Real Estate: Life after the Pandemic

The past two years of the Covid-19 pandemic have been a watershed for the real estate industry. Face-to-face contact has been rare, and ESG has emerged as a key challenge for the sector. As we begin to return to normality, what are the key questions for the sector? In this roundtable, three senior women from the industry give their views.

This roundtable features Sophie van Oosterom, Global Head of Real Estate at Schroders, Joanne McNamara, Executive Vice President of Europe & Asia-Pacific at Oxford Properties, Teresa Dyer, Chief Operating Officer at M7 Real Estate, and is moderated by Claire Cabot, Director at Alter Domus Jersey.

Claire Cabot: Let's start with how you got into real estate. Can I ask how you broke into what used to be a difficult industry for women?

Teresa Dyer: I got into the industry because of my family. I grew up being driven around industrial estates at the weekend. It wasn’t just dad, but my mum was in property too, which was unusual at that time. They loved it. So, I thought “why not” and I have never looked back.

Sophie van Oosterom: I studied economics and then I went into investment banking. Initially as generalist in Mergers & Acquisitions team. At the time JP Morgan was acting for a Dutch client called Rodamco, which was the largest listed global real estate company. Rodamco was demering into five different companies and, being Dutch, I was assigned to the real estate team to help - and thereafter I was never able to escape the industry.

Joanne McNamara: I studied maths at university and didn’t know what to do afterwards. Keen to be in an industry which involved people skills, someone suggested that I should try real estate, so I did work experience for three weeks at DTZ in Cardiff. After that DTZ put me on the graduate scheme, and I ended up coming up to London.

CC: Are more investors asking you to focus on diversity and inclusion (D&I) and environmental, social, and governance (ESG) issues?

JM: All my capital comes from OMERS, so we don’t have LPs as such, but we do have many capital partners and D&I is a massive part of OMERS, Oxford and our partners’ agendas. It is more formally becoming a large part of the “S” in our ESG commitments and certainly forms part of every conversation and questionnaire from partners of scale.

TD: The first time we received an ESG questionnaire was around 2016, and it was a one-pager and we just needed to tick boxes. That has definitely changed.
Big family offices and institutional investors all want to know what you’re doing. If you have a sensible approach, investors are usually happy. They want
to know that there won’t be any big value crashes.

SvO: Different investors have different levels of requirements with respect to ESG topics. Within Europe, the Northern European investors now ask about ESG on the first page of an RFP, where it used to be one of the last. Investors in other countries are catching up very quickly. But unfortunately, execution of parties still varies. I was on a call recently when one of the very big global investment managers said, “you don’t want to be ahead of the pack on
ESG, you want to be somewhere in the middle.” Who still dares say this?

TD: Not being developers, we’re looking at what we can do to existing buildings that will make a difference. With 40 percent of greenhouse gas emissions down to the built environment and a huge amount of that from existing stock, we need to make improvements. That might take 10 or 20 years. Building a
super green new building is of course great but we also need to deal with what’s already built to achieve what’s necessary.

JM: What we are finding with investors is that they want to see what interventions you can make that go beyond certifications. It’s the materials you’re using, how they’re being used, energy consumption, how you are looking at the embodied carbon in your buildings, etc. And that is just the “E”. There is also a lot of focus on the “S” and “G”. You need to show that you’ve thought about these things and have a plan to improve wherever possible.

CC: Are you having to provide statistics like you do for performance? 

SvO: Yes, we do. The challenge is there’s no single truth there, there’s no proper benchmark. Even the Global Real Estate Sustainability Benchmark,
or BREEAM, still focuses on how good an investor is at reporting on the topic rather than what we are actually doing to improve.

JM: This is where technology comes into its own. We’re putting a digital twin in place for the Sony Centre, built in 1987, which is a 3D computer model that tells you where you’re using energy, water, and so forth on a floor-by-floor basis. Technology will become extremely important to help us measure our base
energy usage. Without being able to accurately measure this, you can’t improve. Technology like digital twins makes sense where you have assets
of scale, but I am sure in time this will become a more common practice. We are constantly looking at new technologies to enhance efficiencies at our buildings across the world – one of the many benefits of working in a global business.

TD: It’s a big challenge collecting data across 600 properties in different countries where the metering works differently and you don’t control the data. In France, legislation requires both tenants and landlords to report their data into a central system and all suppliers make data available. I thinkit would be great if the rest of Europe implemented something similar.

SvO: I agree. That makes it so much harder to roll consistent ESG policies out across a larger portfolio, if you get push back from local teams saying they can’t be competitive anymore if you have to price in these required improvements. We need a more global industry body agreement to help us push forward collectively. To try to mitigate the problem of measuring ESG returns, we have introduced a carbon tax into our underwriting across our portfolio. This is to hold our asset managers accountable for carbon emission costs and show the cost of not taking the measures needed to proactively reduce emissions.

CC: Will this make it more difficult to acquire older buildings? 

TD: The valuers are saying that they expect the cost of making a building green will start to be taken into account in valuation. I think the cost of reducing
carbon emissions will become a mainstream part of due diligence soon; buildings will need a net-zero plan.

JM: Although it hasn’t hit the valuations yet, it will do so quickly. There are some people who just won’t bid which impacts values.

CC: With technology in mind, how do you see this affecting real estate investment? 

SvO: Logistics providers are selling off some of their own assets in certain locations, thinking about how technology improvements and regulation will influence how they can deliver into cities (electric, drones, etc).

JM: Look at life sciences, too. There’s enormous government funding across Europe for healthcare spending and R&D. But there’s neither enough lab nor enough manufacturing space. I think there’s still room to grow, even though there’s a ton of capital chasing that opportunity.

CC: With the pandemic in mind, how have LPs changed the way in which they invest?

SvO: Firstly, when it comes to selecting managers during the pandemic lock down, LPs have stuck to the managers they know because seeing new people was impossible. Secondly, I believe that many LPs have realised that they need a team that is operationally very smart. To create performance, you need a team on the ground with specific expertise, that lives it, breathes it and interacts with the tenants on a daily basis. Although LPs have become very professional investors over the years, I think the focus on operational expertise has become crucial when creating value.

JM: Yes I certainly agree and LPs are being more flexible and more creative about the way they access markets. I think that there will continue to be consolidation, and the larger GPs and those who specialise, especially those with strong operational capabilities, will be the winners.

CC: Will today's inflationary environment create more or less opportunities for investors? 

SvO: If inflation leads to higher interest rates there will have to be a valueadjustment. It hasn’t really affected values yet, but it will. Initially returns are
likely to come down a little due to higher financing costs and value adjustment. Thereafter we calculate that there is a 60 percent link between inflation
and real estate income, as you can push through rent increases, so in the medium to long run, real estate should outperform other asset classes.

CC: With life slowly getting back to normal, how do you all feel about MPIM and other conferences? Do they still serve a purpose, in terms of networking and coming together? 

TD: The last couple of years showed that there are things you can do online, like webinars where you present an opportunity to a larger group of people, or talk about technical subjects. But face-to-face conferences are definitely better for blue sky thinking, macro subjects and networking.