Portfolio managers for listed property stocks Guy Barnard, Tim Gibson and Greg Kuhl highlight how COVID-19 is accelerating the importance of ESG factors within real estate and the supporting role the sector is playing in the global recovery.

  Key takeaways

• COVID-19 has highlighted how listed real estate companies are enacting the often harder to quantify ‘social’ aspects of ESG statements via various initiatives to aid tenants, employees and the wider community.
• Quality of management, including governance, will likely be a key determinant in identifying the long-term winners and losers in the sector.
• The growing focus on environmental factors will gain further traction as it is increasingly clear that more efficient and sustainable buildings are seeing greater demand from tenants and investors.

For active investors in listed real estate, an understanding and evaluation of the environmental, social and governance (ESG) credentials of businesses is increasingly vital.  While many companies have a stated commitment to ESG principles, actions speak louder than words. The COVID-19 pandemic has given us insight into how corporates enact the often harder to quantify ‘social’ aspects of ESG statements.

Stepping up to the plate

We have seen the global real estate investment trusts (REITs) sector stepping up to a real challenge in this regard, putting in place various initiatives to aid tenants, employees and the wider community.

Examples include:

• Unite Students is the largest owner, manager and developer of purpose-built student accommodation (PBSA) across the UK, providing homes to 76,000 students, with a focus on aspects such as student mental health. In a proactive step following the pandemic outbreak, Unite was the first PBSA provider to forgo rents for the summer term where students had returned home. While this led to a short-term earnings hit for the company, it has further strengthened relationships with the company’s important university partners.
• In the US, the life-science campuses owned and operated by Alexandria Real Estate are directly involved in the fight against COVID, with more than 80 of Alexandria’s tenants pursuing testing, treatments and vaccines. The company is an ESG leader among US REITs and has publicly declared its sustainability and carbon reduction goals. This includes that all new development meets Leadership in Energy and Environmental Design (LEED) gold or platinum standards. Alexandria seeks to develop sustainable campus environments with healthy workplaces for leading life science and technology entities, by focusing on fitness and healthy nutrition amenities, green spaces, indoor air quality and natural light inside its buildings. The company is not only a landlord but also acts as a partner, being a capital provider and incubator to early stage biotech firms. Through this partnership, Alexandria can gain a better understanding of its tenants and their needs.
• Mirvac, an Australian diversified landlord, has a sustainability strategy with clear targets to ensure positive environmental and social impacts across its businesses. The company’s initiatives include virtual community connection events held in their residential communities and apartments, as well as helping small businesses by paying their suppliers within five days instead of the standard 30 days. Mirvac also aims to send zero waste to landfill by 2030, in line with its commitment to the conservation of natural resources.
• With the pandemic and enforced shelter-in-place policies, the home has rarely been more important. Many REIT apartment landlords have commendably established hardship relief programmes to support tenants, including temporary rent deferral arrangements, flexible payment plans in the short term, as well as not raising rents. In Germany, Berlin-focused landlord Deutsche Wohnen reduced its dividend payout to shareholders to fund an EUR30mn coronavirus relief fund to support its tenants and business partners. Against the backdrop of broader discussion on rent controls globally, the high levels of service and commitment to tenant welfare demonstrated during the crisis by professionally-managed landlords may create a more balanced debate on the subject in the future.

Credit: Getty Images.

ESG’s role in REIT investing

More broadly, quality of management, including governance, will likely be a key determinant in identifying the long-term winners and losers in listed real estate. As ever, it is in times of stress that the best and worst examples of this come to the fore. The recent collapse into administration of Intu, one of the UK’s largest shopping centre owners with a market capitalisation of more than GBP3bn less than three years ago, highlights the risk of poor governance practices for minority shareholders. In this case, a controlling shareholder was seemingly willing to accept higher levels of leverage (debt) for the company in comparison to peers, which ultimately contributed to Intu’s downfall.

Real estate contributing to the ‘green recovery’

Looking ahead, given the growing focus on environmental factors it is increasingly clear that more efficient and sustainable buildings are seeing greater demand from tenants and investors. This trend looks set to accelerate post-COVID as corporates place even greater emphasis on the health and wellbeing of their employees.

In addition, with many governments looking to drive a ‘green recovery’ from the pandemic, active real estate owners investing in creating sustainable buildings and improving existing assets may prove a key pillar of the global economic recovery effort.