You Asked Us: A foundation for impact investment in real estate

WBEF expert panel:

Tanja Volksheimer, Senior Portfolio Manager – Europe, Nuveen Real Estate

Tina Paillet, Chair, RICS Europe

In our current circumstance, is it realistic to expect investors to prioritise anything other than financial return on investment? How can we drive culture change at this most challenging of times?

Tina Paillet: Bottom-up public opinion on responsible investment and top-down environmental regulations are applying pressures not seen prior to this cycle. Investments that do not consider and pre-emptively tackle their impacts and externalities on wider society will become increasingly undesirable and will lose value. I think the real estate sector will soon see a division between “investment grade” sustainable and desirable assets, and all others. This latter group of assets will be considered second class at best. At the extreme end of the scale, they will become stranded assets – stranded either by their failure to conform to environmental legislation, or by simple unattractiveness to end-users. That is a pretty convincing argument for cultural change!

TV: There is, perhaps, a related question here: “How much does a return say about an investment that looks at the true value of a building?” We still need discount rates and net present values to make an investment decision as they reflect the asset´s income and the general state of the market. But it is true that there is another factor that must be taken into consideration. This added factor has been termed social return on investment (which you may have seen expressed as SROI) or, alternatively, impact return. At Nuveen we condense the financial aspects into one number and then do the same for impact. This helps us to see the investment holistically and make the two perspectives comparable – giving a “true” value. This practice is becoming ever more sophisticated; we can look forward to impact soon being added to risk-return profiles. Currently each company has its own approach, but in the future we must surely adopt a common methodology. I am encouraged by the fact that the industry is already working on that.

What will be the sustainable investment model for future offices if, as expected, more people will be working remotely in the future?

TV: Overall demand for office space should not be affected too dramatically, although the balance of arguments suggests it could reduce moderately over time. Corporates will probably restructure their portfolios and accept greater flexibility regarding remote working. Demand for supplementary flexible space is expected to rise accordingly, although the model of provision will need to change. Serviced office operators will need to consult their customers on what constitutes “acceptable” densification. One trend appears inevitable: landlords, property managers and tenants will interact more closely and effectively in the future. They must come together to enhance the experience and value of the office, accelerating a trend that was in its infancy prior to the pandemic. Additional new services will be provided to tenants, with associated income streams for landlords – this will speed the migration to a partnership model. Office values will be reinforced and ultimately underpin a healthy long-term demand for space. The workplace environment needs ‘actively animating’ with an enhanced focus on collaboration, community, hospitality, health and wellbeing. Meanwhile, new technologies will emerge which allow for workplace data collection, contributing to a better work experience in the new normal.