Welcome to the podcast that shares the views of high-level leaders in the European and global financial services industry.

. – Welcome to Shaping Finance, a podcast which offers a platform to high-level decision-makers and shapers in international finance. My name is Nicolas Mackel. I'm the CEO of Luxembourg for Finance and the host of this podcast.

I'm joined today by Lisette van Doorn, Chief Executive of the Urban Land Institute, Europe, or ULI. She will tell us more in a minute on what exactly the activities of the ULI are. Before joining it, Lisette ran her own consultancy business, advising international institutional real estate investors and fund managers on strategy, organisational optimisation and portfolio structuring. Prior to this, Lisette was a country manager for CBRE Global Investors. And before that, founding Chief Executive of INREV, the European association for Investors in Non-Listed Real Estate Vehicles.

Lisette, welcome to Shaping Finance. So the Urban Land Institute, what exactly is it? And what do you do and how does it relate to financial services?

Lisette van Doorn. – “Well, hello, Nicolas. Thank you so much for the invitation for this podcast. Urban Land Institute is a global member organisation for professionals active in the field of real estate and urban development. We are a nonprofit organisation with 45.000 members globally. Our belief is that many active in real estate and urban development work very local, will say this is a local business, but at the same time, the challenges and opportunities we face are very global. And that is what we try to bring together, the knowledge sharing. Important topics like climate change, densification, competitiveness of cities. So very much in the field of urban and economic development. And we do that through events, research, advising cities, and that's it.

Okay. So you have recently released your flagship report, which is the ‘Global Emerging Trends in Real Estate’ report. This is the 2021 edition. Can you give us an overview on what are the key trends you're seeing and how these are affecting investments into real estate and shifts in project financing?

“Well, not surprisingly, there was a lot to cover this year as we are in a market that's correctivised by both a cyclical downturn, as well as a market facing huge structural shifts. And that is something that the industry tries to get their head around and not knowing yet where that's going to go. And that's mostly because of continued lockdowns we see across countries, as well as continued government support packages. So, many people described the situation we're in right now, almost as a vacuum, an in-between between one cycle having ended and the other not having started yet because we don't exactly know where it's going to go.

And at the same time, what we see is continuously huge amounts of capital that want to enter the real estate market. And of course, some of that finds a place now in some of the sectors that have been performing well. And I'll talk a bit more about that in a minute, but also a lot of capital still waiting on the sideline because of travel restrictions that people can't go and see assets, but also because of waiting for opportunities to come, maybe in the sectors that have been hit harder, where pricing hasn't been adjusted yet. And even within sectors, we see strong distinctions. Retail is a good example of that, where a grocery-related retail has been performing really well and all the other retail being hit much harder due to the shop closures, and all of that.

What we've seen so far on the lending side is actually not a lot of distress yet. Mostly what has been seen is accommodating banks, new lending becoming more difficult, especially for sectors not performing so well. And also banks having maybe issues internally with not so much real estate lending and loans given out, but maybe in other sectors where it's much more unsecured lending than in real estate. At the same time, we've seen alternative lenders coming in, debt funds, but also institutional investors that see the opportunity with all the uncertainty to better invest through that instead of equity.

What is the expectation generally is that the level of distress will increase, but that's probably only coming through at the moment when government support packages. And then what we've seen very, very clearly is that huge scale up of the importance of the ESG agenda all across the real estate, I would say, where the industry may have been focused on the E for quite some time. That is definitely being scaled up from just a couple of building certifications to true deep carbonisation of the built environment.

And at the same time, the S has become much more important. And I must admit, but many of those topics, the industry is still struggling. We've seen so far the energy efficiency, the building certification side, having been the easier part because it's easier to make the business case. I can calculate quite easily what the investment is for solar panels or better insulation. And I know what energy I'm going to save and what costs I'm going to save. That is much harder on decarbonisation, as well as on other issues like social impact, what is the business case of that? And there are still a lot of views in the industry that it comes at the cost of financial return. And given that it's hard to measure, how do we make the business case for that?

