Autumn Conference 2023: Highlights

The second session of the day was a presentation on repricing and refinancing by Brian Klinksiek, Global Head of Strategy and Research at LaSalle. 

The results of the audience poll before the session indicated that the audience had taken heed of Edin’s presentation on ‘higher for longer’ interest rates. Nearly 46% of delegates think that the most likely scenario is for interest rates to fall in the next 18 months with a soft landing, 37% think there would be a higher for longer scenario and only 11% thought that interest rates would fall in the next 18 months leading to recession.  

Brian explained that the fundamentals of real estate are still strong, despite having seen some of the preferred sectors ‘coming off the boil’: beds and shed still remain popular, industrial vacancy rates are higher than the long term average, residential remains strong but close to the long term trend and office has huge variations, with the US office sector in the worst state. You do need to dig deeper within the sectors as bifurcation is evident; there are huge quality divides within sectors.  

Brian cited that the key question for investors today should be ‘what is the definition of “all-in core”?’ as we move from the traditional core mindset to a ‘new core’ mindset. Things are changing: from long leases to income resilience and growth potential; from credit tenants to low sensitivity of cashflow to the economic cycle; from lease clauses that pass inflation onto tenants to market conditions that pass inflation into market rents; and from low operational intensity to established operating models.  

Concluding his presentation, Brian asserted that debt and debt-like products outperform equity and/or distressed equity. While banks remain crucial as a source of capital, he highlighted the diversification of funding sources beyond traditional banking institutions. This nuanced perspective underscores the dynamic and evolving nature of real estate investment in the current economic landscape. 

Audience poll:  

How does your view on interest rates (as expressed in your answer to the prior question) translate into your real estate investment strategy?  

• It underpins my strategy 39% 
• It doesn't -- I am a "taker" of current bond market signals 16% 
• Somewhere in between 45% 
   

What do you view as the most likely scenario for interest rates?  

• Falling in next 18 months — global recession 11% 
• Falling in next 18 months — soft landing 46% 
• “Table mountain” / higher for longer 37% 
• Further increases 2% 
• Who knows? 4% 

‘Optimism and Opportunities’, this is how the panel started their discussion on the transformations seen in pensions funds across various countries worldwide and the potential consequences for real estate investments.  

Back in 1992, Australia was the first country where local pension funds changed from a defined benefits structure to a defined contribution structure. Although not as advanced, we see a similar evolution in the US, Canada, the UK and now the Netherlands.  

With the two biggest European pension markets, the UK and the Netherlands changing, it is time to understand the impact it could have for real estate.  

Simon Redman, Invesco Real Estate moderated a panel of two Dutch pension funds representatives: Coen van de Laar, Achmea Investment Management and Andre Broersma, from Aegon Asset Management and representing the UK perspective, Paul Richards of AREF.  

Simon explained that the evolution of pension funds has changed from defined benefits, or so called final salary pensions—where you contribute during your working life and are then granted a pension based on a percentage of your salary—to defined contribution, where members are paid a pension based on their pension contributions and investment performance.   

The UK and the Netherlands have their own specific regulations and challenges, besides being at a different stage of the change. According to Paul, the biggest challenge in the UK is not actually investing the capital, but dealing with operations. Most DC investments are made via platforms that provide scale and aggregation. However, these platforms have been designed, operationally, for listed investments and very few are able to cope with funds that do not price or trade on a daily basis. They cannot operate with capital drawdown, queues, extended redemption periods or gating. 

Both Coen and Andre do not see any direct impact to the underlying investments of Dutch pension funds in the short term. Most pension funds have chosen the so-called ‘Solidaire Premie Regeling (SPR)’, whereby pension funds still have collective portfolios, but will be split in age-cohorts, each with a pre-determined risk-return profile. Each month, the returns need to be allocated to these cohorts and any deviations must be explained to their participants. This will have consequences for the valuation of the underlying investments. For illiquid asset classes such as real estate, it will initially be fine to explain why monthly valuations are not available, but this could change.  

The benefits of non-listed real estate investments as a long-term asset class are consistent, with no discernible difference for UK or Dutch pension funds. 

The problem in the UK, however, is structural, and the solution needs to be found in getting liquidity from the trading platforms or the wrapper around illiquid investments, such as real estate. The future for real estate and DC could be positive with the introduction on LTAF structures and large master trust aggregators that do not have the same operational challenges that DC platforms have in terms of daily liquidity and pricing.   

This is good news from a real estate perspective, but there will be some surmountable, operational challenges to deal with. The industry should and will evolve in response, and INREV can support this. 

