation.

The survey, fielded within North America, Europe, and Asia Pacific in February 2017, included feedback from 250 finance executives (CFOs or EVPs of finance) from companies in multiple industries generating $150 million or more in revenue.

(Source: Dun & Bradstreet)

Cybersecurity and privacy issues, along with infrastructure management and emerging technologies, rank as the top technology challenges organizations face today, according to a just-released survey report from global consulting firm Protiviti and ISACA, a global business technology professional association for IT audit/assurance, governance, risk and information security professionals. The survey of 1,062 IT audit and internal audit leaders and professionals found that IT audit is also becoming more involved in major technology implementation projects within organizations.

In the survey, respondents were asked to name the top technology or business challenges their organizations face today. The top 10 responses:

1. IT security and privacy/cybersecurity
2. Infrastructure management
3. Emerging technology and infrastructure changes - transformation, innovation, disruption
4. Resource/staffing/skills challenges
5. Regulatory compliance
6. Budgets and controlling costs
7. Cloud computing/virtualization
8. Bridging IT and the business
9. Project management and change management
10. Third-party/vendor management

"It is no surprise to find security, technology infrastructure and emerging technologies atop the list of challenges that IT auditors see in their organizations," said Gordon Braun, a managing director with Protiviti and global leader of the firm's IT Audit practice. "Yet, we find the other challenges listed to be just as critical to companies, from resource and skills gaps to ongoing transitions to cloud and virtual networks. Additionally, as more and more organizations rely on third parties to support critical applications and infrastructure, the need to excel at managing vendor relationships has increased dramatically. Many organizations have not sufficiently addressed maturing their vendor management practices, and the resulting business risks can be significant."

According to the ISACA/Protiviti survey, titled A Global Look at IT Audit Best Practices, in large companies (greater than US$5 billion in revenue), 26 percent of IT audit functions have a significant level of involvement in major technology projects, while 45 percent have a moderate level of involvement. IT audit is most frequently involved in the post-implementation stages (65 percent).

"Seeing greater involvement by IT audit in significant technology projects is a positive trend, especially considering the dynamic nature of technology and critical risks related to security and privacy," said Christos Dimitriadis, Ph.D, CISA, CISM, CRISC, chair of ISACA's board of directors and group director of information security for INTRALOT. "This is also notable because a substantial percentage of IT projects tend to run over budget and behind schedule and fail to achieve the desired objectives. Having IT audit bring a mindset of risk and control to these projects can be highly advantageous."

Dimitriadis continued: "However, our results show that IT audit is more involved in the post-implementation stages of these projects versus earlier planning and design stages. We believe there is an opportunity for organizations to derive the most value from their major IT projects by engaging IT audit earlier rather than downstream in the projects. With a solid foundation of assurance on the front end, organizations can have the confidence they need to be innovative and fast-paced in pursuit of their business goals."

Greater Audit Committee and Executive Engagement

In a majority of organizations (55 percent), the IT audit director regularly attends audit committee meetings. This represents a 6 point jump from the prior survey results (published in late 2015) and reflects a long-term trend in the survey findings since 2012, when less than one in three IT audit directors attended audit committee meetings regularly.

"There's no question that cybersecurity and emerging technologies are now a regular topic at the board level," said Braun. "Audit committee members, in particular, are seeking greater assurance around critical IT risks and controls - internal audit and IT audit leaders must be prepared to demonstrate audit coverage of key areas and articulate where the highest risks remain."

Another notable trend is the growing number of IT audit leaders who are reporting directly to the CEO. While still not a large number (for example, 13 percent in North America, 26 percent in Europe), these figures, as well as those from other regions, represent notable jumps from the 2015 survey results. "It's possible that in at least some of these instances, the chief audit executive is serving as the IT audit director, which is positive to see in that it provides the IT audit function with greater executive and board visibility," said Dimitriadis. "This also is a logical development considering the increasing technology-dependence of organizations and the integral role the IT audit function plays in helping management identify key risks and ensure the proper controls are in place."

Risk Assessment Frequency

The Protiviti/ISACA study also found that among large companies, 90 percent conduct an IT audit risk assessment. However, a majority (55 percent) only do so on an annual or less-frequent basis. Considering the growing risk landscape resulting from cybersecurity threats and emerging technologies, ISACA and Protiviti suggest that more organizations consider an approach that includes continually reviewing the IT risk landscape and adjusting IT audit plans accordingly.

