Property investors have an unfortunate habit of not looking very far ahead
The real estate sector has a propensity to underestimate change, perhaps because change has historically been at a rather glacial rate within the industry. In my 30 years in the European real estate markets, it has always surprised me how short-term factors almost exclusively colour investment decisions. While not suggesting the immediate future shouldn’t be a critical element of an asset’s evaluation, I would caution that long-term trends (over a time horizon of, say, ten to fifteen years) have the potential to influence materially returns over a standard institutional five- to eight-year hold period.
I am certain that the number of these long-term trends is increasing, as is their significance. A common catalyst seems to be a combination of technology, demographics, climate change and the application of corporate social responsibility policies that are ever more rapidly influencing the way capitalism evolves in market economies. Let me illustrate the point with an example a long way from real estate.
Major oil companies have some of the most robust financials of any investment sector; for decades they have generated a disproportionate share of UK and US equity dividends. While the basic financials behind these companies have not altered, the last 12-24 months have witnessed a very significant change in sentiment towards the industry that is affecting all areas of its economic footprint. Who could have predicted 24 months ago that several major international banks would declare they would no longer lend to oil exploration and extraction companies? Who could have guessed that a major global investor would release a statement saying it would not invest in assets underpinned by oil companies, citing its corporate social responsibility policy?
The impact on real estate investment is immediate when climate change activists block corporate HQs (for instance, BP’s) and seek to embarrass businesses that deal with such parties (this is despite both BP and Shell investing more than $2.5bn each in renewal energies per annum). The impact on an investor owning a BP-tenanted property will be increasingly detrimental as the purchaser and banking universe for such buildings shrink.