For financial professionals in Belgium

ESG in COVID times: doing the REIT thing

Guy Barnard, CFA

Guy Barnard, CFA

Co-Head of Global Property Equities | Portfolio Manager


Tim Gibson

Tim Gibson

Co-Head of Global Property Equities | Portfolio Manager


Greg Kuhl, CFA

Greg Kuhl, CFA

Portfolio Manager


12 Aug 2020

Key takeaways:

The Global Property Equities Team highlights how COVID-19 is accelerating the importance of environmental, social and governance (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.
  • In our view, the quality of management – including governance – will be a key determinant in identifying the sector’s leaders going forward.
  • We believe the growing focus on environmental factors will gain further traction, as more efficient and sustainable buildings have started to see greater demand from tenants and investors.

We believe an understanding and evaluation of environmental, social and governance (ESG) credentials is becoming a key part of investing in listed real estate businesses. And while many companies have a stated commitment to ESG principles, actions speak louder than words. To that end, the COVID-19 pandemic has given us unique insight into how corporates enact the often harder-to-quantify “social” aspects of ESG statements.

Stepping up to the plate

In our view, the global real estate investment trusts (REITs) sector is 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. In a proactive step following the pandemic outbreak, Unite was the first PBSA provider to forgo rent for students who had returned home for the summer term. While this decision led to a short-term earnings hit for the company, it has further strengthened relationships with Unite’s important university partners.
  • In the US, the life sciences campuses owned and operated by Alexandria Real Estate Equities are directly involved in the fight against COVID-19, 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, including 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 sciences 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 residential communities and apartments and helping small businesses by paying suppliers within five days instead of the standard 30 days. Mirvac also aims to send zero waste to landfills 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 programs to support tenants, including temporary rent deferral arrangements and 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 a €30 million coronavirus relief fund to support its tenants and business partners. Against the backdrop of broader discussion on rent controls globally, it is hoped that the high levels of service and commitment to tenant welfare demonstrated during the crisis by professionally managed landlords can create a more balanced debate on the subject in the future.
Solar panel and an office building, Kyoto, Japan, energy efficient, green building

Credit: Getty Images.

ESG’s role in REIT investing

More broadly, we have long held a view that the quality of management, including governance, is a key determinant in identifying real estate’s leaders. 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 Properties, one of the UK’s largest shopping center owners, highlights the risk of poor governance practices for minority shareholders (administration is a form of bankruptcy under UK law). 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, we expect the growing focus on environmental factors to gain further traction; 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-19 as corporates place even greater emphasis on the health and well-being of their employees. In addition, with many governments looking to drive a “green recovery” after 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.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

Marketing Communication.

 

Glossary

 

 

 

Important information

Please read the following important information regarding funds related to this article.

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Henderson Management SA may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund invests in real estate investment trusts (REITs) and other companies or funds engaged in property investment, which involve risks above those associated with investing directly in property. In particular, REITs may be subject to less strict regulation than the Fund itself and may experience greater volatility than their underlying assets.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a hedged share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency, the hedging strategy itself may create a positive or negative impact to the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
  • In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Henderson Management SA may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund invests in real estate investment trusts (REITs) and other companies or funds engaged in property investment, which involve risks above those associated with investing directly in property. In particular, REITs may be subject to less strict regulation than the Fund itself and may experience greater volatility than their underlying assets.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a hedged share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency, the hedging strategy itself may create a positive or negative impact to the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
  • In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Henderson Management SA may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund invests in real estate investment trusts (REITs) and other companies or funds engaged in property investment, which involve risks above those associated with investing directly in property. In particular, REITs may be subject to less strict regulation than the Fund itself and may experience greater volatility than their underlying assets.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a hedged share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency, the hedging strategy itself may create a positive or negative impact to the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets. These transaction costs are in addition to the Fund's Ongoing Charges.
  • Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
  • In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.