Three FDI trends impacting real estate
In a quickly evolving investment market, which current FDI trends are having the biggest impact on real estate requirements? RealFDI investigates. By Courtney Fingar.
Demand for commercial and industrial real estate is at least partially driven by foreign direct investment (FDI) activity as inward investors account for a significant portion of occupiers of such space. In light of this, what are the implications for real estate and which current FDI trends are having the biggest impact on real estate requirements?
1. The great global gigafactory competition
Electric vehicle (EV) production is driving a great deal of new industrial development. Driven by government incentives and competition among carmakers to grab market share, the EV industry is set to fuel demand for industrial real estate for years. Many locations are already experiencing an uptick in demand for industrial space off the back of increases in e-commerce activity and manufacturing output, which will be exacerbated by the EV boom.
It will also transform the automotive sector in other ways, with implications for real estate and FDI flows. Carmakers will own their manufacturing plants, but will also require an array of supplemental manufacturers and suppliers nearby, as evidenced by the firms located around EV plants, or gigafactories as they’re known.
Gigafactories are among the most sought-after investment projects by economic developers due to the large job numbers they create, the high values attached to them, and their green credentials. The good news for economic developers is that more and more gigafactories are set to come on stream.
Global gigafactory capacity is set to explode this decade. Research company GlobalData predicts cumulative total capacity will increase from approximately 1,500MWh to above 3,000MWh in 2025, and 4,000MWh by 2030, with up to $177bn being invested in gigafactories worldwide between 2020 and 2030. The number of plants is set to more than double and these factories will be significantly larger than today and more dispersed.
China leads competition
China is leading the global competition to attract gigafactories, accounting for 65% of global gigafactory capacity as of 2020, compared with 11% for North America and 9% for Europe. But GlobalData predicts that Europe and the US will eat into China’s share over the next few years, with the US accounting for 14% of capacity by 2030.
“In the US, the announcements and construction of EV assembly and battery plants over the last five years has been profound. In addition to this construction, related projects are being located for parts and chemical components of batteries,” says Mark Williams, founder and president of site selection advisory firm Strategic Development Group.
Europe has also seen a raft of EV investments, with Germany and Hungary being particularly popular.
Stringent site requirements means not all locations that crave EV investments will attract them. But for those locations that do, the ripple effects are large.
High demand for the right sites
“The demand for industrial sites for these projects that have adequate utilities, road and rail locations in appropriate industrial settings and labour supply has been high,” adds Williams. “Generally, it takes years to ready sites such as this, [but] supply has decreased with recent increased demand, making sites harder to find.
“Additionally, electric loads for many of these projects, which often require higher levels of green energy, are significant and can only be supplied at certain sites, further limiting site availability options.”
Lack of adequate charging infrastructure is a drag on EV adoption and the real estate industry has a key role in filling the void. For example, landlords are increasingly incorporating EV charging infrastructure into their buildings as part of their sustainability objectives.
What is clear, however, is that the impacts of EVs on real estate are multi-faceted and will continue to be felt. Also, efforts in many countries to create stronger domestic supplies of the necessary minerals will have significant effects. Increased mining activity, for example, will impact the amount of land available for industrial consumption in resource-rich areas.
2. Shifting supply chains bring shoring opportunities
Continuing supply chain disruptions, changing consumer patterns and the booming e-commerce industry is causing a wholesale reconfiguration of global value chains and redrawing the FDI map. Logistics and distribution centres will remain central to global FDI activity as a result.
Supply chain uncertainty is leading to increased interest in nearshoring, bringing opportunities for locations close to large markets to win production facilities. Data from Tradeshift, a cloud-based platform for supply chain payments and other transactions, indicates that activity across a number of nearshoring hotspots has risen at a faster pace than the global average.
Activity in countries bordering the US appears to have risen at the fastest pace, with Mexico benefitting from a widescale reorganisation of supply chains as companies burned by the disruptions of Covid-19 look to minimise their reliance on China and US companies bring operations back closer to home.
Elsewhere, Central and Eastern European countries are also leveraging the trend and positioning themselves as nearshoring destinations, while south-east Asian countries such as Vietnam are benefiting from the shift away from China. In a 2022 survey by ABB, 74% of European businesses said they are planning to reshore or nearshore operations.
Accelerating ‘friendshoring’
“Nearshoring and reshoring has accelerated,” says Williams. “In my view, it began with tariffs prior to 2020 and was significantly enhanced by concerns related to supply chains precipitating from the covid experience and geopolitical tensions, particularly with China. ‘Friendshoring’, or development of supply from allied countries, is accelerating.”
Nearshoring, along with other investment decisions, has driven significant growth in occupier demand for floorspace, according to a report by Cushman & Wakefield. In 2022, manufacturing occupiers committed to nearly 10 million sq m of space in EMEA, up 27% compared with 2017.
The report points out that “real assets play a significant yet tactical role” in the development of nearshoring strategies and the ability to ensure that production can be achieved both operationally and cost efficiently. Yet another meeting spot where FDI and real assets are intrinsically linked.
3. Automation affects office and industrial space
Artificial intelligence is revolutionising every industry and as an industry in its own right, it counts as the most important. When studying where FDI is headed, looking at hiring patterns is as good a clue as any, and numbers reveal AI jobs are the most in-demand globally. The AI industry will be worth $93bn in 2023, up 12% on 2022, according to research firm GlobalData.
AI and automation are drastically changing companies’ workforce requirements and therefore their real estate requirements. Combined with remote working, a digitised workforce and more automated means of production mean less office space and less factory floorspace.
The place where technological and production activity and shoring trends converge is Industry 4.0, which is reshaping the global manufacturing industry, redrawing the investment map and redefining site selection criteria.
Industry 4.0 essentially covers the use of advanced technology in manufacturing, including cyber-physical systems, the Internet of Things, cloud computing and cognitive computing. Under these umbrella groups sit digital technologies such as location detection, 3D printing, smart sensors and advanced human-machine interfaces, among others.
Labour no longer the key cost element
Industry 4.0 means efficiency-seeking FDI (i.e. corporates chasing low labour cost) increasingly appears to be a thing of the past, says Martin Kaspar, head of corporate development for a Germany-based automotive supplier. “Due to industry 4.0 and the automation and robotisation that comes with it, labour costs are increasingly no longer the key cost element, hence reshoring is becoming more of an option.”
Investment locations that will be able to succeed in today’s fast-changing FDI landscape will be those that can stay out in front of these macro trends that are shaping the investment world and leverage them to their benefit.
The real estate offer in these locations will have to adapt to the changing demands of the corporate occupiers that drive FDI.
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