The real estate sector has been affected by the COVID-19 pandemic in unprecedented way. As of 3 April, the unlevered enterprise value of real estate assets had fallen 25% or more in most sectors, especially hospitality and leisure. Some asset classes, especially those with greater human density such as student housing, malls and healthcare facilities, had the hardest shock and have already been sold off in considerable numbers.
Even with the short-term benefits of increased e-commerce, the yield from logistics real estate could drop off, as goods and human movement slow down. The lockdowns also shrank the expected rate of return for letting and construction considerably. The bright side is that consumer demand will probably shift towards more efficient properties, especially since the lockdown experience has revealed the downsides of energy-intensive buildings.
Many real estate investors are not ready to take the sustainable and digital leaps needed to make properties safer and healthier even if, just a few months ago, the debate about sustainability was becoming increasingly urgent in many sectors, real estate included. Yields and returns for energy-intensive buildings will shrink soon – not just due to increasing regulatory pressures or to different working practices which, in part, will outlive the crisis, but rather because if the sector does not reinvent itself, it will contribute to speeding up the pace of the climate crisis.
Given the magnitude of the crisis we are living through, financial operators should stick to two axioms:
1. The physical crises of pandemics and climate change are interconnected.
2. Real estate sustainability is increasingly being impacted by these crises.
When it comes to resilience, the priority is to fully understand any weaknesses and then to build capability. Real estate investors should first seize the moment to decarbonize their portfolio and make their operations sustainable. Secondly, investors could deploy a portion of their resources towards building renewable-energy infrastructure and retrofitted buildings. Third, it is possible to combine traditional investing with environmental, social and governance-related (ESG) insights to improve long-term outcomes.