We live in a world of accelerating change. From artificial intelligence and augmented reality to the rising impacts of climate change, disruptive forces appear to be approaching from every direction. The resulting complexity is both an opportunity and a threat for businesses and investors. Those that fail to look over the horizon and prepare for what is coming will be left behind, but those that do respond can find opportunities for innovation and growth.

The seeds of the future can be found today

Predicting the future is fraught with problems. We should all be using hoverboards or flying cars for transport and have robot butlers by now if the sci-fi movies of the past were anything to go by.

While we don’t have a crystal ball, it is possible to identify powerful social, demographic, environmental and technological forces of change - or megatrends - that are already having an impact on the world and will increasingly shape the way we live and work in coming decades.

It’s a concept summed up well in the famous quote by American speculative fiction writer William Gibson: ‘The future is already here. It’s just not evenly distributed yet’. If we look hard enough at what is going on in the world today, we can determine which emerging trends will grow to significantly impact the future.

Fundamental and dramatic forces

The term ‘megatrends’ was coined by John Naisbitt in the early 1980s who defined them as large, transformative processes with ‘global reach, scope, and a fundamental and dramatic impact’.

Megatrends are not new. A list of those that shaped the last half a century could include the Internet, the rise of women in the workforce and the baby boom that followed World War II.

However, businesses and investors today operate in a world where several fast-moving megatrends, such as rapid technological change, globalisation, aging populations and increasing urbanisation are intersecting to transform every aspect of society.

“The speed of change is absolutely quickening,” says Dr Matthew Bell, Managing Partner of Climate Change and Sustainability Services at EY Asia Pacific, who points to three key areas of rapid change – technology, the environment, and people.

Technological change is increasing at a rapid pace

Technological change is now occurring at a much faster pace than we have ever known. A little over a decade ago, smartphones as we know didn’t exist, the Internet wasn’t publicly available until the 1990s, and the first personal computer was invented less than 50 years ago.

A good indicator of growth in innovation is the number of peer reviewed research papers, which have grown exponentially since the 1940s1. The acceleration is only expected to continue, with futurists predicting that in the next decade we’ll see more technological change than in the past 100 years2.

Environmental issues are increasing in urgency

Over the last few decades, humans have produced more than half of the greenhouse gas emissions produced in human history3. This is forecast to have a profound impact on global temperatures with extreme weather events expected to increase in severity and incidence.

Demographics are reshaping society

The global population is continuing to grow, not because more people are being born, but because people are living longer. In 2018, for the first time in history, people aged 65 or above outnumbered children under five years of age. By 2050, one in four persons living in Europe and Northern America will be aged 65 or over4.

At the same time, the population is becoming increasingly urbanised. Today, 55% of people live in urban areas, a proportion that is expected to increase to 68% by 2050, and with that the number of megacities will multiply. In 1995, there were only 14 megacities, defined as cities with more than 10 million inhabitants. However, by 2018, that had more than doubled to 33. According to United Nations projections, the world will have 43 megacities by 2050, most of them in developing regions5.

Risks and opportunities for real estate investors

A megatrend that is already emerging in the property sector is mass urbanisation, which is having a notable impact on how developers masterplan for their sites. For instance, mass urbanisation is changing the way people think about infrastructure, property and transport, treating them less like individual sectors and more as combined, connected parts of a whole.

Offices are increasingly catering to, and curating experiences beyond, work. Space is becoming more adaptive, incorporating elements of retail, dining, wellness, connectivity, and community.

Most recently, and using the Sydney office market as an example, we have seen this trend in development applications which seek to transform assets into multi-use destination hubs like Nine’s move to its new North Sydney premises and the development of Commonwealth Bank of Australia’s office park at South Eveleigh. Infrastructure is also playing a key role in tenant decision-making, with Sydney’s new light rail and current Metro projects forecast to seamlessly connect the CBD with the North Shore and the emerging South CBD precincts opening them up to further development.

As increasingly densely populated urban centres limit the potential for warehouses within cities, last-mile logistics will become fundamentally important, creating further opportunities for investors.

Energy will become increasingly distributed as there is a shift away from big power stations and toward smaller forms of energy generation such as renewables and smaller grid or even building networks.

EY predicts property owners could play a key role in the disintermediation process by generating energy from their own buildings and potentially storing it with batteries. In this way, tenants could buy energy from the building owner instead of purchasing it from a power generator and distributor. This in turn could provide the mass infrastructure needed for the wholesale adoption of electric cars.

As new technology enables people to use space in different ways, property investors may need to carefully consider how to head off the risk of disintermediation by advances in technology and new technology players.

Looking beyond imminent dangers

In their 2020 Sustainability Year Book, S&P Global and RobecoSAM say the interconnected systems within which corporates exist has never been more complex. In part, it is this complexity which presents many companies with the need to mitigate against unforeseen negative events, or ‘emerging risks’, defined as areas of potential risk whose impact is unlikely to be felt in the coming three years. However, it says many companies still have a tendency to focus on shorter term risks.

‘While most businesses are usually good at defining and managing material risks – those that pose clear and present danger – the identification of new and emerging risks is tricky. Emerging risks are uncertain and difficult to quantify and so represent large unknowns to companies. Given these constraints, they have been omitted from traditional risk reporting and financial disclosures to investors,’ write Annelies Poolman, Lead ESG Benchmarking Specialist, and Isabelle Stauffer, Senior Manager ESG Research, in the report.

There are plenty of high-profile examples of companies that have failed to see disruptive forces over the horizon and paid dearly for it. Think Kodak not preparing for the threat of digital photography, Myspace becoming obsolete with the onset of Facebook, and Microsoft’s MSN Messenger, which was decimated by the onset of smartphones and social networks.

Cromwell’s response

Cromwell has again increased its annual investment in megatrend analysis, appointing EY to help to identify the key megatrends that have potential to impact the group and its investments. Alongside the annual materiality review Cromwell uses the output to determine which of the megatrends offer the greatest opportunity or present the highest risks and to use this understanding to inform its ‘Invest to Manage’ strategy, business plans and objectives.

Phil Cowling, Cromwell’s Chief Sustainability Officer, says conducting an annual materiality review helps to ensure the Group’s objectives are appropriate and can respond to the fluid and dynamic environment inwhich it operates.

“Things can change significantly in a year in terms of market expectation, emerging challenges and disruptors. If you are not stopping to closely consider what’s coming over the horizon, there is a good chance that you may be too slow to see the opportunities or react to the risks until the impacts are already being felt in the business.”

“I think that’s the role of sustainability over the next few years,” Cowling said. “Companies that have strong ESG practices and are able to demonstrate the capacity to look ahead, adapt rapidly and reinforce their resilience will attract the greatest stakeholder confidence.