The Self-Isolation of the Real Estate Market – A Good Thing?

Some, such as the World Economic Forum, believe the pandemic is a time to rethink the way business and investments should be undertaken in the future (Bhattacharya, 2020). The increasing importance of environmental, social, and corporate governance goals have drastically altered the landscape for property markets in recent years. Perhaps, given the lockdown and a pause in transactions, firms and investors have had time to alter their priorities towards responsible investment. “ESG has definitely become more of a topic of discussion. The (real estate) market was moving in that direction already, but COVID-19 is accelerating this trend,” says Dirk Aulabaugh, managing director at Green Street Advisors (Blaisdell, 2020). Is this true, and what does it mean for the future?

Real Estate getting Real

The halt in economic activity damaged the property sector heavily, as in all markets. But perhaps more importantly, the changing attitudes and interactions with physical space because of social distancing has caused the demand for all types of space to drop, a very new global phenomenon (Gujral et al., 2020). This unprecedented crisis’ effects are most profound in commercial real estate – Intu, a shopping centre behemoth in the UK, only received 30% of the rent it was due in March (Kleinman, 2020), plunging the firm into administration. The UK government could be blamed for closing all non-essential shops, but its £4.5bn debt and declining value of its portfolio did not help (Hammond, 2020).

Blackstone, the largest private equity firm specialising in alternative investments and the UK’s largest small business landlord, was forced to permit its tenants to defer payments for 3 months (Donnellan, 2020). In New York, 25% of the city’s apartments haven’t paid rent since March (Gopal, 2020) and can’t be evicted due to the Tenant Safe Harbour Act, leaving landlords without money to pay bills and engaged in a legal battle to forgo property tax. Combine this with falling rent and property prices, and it makes for bleak reading. Uncertainty surrounding the economy and the way real estate will be used in the future has inspired a ‘wait-and-see’ investor mindset, exacerbating the consequences.

Look on the Bright Side

Byron Wien, vice-chairman of a Blackstone subsidiary, said “some believe that environmental, social and governance issues will get more focus at the policy level and among investors” despite the immediate focus on medical and economic issues (Wien, 2020). He may be right. Recent data illustrated below from Goldman Sachs suggests that shareholder climate-related proposals have increased in 2020, mostly due to Europe (Della Vigna et al., 2020).

Real estate investment arms of Schroders and Aberdeen Standard Investments have already laid out full plans on how they aim to implement ESG into their decisions and setting goals for future years. But this shift towards impact real estate investment is likely to accelerate after illustrations of the shortcomings of healthcare systems, the exacerbation of inequality, the need for social infrastructure and the importance of defensive allocation options (Blaisdell, 2020). Despite the economic downturn, 67% of investors polled by the Global Impact Investing Network expect to hold constant or increase commitments to impact and ESG investments this year (Hand et al., 2020).

The following graphic demonstrates that real estate has emerged as a prominent fixture of the impact investing landscape (Preqin, 2020). Considering it can have a direct impact on urban regeneration, affordable housing, and the environment, this is obvious. Reliance on government spending to address these issues has fallen short since the 2008 financial crisis from widespread austerity programmes, widening the disequilibrium between needs and budget (Deloitte, 2018). COVID-19 makes this problem worse, as governments across the world are scrambling to spend to rejuvenate economies. Yet there is an opportunity for an ESG-focused recovery, with some of the onus on real estate investors to build inclusive communities (Blaisdell, 2020). Not only that, but LPs (limited partners, investors that commit capital to real estate or private equity firms) are looking for more resilient real estate opportunities - ESG investing is the key.

The demand for things like affordable housing, preventative healthcare, and great education is not going anywhere, “ explained Bobby Turner, CEO of Turner Impact Capital, “the same can’t be said for hospitality or high-end condos where demand is being eviscerated.”

Practice what you Preach

However, there have been instances demonstrating ESG principles are not being as strictly held as people may hope. For example, the Tenant Safe Harbour Act in the US prevents evictions which, in theory, support the poorest in society. However, landlords can claim ‘money judgements’ (meaning tenants have to pay back the money owed even if they leave the property) from tenants for missed rent. This indebtedness is still rising and may have adverse effects on credit scores, meaning this short-term fix is likely to have long-term consequences for the poor, exacerbating generational inequality (Gopal, 2020). Additionally, 48% of investors still have no plans to consider ESG in their criteria (Preqin, 2020). Perhaps a pandemic was needed to open the eyes of LPs to the possibilities ESG offers?

