2022 STATEMENT?: ESG OPPS FOR REAL ESTATE INVESTMENT IN '23 MAY LIE IN THE 'LEVELLING DOWN' AGENDA

When the Autumn Statement came out a couple of months back, I briefly considered writing a potted summary of the policies as they related to Real Estate Investment. But aside from the fact that the built environment was barely mentioned, I ultimately decided against it.

Rishi is nothing if not subtle. As such I personally never expected brazen, in-your-face Osbornian Austerity and always, rather, lots of little, incremental, sly and stealthy manoeuvres (such as raising taxes by technically doing nothing). I also knew that it would, ultimately, be politically expedient to backload much of the worse to the end of his tenure when - if all the signs are to be believed – Labour will be lumped with the problems. Which rather raises the question of what March’s ‘Spring Budget’ is likely to produce.

But more importantly, I remain unconvinced of what level of fine-grained Built Environment policy could really have significant impacts on the decisions or problems of commercial Real Estate investors or large-scale developers. If anything, it is more what Sunak-Hunt have not done or will not do or cannot do that may open up opportunities - and especially for those genuinely wanting to put the ‘Social’ into the ESG agenda.

Commercial Real Estate Historically Loves a Crisis

Commercial real estate investment in many ways has an inverse relationship with the economy and ‘the markets’ in general. Indeed that it does not correlate is a large part of its appeal within portfolios. One anonymous yet shamelessly honest global Fund Manager at the beginning of this year (in PwC / Urban Land Institute’s report Emerging Trends in Real Estate: Road to Recovery - Europe) is actually quoted as pointing out that:

“More capital is going to come into our asset class and into other real assets as a result of that inflation fear.”

This is not just financial but perhaps psychological: there is something about those ‘lumpy’ tangible bricks and mortar that – whilst less liquid - are compelling. Bricks and Mortar are arguably still Brick-Brown Gold.

In addition, as distasteful as this sounds (although it doesn’t have to be) the property market often benefits from problems and is often actually looking for distressed deals (or let's face it actual 'distress'). The deeply distasteful side of this was seen in the housing crash in the States where portfolios openly benefited from mass evictions and is now being seen in enormous rent increases imposed in many cases on those who can least afford it, which might be seen as a stealthy eviction method designed to bring in a fantasy new tenant – those who can afford vast rents but who also have no better options (I do wonder quite who these people are?).

A more positive side to this – and I’m assuming any readers I may have are wanting to improve their ESG credentials – is that real estate investment in the best cases can simultaneously reap returns whilst also adding Social Value (for example in well-thought through regeneration projects or in addressing a housing crisis potentially much more explosive than any witnessed thus far).

Interestingly, the PwC report that began 2022 also noted that whilst Inflation and Interest rates were numbers 2 and 3 in the list of worrying business problems (and admittedly this was way before the Truss debacle and the spiralling energy prices crisis), levels of concern were surprisingly low: Only 12% were deeply concerned by inflation – 10% by interest rates; 47% were ‘somewhat concerned’ by inflation and 45% by interest rates. As such nearly half were very little concerned at all!

None of this is to say that there are not significant problems – but they are often far larger than anything specific Built Environment policies in a Budget or Statement could really address. For example, the cost of labour and materials remain a major problem, and the labour issue has far more to do with Brexit and immigration policy than anything that a budget might lay out.

Meanwhile those few policies that appeared to have direct relevance were of questionable value. For example Investment Zones, according to most in the property sector, were dismissed as fairly useless months ago. Indeed to people like me who have followed similar endeavours for over a decade, they sounded little different to Enterprise Zones (except perhaps less ‘green’) – if anybody has evidence that EZ’s achieved anything significant I’d love to see it.

Housing Policy / Housing Developers

Perhaps the Annual Statement – and the forthcoming Spring 2023 Budget – are of more direct relevant to Housing Developers. On paper at least Housing Targets are pertinent - although it’s no surprise that Sunak has always been in favour of retaining them and that scrapping them was simply another Truss ‘classic’.

And yet: every year since 2009 when I returned to the Built Environment sector from the publishing world, Budgets / Annual Statements have always had Housing Targets - yet the Housing Crisis is arguably in a far worse state today than it was nearly 15 years ago. All that changes are the reasons people blame – for example, supposed land-banking, ‘red tape’ or the cost of labour and materials.

