The impact of smart cities

IN A prescient speech in 1983 titled "The Faces of Good and Evil affecting the Soul of Real Estate Finance", James Graaskamp, one of the great academic thinkers of real estate, predicted that "database systems will one day provide meaningful records of occupancy, absorption, energy efficiency, traffic counts, and highly detailed information about consumers of every product and service".

Building permits, Graaskamp added, "will require justification of demand estimates". What he was predicting was nothing less than the impact of big data on real estate in specific neighbourhoods, which opens the door to "smart cities" as defined by today's researchers.

The concept of smart cities has been linked to urban planning, architecture, technology, but rarely to real estate. However, if smart cities are to become a reality, the real estate industry will have to be involved insofar as it will be instrumental in implementing the "smart" agenda. So, what could realistically be the impact of the smart city concept on the real estate industry? How will "smart" affect the way the real estate industry operates, competes, and ultimately creates value for society? To answer these questions, several angles have to be considered.

URBAN FORM AND SPACE: WHAT WILL DEFINE A PROPERTY IN A SMART CITY?

While the industrial revolution in the 19th century greatly affected the structures of cities (eg, with the arrival of railways), the current digital revolution underpinning smart cities is not predicted to significantly alter the shape of cities. Pervasive sensing does not require drastic alteration of the existing urban form. What will be truly different from existing buildings is the systematic search for greater space efficiency.

Although we have come a long way since medieval strongholds were designed to protect villages full of people, a building with its fixed walls and locked doors is protective in nature. With the use of smart technologies, one can expect a more dynamic and flexible use of space. As engineers have been working on technologies allowing modular structures and movable walls, living architecture affecting buildings' structures will become the norm. Instead of developing permanent structures, the real estate industry will deal with fluid and versatile spaces whose usage will be constantly optimised. This improved efficiency will be made possible by the greater transparency stemming from data analytics. With transparency will also come accrued responsibilities.

Indeed, real estate professionals can expect a greater societal accountability with respect to their use of space and overall efficiency of their buildings. In a world where according to the United Nations, 66 per cent of the world's population will be living in urban cities by 2050, optimal use of space will become a key criterion of a sustainable property. Fundamentally, a more dynamic and versatile use of space enabled by pervasive sensing, Internet of Things, and building technologies promoting modularity will question the customary boundary of what defines a building

END OF ASYMMETRIC INFORMATION IN REAL ESTATE MARKETS

Greater transparency will also affect the dynamics of property markets, making them more efficient but also more prone to herding effect and speculation. Real estate markets thrive on asymmetric information, ie, some players have access to (or believe they have access to) information that others don't know. At the individuals' level, there is a certain level of protection in property markets' inability to reflect all information. In effect, opacity embedded into the staleness and lagging of most property indices acts as a safeguard against extreme behaviours and wayward valuations.

As all information likely to affect, say, house prices in a given neighbourhood becomes available in real time, property markets' nature will change, from relatively slow markets to faster ones more prone to speculation. Whether greater transparency can tame speculation and save us from property bubbles, or rather encourage more momentum type transacting in the space market, is an open question.

Hence, public accessibility to real-time property market data will be a boon or a bane depending on how it is used and understood by the masses. To assuage the reinforcement feedback inherent to real-time platforms, patterns identified in datasets made public will have to be qualified in terms of strength and consistency over time so that individuals, and real estate intermediaries, do not make flawed decisions.

NEED FOR NEW VALUATION METRICS AND CERTIFICATION

Valuing a property is an art as much as a science. Valuing a smart building will be even more difficult as its valuation will have to rely on physical structures as well as digital features within the building and its environment. How will such features be captured? Actually, the answer might stem from existing valuation methodologies catering to non-standardised assets. For instance, hedonic models make it possible to value a property based on space users' level of utility for an array of property characteristics. That could be one way to deal with smart buildings.

Research is needed inasmuch as variables in those models will be the product of complex functionalities far beyond buildings' materiality. One can envision that "smartness" certifications of buildings will be derived from such models. These certifications (according to a "smart scale" to invent) could combine two criteria: the ability of a building to interact with its users, and the interconnectedness of a building with the smart urban system around it.

SMART CITIES, SMART PROFITS?

Digital features will define new value chains for the real estate industry. Property value drivers will be increasingly embedded into digital maps, and thereby fall beyond the real estate industry's current reach.

As phone manufacturers discovered at their expense in the late 2000s that smartphones had little to do with phones, developers might discover that buildings and smart buildings are two different animals altogether. Indeed, developers do not want to be left with building commoditised structures while value added is provided by others.

In the knowledge economy in which smart cities will blossom, one can envision greater cooperation between the real estate industry and the tech sector, leading to vertical integration of developers, joint ventures, and M&A. It would actually make a lot of sense for the real estate industry to invest in promising smart technology companies today, by setting up private equity funds for venture and seed capital.

NEW FORM OF HUMANISM

Smart buildings hold many promises. If properly implemented, smart technology has the potential to put humans back at the centre of our cities. However, it is not the first time such promises derived from the combination of architecture and technology are made. In post-war Europe, people dreamt of never-ending bliss with ubiquitous cars, lifts, escalators, washing machines and other electric appliances invading newly built concrete jungles, but to no avail.

The opportunity for smart cities is to rely on post-modern humanism where technology is used for the sake of humans and not the reverse. Obviously, challenges will abound, from data privacy pertaining to building use to security of the digital infrastructures underpinning smart buildings. As ancient Greeks devised, there are two dimensions in a city: "topos", the physical and geographical place a city defines, and "khora", the place where human lives happen and memories are built. What smart cities offer to the real estate industry is the opportunity to become the necessary enabler of the latter where value, and ultimately profits, will be made.