portfolio institutionell Awards 2023
In sustainability, goals sometimes conflict, such as in real estate. Dr Jörg Mayer, head of finance at the Evangelical Lutheran Church in Braunschweig, found that in apartments and buildings rented by the church, there was a conflict of objectives between the social factor and earnings factor in renting below market value and meeting the parish’s financial obligations. This shows why it is important for investors to clearly communicate their goals: is the focus on the social component or on income? On the subject of sustainability in real estate, Philipp Lehner, senior vice president and managing director at Alliance Bern- stein, admitted that “the industry is struggling here”. Real estate per se is an “ESG offender” due to CO²-intensive materi- als such as concrete and steel. But energy efficiency is an area where the asset class is creating sustainability.
Safe as houses? Property is a big topic among pension schemes and insurers, so it was not surprising that as a theme it continued through- out the conference. Rising interest rates, higher construction costs and shrinking values mean trouble for real estate in Ger- many. Indeed, real estate and infrastructure have been sought- after asset classes, but interest rate rises have made traditional interest-bearing securities more attractive again. Yet infrastructure credit offers a good risk/return profile, and there are arguments for equity investments. “As an infrastruc- ture equity investor, you have an upside,” said Charlotte Daele- mans, senior real assets specialist at Nuveen. Sebastian Dooley, senior fund manager at Principal Real Estate, touched on digitalisation. But data centres need for energy is immense. The industry is working to make their systems more climate friendly by signing power purchase agreements with wind farms or hydroelectric power plants. This turns conven- tional data centres into “green data centres”, he said. From an ecological point of view, however, there is another problem: the sharp rise in energy prices, so data centres must continue to make their systems more efficient. Dooley added that this is important because without ongoing digitalisation there will not be a green future. “I advise institu- tional investors to work with operators and investment manag- ers to promote efficient data centre expansion, especially in mechanical and plant engineering.” So data centres might be greener than you expect, but motor- ways are difficult to associate with the adjective “green”. Manuel Cary, founding partner and CEO of transport infra- structure investment manager TIIC, admitted that roads have a negative impact on the environment as green areas have to give way for the construction of the asphalt strips. But work is being undertaken to minimise the damage to the environment through building automated toll roads where drivers save fuel by not having to stop to pay the toll.
Inflation protection was also on the agenda with Cary saying: “I’ve supported the theory that infrastructure serves as a hedge against inflation. But for a long time I didn’t have the opportu- nity to prove that. Now asset valuations have benefited from the rise in inflation.”
When asked what “the next big thing in infrastructure will be” aside from decarbonisation and electrification, Cary outlined two short-term trends in Europe. One is the increasing use of the railways for freight as trucks are inefficient. Second, he sees a trend in the intersection of climate change, infrastructure and water management. “It’s not just about using less water in agriculture. It’s about how you deal with the fact that it will rain heavily in a short time as a result of climate change and you have to catch the water somehow?” For Cary, solving this will require enormous investment. “That’s going to be a big revolution in infrastructure,” he said. In view of rising interest rates, falling valuations in some real estate segments, there is great uncertainty among investors where fair value is concerned. This is reflected in the lack of transactions with buyers and sellers rarely coming to an agree- ment currently, in favour of a wait and see approach.
Concrete gold Is “concrete gold” now losing its lustre after some residential and commercial properties as well as riskier developments changed hands at dizzying prices but are now threated by valu- ation corrections.
When asked whether real estate would become a “problem child” in the future, the participants, including Thomas Gut, head of real estate at Hamburg Pensionsverwaltung, unani- mously opted for “concrete gold”. While Gut sees opportunities for diversification “in the current situation of re-pricing”, Dr Miriam Esders, a sustainability spe- cialist at project developer Freo, stated that real estate could be- come a problem child thanks to poor ESG quality. “But if you do it right, we have a chance at concrete gold. We are of the opinion that sustainable development and investment does not have to mean less return,” Esders said.
These can both be achieved through carrying out the energy renovation by using technology to lower costs. “There are some challenges that we can only successfully meet by thinking out- side the box,” she said, referring to climate change. Following a difficult time last year, and with questions about how return can be earned, it is now business as usual for Ger- many’s institutional investors in making assets greener and driv- ing digitialisation in Europe’s largest economy.
Issue 126 | September 2023 | portfolio institutional | 45
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