Janus Henderson Investors: ESG in COVID times - doing the REIT thing

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.

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 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.

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