Bjørn Lomborg, author of the ‘Best things first’ and president of the think tank Copenhagen Consensus Center challenged the prevailing narrative around climate change, asserting that while it is indeed a problem, it is not the end of the world.  

Bjørn provided several examples to illustrate this, such as the dramatic decrease in climate-related deaths and flood-related deaths since 1920 and up until 2100. What really matters is not climate change, but how we adapt to these changes such as building dams.  

According to Bjørn, the way we tackle climate change is very inefficient and expensive. The Paris Climate Agreement is the second mostly costly agreement, after the Versailles Treaty. He asked if anyone has ever made a cost/benefit analysis, and cited that for every dollar spent we will receive $0,17 cents back.  

In a thought provoking presentation, he challenged the audience to do more good. The largest impact to improve life quality for humankind is actually finding and supporting education, medication, medical equipment which will save lives and improve the population’s development.  

We can do a lot more good with our money, but if the intention is simply to tick boxes then we can continue doing what we are doing, but we should at least be efficient about the improvements for environmental policies. The most efficient use of capital would be investing in green energy innovation.   

He ended his session by stating, ‘If your intention is to actually do good in the world then support projects that deliver more meaningful outcomes.’  
 
Audience poll:  
 
Where can you find the highest social return on investment, and get the most “ESG” per euro spent?  

• Clean drinking water  48%
• Cut carbon emissions  28% 
• Fight malaria and tuberculosis 24% 

To stimulate the delegates’ appetite for lunch, we heard some fresh ideas for the E and the S from Niall Gaffney, CEO, IPUT and Thomas Hoogeveen, VP Head of Mobility and Energy Europe, Prologis as they discussed progress through social and environmental innovation.  

Social impact: How creating vibrant developments within urban areas positively influences communities and cities.  

Niall started with a concise presentation on Wilton Park, IPUT’s Dublin development. He explained how IPUT evaluated the social, cultural, economic and environmental impact of this investment. The findings provided valuable insights, not only for IPUT but also city planners, developers, and stakeholders in impact investing. Niall highlighted the importance of partnership with experts, IPUT collaborated with experts to measure 73 metrics across 18 measurement areas. The study combined qualitative and quantitative approaches. These findings can inspire advancements in the real estate industry and contribute to the revitalisation of cities. 

E: Achieving net zero within distribution centres 

Thomas delved into the importance of adopting a holistic approach to achieve net-zero emissions and recognising the significance of addressing Scope 3 emissions. Achieving true sustainability requires considering the entire lifecycle of a product or service. Almost all, 99.9% of Prologis emissions sits in Scope 3, covering the indirect energy used by their customers. 

To reach net zero, Prologis is focusing on energy efficiency, implementing renewable energy solutions, and enhancing building designs to meet high sustainability standards. 

Additionally, Prologis introduced a Mobility Programme, which involves providing charging infrastructure to customers where it's most needed. It promotes energy-efficient and environmentally friendly transportation solutions, optimising routes, increasing the use of electric vehicles, and collaborating with transportation partners to improve supply chain sustainability. Prologis aims not only to reduce emissions from transportation but also to contribute to a more sustainable and efficient logistics ecosystem. 

After catching up with old and new friends, delegates reconvened to hear about Artificial Intelligence (AI), beyond the fog of hype and hysteria with a keynote presentation by Elin Hauge.  

Elin electrified the stage, shifting the focus from the post-lunch lull with a dynamic exploration of AI. Opening with a discussion on the recent Hollywood strikes and AI’s impact on various industries, Elin set the stage for a thought-provoking session.  
 
Dispelling myths, Elin went on to state that AI is fundamentally mathematical computations, albeit with vast datasets. The evolution of digital transformation has empowered us to manage these extensive datasets effectively. 

ChatGPT is a paradigm shift, creating content on par, or even better than humans. But what we should be looking at is the engine that runs it.  GPT-4 is the engine for ChatGPT but there are many more engines out there.  

Drawing an analogy to building a house, Elin urged businesses to consider these large language models as their foundations, the core of AI, for specific applications. Like a house, it won’t keep you dry unless you build a roof on top of it. This is where we will see more innovation. Examples are actually all around us today eg facial recognition on your smartphone, to personal music recommendations via platforms like Spotify.  

Elin painted a vivid picture of the AI landscape, foreseeing the rise of next-level virtual assistants that go beyond the capabilities of current systems. These assistants will be personalised, context-aware, multi-modal, and rooted in extraction analysis, seamlessly integrating into our daily lives. 

Real estate, she cited, stands to benefit significantly from AI, citing applications such as digital twins for design simulation and optimising refitting and due diligence processes. Elin highlighted that data quality is more important than ever, garbage in will result in garbage coming out at scale.  

