Inflation has risen to up to 9 percent around the world, central banks are raising interest rates to combat it, global stock markets are swinging violently and war rages on in Ukraine.
All of that matters to the world’s biggest institutional investors, but at last month’s returning PERE Global Investor Forum in San Francisco, nothing dominated discussions more than environmental and social matters.
“Climate change and sustainability will be the factor that really affects everything for the next 20 years,” Pamela Thomas, managing director of US real estate investments for CPP Investments, the investment arm of the Canada Pension Plan, told the audience. “It may be the single largest factor. We’re just getting started.”
Thomas noted how today’s exogenous pressures are appearing more regularly. However, they do not stop the world’s largest investors from being active, she said. CPP Investments stopped investing for approximately 30 days after the pandemic ground the world to a halt in March 2020, but began again shortly afterwards. The investor manages about C$49.54 billion ($38.7 billion; €36.6 billion) of real estate, equivalent to about 9 percent of its total assets, according to PERE data.
Dennis Lopez, chief executive officer of QuadReal, the real estate investment arm of Vancouver-based British Columbia Investment Management Corporation, said it too would continue to be active, despite current market volatility. “Maybe some people have borrowed too much money – floating rate – and now they’re going to get in a little bit of trouble,” Lopez said. “We’ll be looking for a little bit of stress.”
QuadReal has more than C$67 billion of real estate under management.
The greater tension for these investors resides in their continuous need to put capital to work while simultaneously ensuring the long-term sustainability of their assets. “On the one hand, the cost of capital is increasing. On the other, you still need to invest in the assets to make sure they won’t become obsolete,” said Edward Lerum, head of global logistics real estate at Norges Bank Investment Management, the steward of Norway’s sovereign wealth fund.
His industrial focus sits within the two favored asset classes for institutional capital these days, alongside forms of residential property. They remained favored because of their strong rent growth projections and inflation-hedge characteristics. Despite that, there are some alternative asset targets gathering momentum. Both Thomas and Lopez said their organizations would also be investing in life sciences and data centers, for instance, as another way to counter today’s volatility.
Across the asset classes, combating carbon emissions is a key aim and a net-zero status by 2050 is the common goal. Lopez’s QuadReal has agreed to a 50 percent carbon emissions target by 2030. Thomas said CPP’s 2050 net-zero plan means every manager it partners with must have a decarbonization plan. She said some in the US “haven’t thought about it,” adding, “even if governments aren’t imposing a decarbonization ethic, you as your own capital can bring that to the table.”
Exactly how to tackle environmental concerns differs depending on the asset type. For instance, Norges Bank uses smart meters to quantify its energy savings. The investor has also begun installing solar panels on the roof of many of its industrial properties for greater renewable energy and has added football pitches close to some for recreational purposes – part of its social investment.
Lennart van Mierlo, head of commercial real estate debt at The Hague, Netherlands-based NN Investment Partners, asset manager to the Dutch insurance company NN Group, said adding space like that helps attract talent.
When it comes to offices, Kurt Roeloffs, chairman of London-based developer Seaforth Land, said his firm is developing assets using alternative materials, as that contributes to net-zero emissions and retains talent. The firm uses cross-laminated timber in its London office developments as opposed to concrete and steel. “It’s relevant to people wanting to come back to the office,” Roeloffs said. “People want to know the building that they are working in is taking an ethical stance.”
All these considerations have a future effect on values, van Mierlo said. “What the impact is you don’t really know. But what you do know is at least it is value-enhancing.”