The revenge of the brick as real asset vs financial asset
Following the financialization of real estate since late 1980s, properties’ portfolios to which asset investment strategies were applied began to be considered on a par with financial assets.
This trend is now reversing for two main reasons. The first one is the growing commitment to sustainable development, virtuously accompanied by companies’ decision to measure their economic performance also in terms of social and environmental impact and to put social issues back at the heart of their policies. The second one is the pandemic that has highlighted the resilience of certain real estate assets and accelerated investor’s awareness in adapting their investment strategies to the changing needs of our society.
In the late 1990s, the financialization of real estate was strongly influenced by Anglo-American investors. According to their investment approach, a real estate asset should be valued not according to its real value rather to its capability to generate an income, considering the initial capital, the cash flow and the return on investment at the exit time. The valuation of an asset is, therefore, based on cash flow and revenues generated.
Since the 2000s, a stream of thinking inspired by sustainable development has progressed in traditional finance, with a Socially Responsible Investment (SRI) defined as “an investment that aims to reconcile economic performance with social and environmental impact by financing companies and public entities that contribute to sustainable development regardless of their sector of activity” (definition by the association française de la gestion financière and the forum pour l’investissement responsable in 2013). This trend has been then implemented within companies thanks to Corporate Social Responsibility (CSR) policies, which have become a corollary of SRI. According to the European Commission, this is “an approach to encourage the integration of social and environmental issues into business activities and stakeholder relations.”
The link between CSR and SRI is to encourage investors to include extra-financial criteria in the selection of their investments, thus stimulating companies to adopt and/or improve their CSR policies.
Many international and European initiatives have reinforced and regulated this trend by also setting extra-financial objectives for investment funds. For example, by requiring them to adopt ESG (Social Environment and Governance) policies and to disclose how their property portfolios contribute to the energy transition.
Specifically in corporate real estate sector, end-users are, in most cases, companies concerned about compliance with their CSR policies, especially after the pandemic that profoundly changed social habits and working methods. Corporations have had to adapt to a changing labour market and to face the need for quality of work and related services to retain their human resources and attract new talented people while maintaining their business performance.
Therefore, in view of assets’ optimisation and valorisation and to achieve the best return, tenant attractiveness and good knowledge of the property are essential.
Nowadays, purely financial logic is no longer enough to give value to a property as it does not consider related services, tenants’ satisfaction, their needs and prospects, nor the building’s intrinsic characteristics, its ESG evolution or its sustainability potential.
A gradual evolution, accelerated by pandemic, has reversed the purely financial vision in the management of all real estate asset classes.
Both institutional and private investors are currently looking for meaningful investments and for responsible assets within their investment strategy while not forgetting that this is strategically profitable from an economic and reputational point of view as virtuous investments have also become less risky and much more resilient.
This is confirmed by the large number of sustainable finance brands on the European market today. At the end of 2021, 1,799 funds were classified as sustainable in Europe, with assets under management of €1,330 billion and 877 “Article 9”-related funds (SFDR Sustainable Funds open to retail investors) with assets under management of €361 billion, according to Novethic.
SRI in real estate is therefore both a real challenge and a response to investors’ expectations.
From a real estate point of view, SRI allows to prevent risks and to preserve the value of real estate assets. A reversible building will be able to respond to a difficult economic situation and adapt to a new use according to changing needs (coliving, flexoffice, healthcare facilities, senior housing, etc.). Taking non-financial criteria into account enables asset managers to identify further growth opportunities and make more sustainable and virtuous investments.
The performance of buildings is increasingly measured by the number and quality of the services offered, which can be different according to location and users, allowing for creativity and innovation.
According to this new trend, investors are ever more focusing on long-term forecasts to select sustainable opportunities and thus minimize risks, considering criteria that were not previously considered, such as demographic changes, security and artificial intelligence.
This is called “thematic investment”, an approach focused on long-term trends such as the evolution of cities, climate change, scarcity of resources, social mutations, and others, leading to structural changes in all economic sectors.
This is the time of mixed use, modular premises, and bespoke services, where everything is designed for the end-user, both in his professional and personal life. A real estate asset is becoming a true provider of well-being and serenity, allowing everyone to find a balance between work and personal life.
In this context, asset managers and fund managers are facing many challenges. Due to the strong impact of digitalisation and artificial intelligence, which have pervaded performance and risk assessment processes as well as data management, they have to reshape their real estate approach in a more virtuous and human way, looking more…at the real asset itself.