Resilience - avoiding long-term risk in real estate investment

Ian Albert is CEO, Colliers, and has worked in the real estate industry, for both real estate companies and real estate consultancies, for 32 years. As well as the MENA region, Ian has extensive industry experience in the United Kingdom, the Levant, North, Southern and West Africa. He led the MENA valuation and consultancy teams at Colliers for 20 years, and as chief executive officer, leads Colliers offices in the UAE, Saudi Arabia and Egypt. He appears frequently at international conferences, on radio and in numerous print and online media.

Website: www.colliers.com

Perception of resilience in the real estate market should change with the advent of the global pandemic, argues Ian Albert. While cities in the USA have been highlighted for their ability to recover from meteorological events, global investors should consider factors relating to COVID-19 response when it comes to assessing market resilience

  

Grosvenor Estate is a serious pan global property investor. Its current assets are estimated at around $65 billion and are drawn from the UK, France, Sweden, Canada, USA and China. They’ve also been doing this for about 340 years.

With this long-term outlook they produced in 2014, after three years of research, a report entitled Resilient Cities.  The crux of the report was to provide a new way of looking at (institutional) real estate investment, for the long term.

Typically, investors look at a seven-to-10-year investment horizon, with a number of key factors, let’s take for example an office building in a downtown location; Who are the tenants? What is their covenant status; or more simply their financial stability and therefore ability to pay the rent?

How long are the leases? For how long is revenue or income secured? What is the condition of the building and will there be major works?

What is the current and projected demand for office space? If there are vacancies, how long will it take me to fill them? Can I increase my rents or is there a future threat to my income from an oversupplied market?

These, along with others, are the main risk profiles attached to any investor’s decision. The decision to purchase, the reward component of the pendulum, would then be taken.

However, the Grosvenor report identified a much broader risk analysis and they split it, as per risk reward, into two, each symbiotic with the other - vulnerability and adaptive capacity. 

Vulnerability covered climate risks, environmental urban conditions, energy and water resources, infrastructure, including affordable housing, and community. The other side of the scale was adaptive capacity. This covered governance and transparency, institutions, both private and government, and their ability to strategically plan, technical ability, planning and disaster management responses and funding resources.

The correlation to these would be the resilience. Using the definition of resilience as “that a city be able to maintain itself as a centre of production and culture in the face of adversity while offering its inhabitants a decent standard of living”, they covered the analysis under a number of headings for vulnerability.

Subsequent reviews on the subject, notably from the Urban Land Institute (ULI) have tended to show greater focus on the climate components.   The ULI report Returns on Resilience covered 10 US examples all linked to climate change (from droughts to flooding and hurricanes). All this makes sense, barely a quarter goes by without some form of man-made or natural disaster besetting somewhere in the US.

The Grosvenor report ranked 50 global cities, with only Cairo ranked in the MENA region, in terms of their vulnerability and adaptive capacity.

The report makes interesting reading. Out of 50 Cities analysed, New York ranked 31st on the vulnerable scale, due to damage from hurricanes and winter storms, but first on the adaptive – the city recovered from the impact very quickly.

Los Angeles scored 36th    due to annual floods and fires from 2017 - but third on adaptive.

London, ran 13th and 17th, mostly hampered by its lack of affordable housing.  

These reports were written in 2014 and 2015, and but now, we have seen the effects of a global pandemic. If the same report was issued today, would we see the numbers the same way? How would the response to the pandemic change the adaptive capacity, especially from an economic return to business angle?

I would propose that the adaptive capacity response should be measured with some key components - provision and availability of medical facilities – public and private sector coordination, swiftness of imposition and enforcement of regulations – lockdowns, masks and social distancing. Other components would be ability to work from home due to national IT infrastructure, supply chain infrastructure – those all-important home deliveries, availability and speed of vaccine rollout and finally return to business, restaurants and offices reopening.

If the counterbalance to vulnerability is adaptive capacity, would New York or Los Angeles, based on their Covid response, still be based ranked first and third? Or would, Riyadh, Bahrain, Abu Dhabi and Dubai sit at the top of an adaptive capacity table based on their responses to the above list?

Of course, there are still some issues from the primary list that need to be met, notably affordable housing and the lack of institutional level local investment.

The Grosvenor report states: “Cities, like societies, are adaptable. Just like societies, they vary enormously in their adaptive capacity due to governance, institutions, technology, wealth and propensity to plan. So, resilience increases when cities have more adaptive capacity and decreases when they are more vulnerable”.

It would be contrary to claim that overall, the GCC lacks growing populations, long term planning, the ability to deliver long term projects or the access to local or global funding.  Additionally, the region’s known appetite for expanding its educational and healthcare base is apparent.

If long-term real estate investment is to be based on an expanded Resilient City criteria, to include the adaptive capacity (disaster management) COVID response, global, regional institutional and individual investors should be looking closer at the GCC region for real estate investments.

© Opinion 2021

Any opinions expressed in this article are the author’s own

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