(Source: Protiviti)

With fintech at the forefront of innovation in the financial services sector, Finance Monthly here benefits from an insightful outlook into the kinds of challenges fintech firms face, in the midst of growing competition and an ever-increasing customer base. Michael Quirke, Senior Strategist at Brand Union here provides the ultimate breakdown of priorities every fintech brand should be considering.

Financial technology (fintech) investment is forecast to grow beyond $150bn over the next few years, and many new market entrants are trying to get in on the game.

The challenge as this evolves is going to be how you stand out. People have to be able to remember your name and who you are. And not everyone can become the Monzo, Xero or TransferWise of this world.

Getting to that space requires a pragmatic approach to branding that takes consideration of the limited factors you have under your control: an often small marketing budget, primarily online touchpoints and (hopefully) an excited team who are eager to spread the word about the new platform. The worries then are consistent with any other company: how do I attract and retain the best talent? How do I meet my growth targets? How do I position this company to scale?

For more technically-minded companies, this ‘softer’ side of creating the brand that people remember can be a challenge. So from our work with Sonovate, a funding platform for recruitment agencies, we wanted to share a few principles from what we’ve learned.

1. Go back to basics - why are you here?

One of the biggest challenges fintechs face is explaining a complex offer. It is very easy to get caught up in industry jargon, or hooked onto a functional sales playbook that served you in a rush when first starting out. People need to understand clearly who you are, what you offer and why they should care. And they’re not waiting to get to know you, so you need to be able to show that in under 3 seconds. Work on making as simple as possible who you are, what you do and why you’re here and you have a good platform for making that creative. Talk it to yourself. It’s healthy.

2. Know your audience

Another challenge - especially again for technically-minded companies - is thinking in benefits vs product features. You need to know who exactly your customer is and how what you’re pitching fits into their lives. For instance, for Monzo they are very humble and focused about what their product does. It’s there as a pre-pay card, they make it as easy as possible to manage on mobile, and they open up their product roadmap to their community of beta testers to add in feature suggestions as they go. The actual feature set is quite small, but they make the most out of each one by being very diligent in UX design and communicating it well. For them, it is a mass audience of (currently) dedicated tech fans and students, but for you it may be B2B or more niche B2C. Think how you can quickly get a ‘map’ of your audience’s life and world, and make sure all product decisions, features and communications are guided towards fitting in easily there.

3. Make the most of your touchpoints

Monzo has bright orange debit cards that draw just the right amount of attention when flashed. TransferWise have their sharply designed ads and a pointedly anti-bank tone of voice. Citymapper (not a fintech, but useful analogy) has their “jetpack” or “catapult” ways of travelling in-app. Small touches of delight you add, on top of the basics, make your experience more memorable and, thereby, more sticky. Building stickiness or virality into the design of your products and onboarding experience has more power than any amount of content marketing.

4. Nurture your community

As more technology companies spring up, covering a wide base of offers, becoming the preferred partner in your category is essential. This means cultivating a community and partnership strategy as soon as possible in your lifecycle - deciding which apps you are going to target to integrate with (see the Slack playbook), and how you are going to reward and engage users to keep them interested. Forming a community platform like Monzo’s has the added benefit of providing regular user feedback, that can feed into the product and brand. On B2B side, the community forum can be doubly effective in helping end-users quickly and elegantly fix issues with the platform; and pass on the experience to friends or family at other businesses.

5. Communicate, communicate, communicate

Email marketing is a skill in itself, but an essential one to get right. However you contact users (whether in-app or on email), make sure that at all times you are a) putting in place a system to manage any concerns or feedback on new features, b) keeping in line with your core brand positioning and tone of voice (so as not to seem inconsistent or overly sales-y) and c) giving users the opportunity to input into the future of the platform. Whether working with B2C or B2B clients this is a huge advantage, and you can always filter and take your own opinion on responses as they come in.

Branding in the fintech age is a very different proposition from the suave logos and airport ads it used to be. But the same classic rules of knowing what you’re offering and why people should care apply. As long as you are clear enough on these things to let your teams get creative with them, you shouldn’t go far wrong. We look forward to seeing you on-stage at Finovate Europe 2018.