Emphasising a crucial point, Elin stressed that data quality is paramount for successful AI outcomes. The adage ‘garbage in, garbage out’ holds true at scale, making data quality the linchpin for quality AI. Instead of viewing AI as a threat, Elin urged delegates to recognise it as an opportunity, cautioning that our biggest threat lies in not utilising the AI toolbox. 

Audience polls:  

To which extent are you personally using AI tools, such as Copilot, ChatGPT, DALL-E etc?  

• Not at all 26% 
• I have tested a bit, but I’m not a frequent user 57% 
• I use one of more AI tools every day 18% 
   

To which extent are AI tools part of your business operations?  

• Not at all 26%  
• We have started exploring the opportunities 51% 
• We have one or more AI applications supporting/enabling our business operations 23% 

View and download the presentation

Next up we moved to the topic of unconscious bias, a subject that is as sensitive as it is imperative to address.  

Aimée Massey from Future Act Diversity passionately guided us through what unconscious bias is, how it manifests itself and more importantly how we as a real estate industry can do something about it. She encouraged us to see unconscious bias as an opportunity for positive change, not a risk.  

Aimée highlighted the roots of bias, ingrained in us from a young age, through our surroundings, from family to school. Aimée explained there’s plenty we can do. If we can identify our bias, we can overcome it. We should also question what we are told and challenge others for their bias. We can educate ourselves, mentor minorities and underrepresented groups.  

Aimée explained that we talk about race and gender but less about socio-economic, sexual orientation, age, religion and ability. We need to give thought to all these areas.  

We need to start at the top, cultural values spread, it is essential to have a diverse leadership team, but buy-in is essential, diversity of thought is key and it will result in greater ability and innovation. To be or remain relevant going forward we need to have a diverse workforce.  

In the panel discussion that followed, Aimée was joined on stage by Jo Banfield, Human Resources Director, Grosvenor, Maëva Bregere, Real Estate Development Manager, AXA Investment Managers and Achal Ghandi, CIO – Indirect Real Estate Strategies, CBRE IM.  

The panellists agreed that real estate is lagging behind other industries in terms of DEI. We, as an industry need to make a long-term commitment and make the industry more attractive for a diverse workforce. It’s the key to staying relevant and being innovative.  

We should focus on younger generations and reach out to them during their formative years, as early as 15 years old to help shape their dreams and make real estate less of a hidden sector.  

In the workplace we should talk about differences and celebrate them, they also suggested diverse recruitment panels and that training on DEI and unconscious bias is a game changer.  

Closing on a positive note, the panelists all shared actionable steps for a more diverse industry: 1) move beyond the business plan, measure data and impact to track progress, 2) collaborate with HR to initiate grassroots initiatives, 3)  give everyone an equal chance and 4) combat diversity fatigue by being a change agent within your organisation.  

Paul Morland, author and broadcaster on population and big demographics closed the conference by looking at demography as a lens through which to see global trends. Paul increased our comprehension of demographics and told us how the following ten insights could empower and inform the future of real estate demand.  

1: Fall in infant mortality: leads to a rising demand for schools  
2. Populations growth: leads to a need for real estate in Africa, as the African population jumps from 7% of world population in 1950 to an estimated 35% in 2100.  
3. With populations increasingly urbanising there is a growing global demand for real estate as more cities develop.  
4. Town-dweller/Fertility rate falls: Paul discussed the prospect of shrinkage in areas with falling fertility rates  
5. Aging population: Drawing attention to the impact of aging populations, Paul highlighted the difference between societies with a median age of 20 and those with a median age of 40. Older societies were noted to be more peaceful with declining crime rates, impacting real estate demand.  
6. Very old population grows: as people live longer, there is a higher demand for senior housing emphasising the need to adapt real estate  
7. Populations in decline: The Detroit effect.  Examining countries like Bulgaria, China, and Japan, where a 30-40% decline in population is expected by the end of the century, Paul drew parallels to the Detroit-style decline, foreseeing substantial impacts on real estate. 
8. Immigration/ ethnic change: Paul discussed how immigration and ethnic changes, such as California's shift from 80% white to 20% white population in schools, result in evolving real estate requirements.
9. Food: Highlighting the link between high food productivity, increased land availability, and its impact on real estate development, Paul emphasised the interconnectedness of agriculture and urban planning. 
10. Education: He concluded by stressing the significant impact of literacy changes on real estate needs, particularly as the workforce evolves, underlining the transformative role of education in shaping the future of real estate.  

Mark your agenda for next year’s flagship Autumn Conference which will take place on 20 November 2024 in Vienna.  

In the meantime, take a look at the INREV Event Calendar for other events that you might like to attend.