Skipping past the destruction of the economy on a scale not seen before in human history, one still can be optimistic about the future. Shifting investor attitudes will make humanity more sustainable and the world a better place. For those who do not have morals and require a monetary incentive, research proving that a focus on ESG can lead to financial outperformance for banks (Kotsantonis and Bufalari, 2019) is spurring further discoveries in other sectors. ESG investing has never been more important than it is today, but it also has never been more rewarding.

By Sebastian Thomas

References:

Bhattacharya, C. (2020). How the great COVID-19 reset can help firms build a sustainable future [Online]. Available at: https://www.weforum.org/agenda/2020/05/the-covid-19-reset-sustainability/ (Accessed: 10 July 2020).

Blaisdell, K. (2020).

How COVID-19 Could Drive ESG Adoption in the Real Estate Industry [Online]. Available at: https://www.preqin.com/insights/research/blogs/how-covid-19-could-drive-esg-adoption-in-the-real-estate-industry (Accessed: 10 July 2020).

Della Vigna, M., Stavrinou, Z., Gandolfi, A., Patel, A., Mehta, N., Bingham, D.R., Chetwode, S. and Tylenda, E. (2020). Carbonomics: The green engine of economic recovery [Online]. Available at: https://www.goldmansachs.com/insights/pages/gs-research/carbonomics-green-engine-of-economic-recovery-f/report.pdf (Accessed: 11 July 2020).

Donnellan, A. (2020). Breakingviews – Virus leaves all landlords under same leaky roof [Online]. Available at: https://uk.reuters.com/article/us-health-coronavirus-property-breakingv/breakingviews-virus-leaves-all-landlords-under-same-leaky-roof-idUKKBN21D2EY (Accessed: 10 July 2020).

Gopal, P. (2020). NYC Rental Market Pushed to Breaking Point by Tenant Rents [Online]. Available at: https://www.bloomberg.com/news/articles/2020-07-08/coronavirus-moves-nyc-affordable-housing-crisis-to-breaking-point? (Accessed: 11 July 2020).

Gujral, V., Palter, R., Sanghvi, A. and Vickery, B. (2020). Commercial real estate must do more than merely adapt to coronavirus [Online]. Available at: https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/commercial-real-estate-must-do-more-than-merely-adapt-to-coronavirus (Accessed: 8 July 2020).

Hammond, G. (2020). UK shopping centre owner Intu files for administration [Online]. Available at: https://www.ft.com/content/97b54a02-4ccf-4ac5-b31c-03e71a9abc40 (Accessed: 9 July 2020).

Hand, D., Dithrich, H., Sunderji, S. and Nova, N. 2020 Annual Impact Investor Survey [Online]. Available at: https://thegiin.org/research/publication/impinv-survey-2020 (Accessed: 12 July 2020).

Kleinman, M. (2020). Coronavirus: Lakeside-owner Intu to lay bare scale of retail rent crisis [Online]. Available at: https://news.sky.com/story/coronavirus-lakeside-owner-intu-to-lay-bare-scale-of-retail-rent-crisis-11963708 (Accessed: 9 July 2020).

Kotsantonis, S. and Bufalari, V. (2019). Do sustainable banks outperform? Driving value creation through ESG practices [Online]. Available at: https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/Banking/lu-do-sustainable-banks-outperform-driving-value-creation-through-ESG-practices-report-

digital.pdf (Accessed: 12 July 2020).

Wien, B. (2020). Byron Wien: Speculating on the Secular [Online]. Available at:

https://www.blackstone.com/insights/article/byron-wien-speculating-on-the-secular/ (Accessed: 6 July 2020).

https://www.aberdeenstandard.com/docs?editionId=d5f669b8-312d-449f-9f83-e6bd58bebdee (Accessed: 8 July 2020).

https://www.schroders.com/en/uk/realestate/products--services/sustainability/integration/ (Accessed: 8 July 2020).

https://www.preqin.com/insights/global-reports/2020-preqin-global-real-estate-report (Accessed: 11 July 2020).

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Public-Sector/gx-ps-funding-and-financing-smart-cities-20181.pdf (Accessed: 11 July 2020).