At conferences of global real estate investors from New York to Paris and Tokyo, “resilient portfolios” are a hot topic at the moment. The talk is about portfolios that are robust and able to withstand economic shocks as well as major climate policy changes and technology-driven disruption. The word “resilient” is used so often nowadays that it might sound almost meaningless – just another buzzword added to the jargon of international investors.
However, I believe the word has real substance. This new focus on resilience highlights an area of the real estate industry that is more important now than ever before: risk management. Effective risk management can significantly boost the resilience of a portfolio. Diversification of real estate portfolios by use type and region is proof of that. Union Investment, for example, is aiming to at least double its logistics exposure over the coming years compared to the end of 2019, thus achieving even greater diversification across Europe than previously. That is why our strategy includes focusing on new concepts for the last mile in the logistics supply chain, where developments are mostly being driven by online retail.
Forward-looking acquisition decisions also need to be made to boost the resilience of fund portfolios in terms of other commercial property types. Going forward, office properties must be adaptable to a variety of different work models. In retail, not all concepts will be able to survive in the long term. Hotel portfolios should include accommodation in all categories that delivers recognisable added value over and above the offerings of Airbnb and similar platforms. The examples mentioned above indicate how important it is for medium and long-term impacts during the management phase to be taken into account when making an acquisition decision.
To put it simply, investment management and asset management are becoming ever more intertwined. In the past year, for example, we have increasingly acquired properties for which we expect a noticeable increase in rents during the holding phase in order to justify the high purchase price. A new risk factor that has emerged in recent years, and one that remains relatively difficult to quantify for the real estate industry, is climate change with its direct physical impacts and indirect insurance-related and climate policy implications. The German Climate Protection Plan, for example, aims to make real estate portfolios virtually climate neutral by 2050. Based on the Paris Agreement, Union Investment is committed to meeting this target across its entire global real estate portfolio.
However, throughout the process of making the portfolio as resilient as possible, a range of local legislation has to be taken into account, as do innovative leaps in technology which could bring together digitisation and sustainability within a property. No one can put an exact figure on the price of a changing climate. Responsible investors thus face yet another challenge.
By Martin J. Brühl