In actuality the entire system is blocked because councillors feel pressure to keep on the right side of constituents. Even if a new estate is well thought through, it comes down to what pre-existing locals want – which is almost always for the Housing Crisis to be solved SOMEWHERE ELSE (i.e. Not In My Back Yard). And Sunak has had a strong stance on this – indeed he discourages the imposition of unwanted development. One has to wonder where he expects the Housing Crisis to be solved (other than the Magic Brownfield Tree).

Government after Government, too, focuses on encouraging building on brownfield – and Sunak takes this to the extreme, which is likely to make matters worse. But developers understandably don’t relish brownfield because it's fiddly and often includes remediation costs. It also tends to come in far smaller pockets of land, which may not be economically viable and is also unlikely to truly address the scale of the problem.

Affordable Housing Targets in particular (and the Housing Crisis is really an Affordability Crisis) can also be effectively waived simply because of the inherent nature of the Residual Land Value Bid which works backwards from the Target Rate of Return. Now I’m not saying this is wrong as such – clearly if a developer cannot make what it considers an acceptable profit, it has little motivation for continuing to stay in business. But we must surely admit there is something rather quirky and back-to-front about this.

Believe me, if I walk into Chanel tomorrow and tell them I can only afford to pay £35 for a handbag because otherwise it will eat into ‘my profits’, they will call me mad and tell me where to go (Primark, probably). But that is the exact way that RLVBs are set up. And if a developer feels it must walk away if it cannot make its TRR, the likelihood is that targets will be waived for the ‘bigger picture economic benefit’.

Finally, as has been pointed out by numerous political commentators, none of this makes any difference in the first place (from the perspective of the populace at least) if there is no measure in place to prevent landlords purchasing new homes en masse and then renting these out at inflated prices. Or if buyers simply cannot afford to save up a deposit full stop because they have zero disposable income to save.

Levelling Down: I’m an Investor, Get me out of Here…

Where the Sunak-Hunt administration may make a difference to commercial real estate investors (and perhaps especially international investors into the UK) is in what they choose not to do. And indeed in what they actually cannot do because it is in part a macroeconomic or global crisis related issue.

In the UK at least, interest in investment had already moved somewhat away from London and into the regions long before the Pandemic, simply because there was increasingly less scope for adding value.

Northern cities Manchester and Leeds, for example, fared quite well way before the Pandemic with what Property Week often called the ‘Northshoring’ movement. Now, circumstances have changed but in some ways remain the same - London is still less desirable than it once was for investment partly because WFH seems to have had a bigger impact on London that it has in the regions (or indeed in other capitals). And the suburbs rather than urban centres are increasingly of interest, due also to the effects of WFH. There is also the relative solidity of investment into Industrial and Data Centres in a world where Retail and Office are precarious, both of which are far more prevalent in the regions than in London (although it is true that places heavily reliant on Industrial may be at real risk if the oil price crisis continues).

From this perspective, the Levelling Up agenda as originally conceived may have been useful in attracting investors by providing catalysts for regeneration - and as such the Levelling Down 'non-agenda' will have an impact (although in fact it’s a vicious circle). Of course Sunak-Hunt don’t call it Levelling Down but with Local Authorities on the verge of bankruptcy this will likely be the end result. In any case the work of Levelling Down has already been thoroughly accomplished by macro factors.

This has an impact on investors as much as it does the populace because when people have zero expendable income, town centres suffer. Only a few years ago it was considered blighting that high streets had been taken over by budget shops. Now even the budget chains can barely survive and appear to have lost all sense of self-respect. Cost cutting on cashier numbers, budget chains that at least once served a specific function of being inexpensive are now truly desperate affairs – single, depressed cashiers serving long, cramped, unhygienic lines of people coughing all over each; foul-looking and deeply unsanitary ‘sanitizer stations’ unused, uncleaned and left over from the Pandemic; glass doors broken into and boarded up instead of replaced; hand-written notes on bits of cardboard on the doors of major-chain budget supermarkets saying ‘contactless not working’ (and staying there for weeks). It looks like something from Bladerunner – except without the tech-noir glamour. There was a time that I enjoyed the odd bargain hunting trip. Now it’s too depressing (and unsanitary) to go near.

Now as much as I have sympathy for the actual populace, my focus here is on investment and real estate, so my question is, rather: why on earth would any international investor want to invest in places that are this dejected? Why would anyone expect them to? It would be like turning up to a Speed Dating Event (or MIPIM!) in a pair of ‘trackie bottoms’ and without washing your hair or cleaning your teeth, and then moaning that nobody had found you attractive enough to spend time with.

