Watching the market

Real Asset Insight brings the opinions of real estate specialists across the sector through its Thought Leader interviews, broadcast on the RAI website and accessed by subscribers through our daily e-newsletter. Here we present a selection of insights into the hottest topics affecting real assets.

‘ESG must be more than hype’ – Olivier Elamine, Alstria REIT

Despite claims that the covid crisis has raised the profile of ESG as employers and building owners have become more conscious of the quality of working environments, and traffic reduction has dramatically cut air pollution, not everybody thinks the change has been as fundamental as it needs to be. The hype may have been bigger than the actual change in the view of Olivier Elamine, CEO of Alstria REIT.

“What we think is going to accelerate is the communication around [ESG] and unfortunately not necessarily the action around it,” Elamine says.

“The whole net zero debate is the wrong debate because it pretends you can run real estate without emitting carbon, it pretends you can build real estate without emitting carbon. The net zero advocates will argue that this is not how net zero is defined. But when you need to look into the definition of something to understand what it is and that understanding is different, that’s the definition of marketing. The topic is way too important to be dealt with through marketing claims.”

He concedes that there are a number of initiatives which are doing good and going in the right direction, but overall they are in the minority. And he says there is no real appreciation of the cost of combating climate change.

“I think the elephant in the room is really how much it’s going to cost and nobody is really willing to have that conversation. Unless we have that conversation it’s going to be very difficult to move.”

Drastic action required

Olivier Elamine: ‘We need government to implement a stringent carbon tax and we probably need to start lobbying for that.’

The action required does have to be more drastic. To reach the 2030 carbon reduction target, every year until 2050 carbon emissions globally need to be reduced by the same amount as was the case in 2020. “So we need a covid crisis every year between now and 2050 to reach the target, that’s the gap.”

The discussion within Alstria, he says, is whether it is best to protect assets from climate change risks, such as flooding, or to sell those assets at most risk and reinvest in less vulnerable stock.

“You ask yourself whether or not it still makes sense to try to avoid the train wreck and just protect yourself for the shock, invest in an airbag. I think this is going to be a conversation that’s going to take place more and more. If there is no government action I am very pessimistic about getting anywhere and currently there is no government action.”

A referee is needed to change the rules of the game, he says – and there is a huge role for the real estate industry, and actually all industries. “We need government to implement a stringent carbon tax and we probably need to start lobbying for that.”

This might sound like lobbying against the industry’s own interests, as no company likes to be taxed. “But I think if we’re really serious about solving the carbon crisis this is the only way to take it further.”

He adds that a carbon tax needs to be of sufficient magnitude “to actually move the needle” and points out that Germany has imposed a €25 per tonne of CO2 carbon tax on everything, including real estate. But for Alstria, for example, this is a €15,000 per year tax that is completely painless. “It needs to be substantially higher to be able to make a difference.”

Is core future-proof after covid? – Christina Ofschonka, AEW

Until the pandemic shook up our lives and markets, ‘core’ was a straightforward concept that implied strong covenants and long-term income streams. Now we need to ask, and to understand more fully, why an asset is capable of generating strong demand and whether it can do so beyond the current occupation, says Christina Ofschonka, managing director, fund management, at AEW.

Christina Ofschonka: ‘You need to be very active to successfully run a core strategy.’

Apart from the pre-existing trends accelerated by the pandemic, the need to ensure that assets meet ESG requirements has added further complexity. “It’s a very dynamic context,” says Ofschonka. “Assets need to be, and need to stay, future-proof. You need to be very active in order to successfully run a core strategy.”

“Ultimately it comes down to the ability of an asset to generate a long-term sustainable demand from occupiers which then translates into being future-proof,” she adds.

In the long term, sectors that have historically been perceived as the most liquid or as safe havens will not continue to be defined that way by default. Although logistics and residential are likely to continue to become viewed as lower-risk sectors, office and retail will find their equilibrium, albeit with higher yield expectations. But the shifts mean that new opportunities will emerge: “When others are doubtful, then undervalued assets can be found.”

‘Distress to follow withdrawal of support’ – Omega Pool, Mishcon de Reya

While last year lenders retrenched, this year began with a sense of cautious optimism in the UK, says Mishcon de Reya real estate debt partner Omega Pool. There is a sense that 2021 is a good year to originate debt. “We’ve seen a fair amount of capital that’s been raised specifically to target distress, but also, more generally, debt strategies.

“As a whole, the market is more resilient than just after the last crisis, probably as a result of the variety of lenders that now operate lower average LTVs, and probably less covenant-light loans than we saw last time round,” she says.

Omega Pool: ‘As a whole, the market is more resilient than just after the last crisis.’

However, this is the average position she says and, addressing individual cases, there is still a funding gap in the market which could be as much as 17% of outstanding loans. “So, yes, I do think that we’re going to see a period of distress,” she adds. 

Last year there was government support and lenders showed a degree of forebearance, but “once this stasis starts to unravel we’ll see more distress”, says Pool, adding that the extent will differ depending on the asset class.

Alternative lenders have emerged either to acquire non-performing loans or recapitalise them. “We’re expecting it’s going to catalyse a secondary debt market,” she says, which will help banks remove problem loans from their books, but there will be other innovative asset-backed loan strategies which allow sponsors to source finance against balance sheet assets and cashflows.

‘Tech could change capital raising’ –  Susheela Rivers, DLA Piper

Not all of the consequences of the covid health crisis have been negative, such as the acceleration in the application of technology and the adoption of ESG principles. Susheela Rivers, global co-chair, real estate sector, at DLA Piper, believes there have been implications for capital raising too. 

Susheela Rivers: ‘Operational efficiency’

She says that while covid has restricted the global flow of capital and imposed a local, or at least regional focus, accelerated technological developments, including Blockchain, could change capital raising.

“Perhaps the distribution ledger technology can provide operational efficiency or certainly new ways of lending which ultimately means you can have greater reach of investors,” says Rivers.

Another ‘silver lining’ of covid is the positive impact on the environment of the restrictions and the increased drive for funds to commit to sustainable investment and impact investing. “If currently 25% of investments in a portfolio are [ESG and impact] linked, I think in the next three years that might even increase to 70% or 75%.”