We will, of course come back to the sustainable housing topic in a minute, but let us stay a little bit with the evolution of the real estate market, because we have seen record high growth in residential real estate prices across the globe. The Economist ran a story on this a couple of weeks ago in an article where they also highlighted the enormous increases in prices from, I think 22% in New Zealand to 11% in the US market. In Luxembourg, the statistics office has announced that in the last year, we have seen an increase of 16%. So, somewhere between the US and New Zealand. This obviously is becoming a challenge and at least an issue for the political world. What exactly are politicians to do on this particular challenge? What would you recommend they do? And what consequences would increased inflationary pressures have on this phenomenon?

“We've done a lot of research into the issues on the housing market, especially on the affordable housing market, because that's almost where the pressure has become highest. Those people that we've all depended on in this pandemic, not able anymore to live in the cities where they work, police, healthcare workers, teachers, whatsoever. And what you see with this crisis, it's a supply crisis. There is not enough supply. We're looking at a huge structural demand, urbanisation, the larger number of households, aging. All those people need to live. And with fewer people in a home, we need more homes. And that is something that, especially after the financial crisis, has not been picked up sufficiently.

So the most important thing I would say is build, build, build. We really need to build homes. And what we've seen so far is almost increasing the problem by putting in political and policy measures on the demand side. If I look, for example, at the Netherlands, I'm Dutch, living in the Netherlands, a lot has been done to allow, for example, surges to buy a home. They've just kind of abandoned stamp duty for starter homes. In that sense, what happens then is that amount that they used to pay for tax now goes into the prices. And that's exactly what we're seeing.

So unless we really scale up supply massively, nobody's going to solve this problem. And then of course, it's an issue of those that own a home profit from the price increase and those that don't own a home don't have access anymore. And you will increase the problem even further because those that don't yet own, will not be able to own. And at the same time, that has a consequence on the rental market too, because those prices, those markets act in parallel. One is too hot, the other follows and kind of you get a similar issue.

So we think it's really important to enhance the supply. And we did a research study last year to look into what can be done and what is already being done to increase supply. That was specifically targeted at affordable housing, so that mid-level for those that don't have access to subsidies, but at the same time, can't afford the market level pricing or rents. And what applies to them applies basically to everyone. It's about reducing risk throughout the whole process of planning and construction.

And that is for the governments to make regulation much more transparent, to speed up planning processes, to be clear on expectations, what needs to be done. And all of that helps to decrease risk. Design, can we standardise designs? Can we work with modular construction more? And also having financing tools available, for example, through interest rate discounts or guaranteed loans that really help to kind of reduce the risk. And if the risk is lower for the developer, the required return can also be lower and you make housing much more accessible. And we think that's really key.

And Lisette, if I may ask you a follow-up question on the price crisis, what role does the international monetary policy and interest rate environment play in the rise of the prices of housing assets?

“Well, of course we've been living in a low interest rate environment for the last, how many years, many. And that has really driven also investment into residential because before there was more focus on commercial real estate sectors, but that enormous wall of capital needed to find a home and more and more residential was seen, partly because of the structural demand drivers I just touched on as an interesting asset class, also through its anti-cyclical behavior versus more commercial real estate. But also in a low interest rate environment, residential, which is not the highest yielding real estate sector among them still provided a very interesting optic and positive premium versus the interest rates, versus risk-free interest rates.

So in that sense, it has definitely played a role, but I think it's important to recognise that that is one factor because also, in other sectors, we've seen price increases generally for real estate, but it hasn't been the most determinant factor and there the increases haven't been as high due to the amount of capital than it has been with residential being so restricted and regulated in terms of construction and supply, that is an additional factor.

And maybe to also comment on private individuals, the interest rates on your savings account are basically zero. No? And on the other hand with pension cards, with the need to work longer across countries due to aging and kind of government support in terms of pensions and pension buildup is much less than it used to be years ago. And that's where I think individuals have started to see the opportunity to invest in housing, to make sure they save for their pension age. And there, residential has been a way to do that. And so far successfully because of that limited supply.

Good. If I may come back to what you mentioned before, namely the sustainable trend in housing, a key highlight of your report has been the decarbonisation and dealing with this from a real estate perspective. Given the growth in green legislation, including for instance, the Sustainable Finance Disclosure Regulations and the Green Deal and the taxonomy, how is this trend affecting investor behavior relating to green and brown assets?