It is all very well to say ‘look how desperate things are – invest in us!’ But whilst Seed Money from Government is never a bad thing, to attract real levels of investment you need to appeal to external and international investors (as well as businesses offering opportunities) and while they are certainly looking for Value-Add and Uplift opportunities and even – in the most flinty-nosed cases - actual ‘distress’, is this level of bleakness likely to whet anybody’s investment appetite? ‘Distress’ can certainly provide investment opportunities that also help communities – but there needs too to be a general sense of a place going in the right direction. Not a general spiral into a pit of abject despair.

If desperate budget shops are blighting town centres, and quality stores like M&S have left, this is because they cannot make a profit. Why? Because the populace is stony broke. Why? Because whilst unemployment is low, business themselves are struggling. And many people are too ill to work. Why? Because the NHS is on its knees. Why? Because there is no money. Why? Because businesses are struggling! It is a literally a vicious circle. You might just as well say, to mis-quote Shakespeare, that the fundamental reason is that ‘there is something wrong at the heart of England’. Should Sunak-Hunt have been expected, like Bob the Builder, to fix this? On paper, absolutely – that is their job.

In reality, however, the Growth and Productivity problems (and the sense of general malaise) are now so enormous that I wonder if any Government could ‘fix it’ on the money that it has - it may in fact be up to external investors to gingerly step in and take the reins.

The Re-generation Game – 3 Billboards on the Way to a White Elephant…

Even where Local Authorities have historically initiated regeneration, it has often led to White Elephants, or impacts that are the exact opposite of those intended. Sometimes, putting up glossy billboards about future regeneration – or to attract investment – almost seems to be considered the equivalent of the actual regeneration itself. And all too often those billboards are still standing – and rotting – a decade later. It doesn’t help if these are in places that are unlikely to attract investment: for example on Flood Zones, where few will want to build because of the insurance. Could not rather some basic superficial and attractive public realm have been put in place instead?

Projects are often poorly planned, by which I mean ramifications are not thought through to their conclusions. I recall a shiny new college going up that was supposed to provide evening classes for mature students. Yet courses were repeatedly cancelled due to a supposed lack of interest – which was then blamed by the college itself on a lack of car parking spaces! Hint: if you are going to create facilities without enough parking, you have to reduce the emotional reliance on driving in the first place. Often, too, shops and facilities are closed down in fits of enthusiasm in order to make way for future projects…but then the projects never happen, or are delayed year after year, leaving a town with even fewer facilities than they had before – and even more boarded up buildings.

Why does this happen? I am not blaming individuals, who I’m sure have positive intentions. But due to cuts over the years, very few Local Councils have in-house specialist urban planners anymore, let alone fully trained architects. In the past, in-house departments were responsible for some of the most admirable architecture in Britain, ranging from the slum-clearance replacements of the GLC in the 1950s (I once lived in an ex GLC block in London and whilst the architecture was not to everyone’s taste the quality of these apartments was undeniable – original parquet flooring, terracotta tiling and immaculate sound proofing leading to zero problems with antisocial neighbours); another example was the cutting edge Hampshire Schools of the 1980s (indeed this is the only large-scale public sector county architecture facility still in existence).

Without such expertise, planning and design is farmed out – but cost-cutting also means that, for example, trained architects are deemed expendable. And whilst it is not impossible for good design to be created without architects, the rash of ‘carbuncles’ – for example historic assets destroyed by out of character window replacements and pseudo-‘matching’ extensions – and well-meaning but ill-thought-through White Elephants does suggest that the out-of-house expertise being employed is not always of the highest quality.

I question whether showcase projects always help in any case. They can do. For example, Gehry’s now famous museum certainly put Bilbao on the map. And I do think ‘photogenic’ projects by big-name architects and artists went some way to developing Newcastle/Gatehead’s reputation as a vibrant arts centre. However the effects of other projects are more questionable.

Did the Barbara Hepworth gallery truly lift Wakefield from the doldrums? I only ever visited the gallery once and whilst I won’t deny it’s a good gallery, I was at the time surprised at how little it had catalysed around it. More to the point, what could it really achieve for the many, many people in Wakefield who have absolutely no interest in – specifically - Barbara Hepworth? The last I checked, Wakefield was not brimming over with vibrancy or prosperity. The problems are entrenched and endemic and a single art gallery focused on a single artist was never likely to fix them.

