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03 April 2020

Providence and the future of real estate in these uncertain times

Etienne Cadestin

 

When I first heard about a highly transmissible virus emerging in China that impacts humans’ respiratory systems, I didn’t think for a moment the virus would spread globally to become a pandemic in a matter of weeks, dragging the global economy to a standstill 

In just three weeks, Wall Street lost a fifth of its value and sent global financial markets in turmoil. In an effort to stem the haemorrhage, governments around the globe have announced trillions of dollars’ worth of stimulus packages. The urgent monetary response is our attempt avoid a great economic depression, but in the long run, we will have to acknowledge and reconcile the message nature is sending us if we want sustain lives for 10 billion people. 

This might be a good time to admit that our failure to look after the planet now has serious consequences for all of us.  As the UN Environment Chief, Inger Anderson explained last week, this recent pandemic is nature sending us a warning shot, a stern message to stop unconsciously, destroying the planet. Other leading scientists also concur that it is almost always human behaviour that causes these virulent diseases to turn into pandemics.  

Theres a clear correlation here between the drive for more human consumption, industrial farming, irresponsible mining and carbon-intensive construction to global warming and the destruction of the natural world. We know, for example, that most of the latest pathogens emanate from wildlife, including Sars, Mers, COVID-19, bird flu, Zika virus and many more.  

Last October, in happier times, I was awarded the prestigious Future of Real Estate’ at the Estate Gasette Awards. This recognition came after a decade of relentless lobbying and hard work to support an on-going transformation of the European property sector into a more inclusive and responsible industry. That Autumn, the property industry was pretty solid with booming investment in so-called prop-tech. The biggest issue was affordability, which remains an issue for many.  

Now, the property investment landscape is changing rapidly.  This is a good time to stop, reflect and ask the following questions: What does the future of real estate look like in these uncertain times? How can we emerge from this turmoil as a more robust and agile industry?  How do we restructure and rebuild towards a sustainable future? 

What does the future of Real Estate look like? 

Bricks and mortar spaces such as shops, pubs, restaurants, gyms, clubs are closed for now. Flights and trains, cancelled. Those who are still able to work from the safety of their home have radically changed their lifestyles and offices are mostly empty. Calls for confinement and social distancing will not last for ever, but what will the future look like as we recover from the COVID-19 crisis in Europe? 

  • Climate and crisis long-term resilience will become a key priority to boost competitiveness and protect businesses.  Property investors will continue their quest to become net zero carbon; 

  • Offices will transform into clusters where employees can meet, socialise and learn, but with a sizeable decrease in the number of desks. Working from home will become the new norm; 

  • As a result, office space will become a symbol for future employees with wellbeing, productivity, culture, and creativity with the integration of nature and sustainability principles being the priority: 

  • With resource scarcity and construction costs being one of the main concerns, architects will increasingly integrate circularity principles within their schemes; 

  • Leisure and hospitality sectors will recover slowly, with a stronger appetite from customers for responsible hotels; 

  • Logistics, more than ever before will strive as the demand for both last mile delivery and big boxes increase as a result of e-commerce; 

How can we emerge from this turmoil as a more robust and agile industry? 

The current situation has taught us that investment in social infrastructure have been overlooked for a very long time. It has left most governments and businesses unprepared to manage the current crisis. Post-COVID-19, it will be important to take into account the social impact of property investment and take the responsibility to engage with local communities to support employment, economic growth and wellbeing.  

Social infrastructure investment was struggling as an asset class before the crisis.  But now there is a great opportunity to develop more private and public partnerships at both local and national levels Human and social capital formation, poverty and social cohesion, economic growth and employment are all intertwined. Investors will now have to take these factors into consideration when investing in property assets to increase resilience.   

More good news is that pursuing low-carbon and climate-resilient growth is proven to be best way to unlock lasting economic and social benefits. According to the new climate economy, $26tn could be unlocked as a result of climate action between now and 2030 and create 65 million jobs. CEOs and business leaders across the globe now understand the long-term risks associated with the climate crisis but also the opportunities that it represents to them. The powerful, natural forces of wind, sea and sun must be harnessed in future to fulfil our energy needs without depleting the planet’s resources. 

China’s manufacturing sector has dropped between 15%-40% since the crisis began, leading to a roughly 25% drop in CO2 emissions over that same period, according to the World Resource Institute. In a world transitioning to net zero carbon, countries with low CO2 outputs will have a serious competitive advantage. In order to meet the climate goals, there will be unavoidable changes on procurement, and footprint calculations.  

How do we restructure and rebuild towards a sustainable future? 

The real estate industry provides space for societal needs. Post-COVID-19 crisis there will eventually be an economic recovery of some sort.  This recovery process could be slow or fast (no one knows), but nonetheless its crucial that we use this as an opportunity to unlock the trillions the low carbon economy offers and that we include social welfare in the process. 

In the latest OECD report “In it together”, the OECD secretary general explains that “inclusive growth has clearly shown that there doesn’t have to be a trade-off between growth and equality. On the contrary, the opening up of opportunity can spur stronger economic performance and improve living standards across the board!.  

For the property industry, this means understanding how you can contribute to society whilst having a positive impact on the planet and financial results. We already know that listed companies with a focus on ESG performed better and were more resilient since the crisis started, as illustrated below, but the same is relevant to private equity investments (although this information is not publicly available).  

Increasingly, private equity real estate investment firms are required by their investors to develop a robust approach to climate risk and social welfare. There are many European pension funds that will not invest in a property fund without a plan to address these responsible investment principles.  This will become universal.

Every investment firm is different as they have different leaderships, approaches, cultures, methodologies and visions. What we are seeing now is fascinating as companies use this opportunity to redefine their vision and develop ESG programmes that fit their DNA. What will emerge from this large-scale combined response to the climate and social crisis will shape the future of real estate.