WFH raises questions about the Value of Infrastructure Projects

The final difficulty with even the original Levelling Up agenda was how far it was tied into transport projects: the Northern Powerhouse, for example (which was really just a forerunner of Levelling Up) was ultimately all but subsumed by the remit of TfN (Transport for the North).

The Northern Powerhouse agenda was partly predicated on a model inspired by the Randstad region in the Netherlands and Rhine-Ruhr region in Germany, whereby connectivity via transport was (incorrectly) correlated to productivity – a notion that the Centre for Cities has refuted through a closer look at what actually makes these areas successful. In any case, the situation (as again Centre for Cities has pointed out) was in no way easily applicable to the relationships between key northern cities.

Personally I always doubted whether better rail connectivity would produce collaboration, or east-west commuting between, say, Lancashire and Yorkshire. Besides, most of these hypothetically collaborating business leaders don’t use rail anyway – they drive! And there are limits to how far a typical worker is likely to want to commute.

Even more importantly, WFH has further eroded the need for physical connectivity (although it is true that the Energy Crisis may send more people back to the office than was expected, purely because people are sometimes forced to sacrifice newfound freedom gains to get their employers to foot the heating bill). But that is pragmatic. If we are really talking collaboration, I question it. In the last year alone, I had highly collaborative talks and meetings via Zoom et al with people as far-flung as London, Atlanta, Florida, Norway, Germany, Ireland, Thailand and New York - all from my home office. The relevance of transport to productivity is even more questionable now than it was before.

And now for something less miserable instead: Putting the ‘S’ is ESG

I never intended to write such a thoroughly depressing post but that is the situation as I see it – and why I sadly never expected the Annual Statement – or next year’s Spring budget - to make all that much difference either to Real Estate investors (or developers) or indeed those communities in which they are investing.

Is there not a sunny side? There might be. Given the overarching concern of many in Real Estate development and investment as to how to ‘do’ the Social in ESG, the way forward might be to align investments with what might also actually help people and communities at a time when Government either won’t or can’t. That would in fact be fulfilling the original meaning of what Social Impact statements were supposed to prove – that every £ spent should contribute socially as well as economically. What are some areas of investment that would also have positive social outcomes?

For a start, skyrocketing rents in the private sector as a knock-on effect of mortgage interest rates may further increase the appeal of new, attractive BTR properties let by dedicated, ethical developers with high levels of customer (resident) service and high accountability (perhaps with guarantees about possible rent rises). This could simultaneously help people priced out of the more ad hoc elements of the private sector, whilst enabling developers to bring forward infrastructure costs. This is already a new trend but may become stronger as the oncoming private rental crisis escalates. But this will only work if the developers hold themselves to genuinely ethical standards in the first place.

Secondly, it appears to me that what Local Authorities need as much as they need Seed Money is deeper expertise and longer-lasting collaborations – both in planning and architecture but also in investment strategy. Too often individual projects are conceived as the end goal when in fact they should be catalysts or flagships for broader investment. And even where consultants come in, they very often disappear after the fancy brochure and billboards have been put in place. I would also argue that external consultants often have rather grandiose ideas about what a given community might actually want – and that community consultations are far too often superficial exercises with no real psychological understanding of the residents' needs or desires – but that is perhaps beyond the scope of this piece.

So instead of miniscule Social interventions arbitrarily tagged onto projects, such as ‘we will train 5 apprentices’ (you know the type of stuff), is it possible that Real Estate experts could start offering their time and expertise as long-lasting co-partners with Local Authorities? Some will say this is far too much to ask – I would argue then that you may not be entirely serious about the ESG agenda.

Of course reluctance to truly do ESG always come down to fears about profitability. But it has long since been proven that sustainable investment in no way directly correlates to lowered returns. In this sense the markets are actually ahead of the real estate investment sector. In fact, by partnering with or genuinely helping Local Authorities with regeneration and investment strategies, it may possible to simultaneously help communities whilst also offering larger-scale and more holistic investment opportunities. Of course this will also take significantly higher levels of vision than previously, since the towns that might offer the most opportunities in the long run may well be in a metaphorical state of undress today.

If Government can’t ‘fix it’ – can Bob (or Roberta) the Builder (or Real Estate investor)? Yes, I think we can!