“Well, we've seen already for quite some time that if assets have energy-related certifications, like BREEAM or LEED, there's definitely a premium, or you could say there's a discount if they don't have it. Now that we're entering say, another league with a focus on decarbonisation, that becomes a different matter. At the moment, it's still hard to say whether there is a brown discount on that because so far the pressure has most come from financial institutions like pension fund institutional investors, as well as the bigger tenants, especially the bigger tech companies, who've been very explicit on what type of buildings they want.

But the big issue here is what is the definition of zero carbon actually? And is it just the operational carbon, meaning the energy use of the building, that's been the focus so far for many, or is it also the carbon embodied in the materials and the construction and the transportation of the construction materials to the site? And that is something that I think is only starting to come through that it's very important to consider that, especially because if we consider that in 2050, we have to be in a zero carbon society, 80% of the buildings that will exist then have now already been built. So unless we consider that, we will not get to zero carbon.

And then you come back to an issue that I mentioned before on definitions and measurement. So first we need to get to a common definition of what is all included in that zero carbon and what needs to be considered? And then the next thing is how do you properly measure that? And that's not happening yet at a large scale. So talking about brown assets for decarbonisation, that's too early now. I think it will definitely come. And it will probably go fast, especially if governments start issuing regulations, which has only just started. And I think that will really help drive this move towards zero carbon.

Maybe one other thing to also consider is the tenant. And that's something that, because now you can say, well, all the areas I control, I make sure they're zero carbon and they don't use energy or just renewable energy, but what about the spaces that are controlled by the tenant? So the tenant needs to come on board as well. Recently, we had a webinar where one of the speakers said the most sustainable building is the building that was never built. And then making also the comparison to why are you in the real estate industry? Because, you like to build. So are we moving towards a real estate industry that is not building new buildings anymore? That would be the most sustainable solution.

So basically there's a long way to go for real estate where we need to adapt behavior quite fundamentally. And that's not just the real estate industry itself. It's also the tenants because we see a lot that companies have said their own pledges for zero carbon, but at the same time, they move their headquarters into a newly built, fancy building. And that's why we think collaboration within the industry is crucial, partly also because huge innovations are needed that nobody can do on their own. And we need to collaborate very closely with other sectors like energy supply, mobility. What if I make my building zero carbon and you can only reach it by car? That's probably not the solution either.

Good. Let's have a look at the consequences of the COVID pandemic, because a lot is being written about the future of work and of course, then its impact on the commercial real estate. And then the flip side of that would be the future of a work-from-home culture that would, of course, also have consequences on the housing market. What are some of the lasting effects that we can see already now from the real estate sector due to the COVID pandemic?

“I think it's still hard to predict long-term effects because sometimes it takes long to come back to where we were before. But we do definitely think that flexibility in work will remain. Where kind of first, I think before the pandemic working from home was a privilege only for a few. Now, people were forced to go home and work from home for more than a year, in many cases now. So you now can’t go back and say, ‘Oh, by the way, you can't work from home because I need to keep an eye on you.’

So I think the dynamics between employer and employee have changed and therefore, I think it's now at the discretion of the employee to decide when and where he or she will work. Of course, there's a middle ground where employees can say about three, two days a week in the office and the rest wherever you feel comfortable, but I think that's already a big change. So I think that flexibility element is a very important one. The decarbonisation, we just talked about it, but I think that will definitely remain. It was there before, but it's been hugely accelerated now through the pandemic. And I think it will keep pace afterwards as well.

And I think also social inequality. We talked about housing before. Making sure those people that need to live in cities can live in cities and it's not a privilege to be able to live there, I think is very important too. It's basically also for the real estate industry to incorporate the social impact that buildings have on their environment and looking at what positive impact they can bring to a society. I think that's really important.

And then maybe more on a sectoral basis, we've also all been forced to shop online to an extent that we've probably never done before. That was already a trend obviously, but it's now come to a level that you're not sure how much it's going to go back from that. Some obviously will, but especially when it's about convenience maybe, or experience, you go to the physical shopping. So that structural adaptation of the retail sector had already slightly started, but partly because of that wall of capital and continued good performance or okay performance of retailers, it had not really pushed through. Now, there's a real need to restructure the retail sector. And that's also something that we think will come through. And that's also an opportunity, especially I think for city centers where you can have a true mix of uses, bring residential that we need so hard back into city centers, make it more community places and have the opportunity to distinguish those city centers from one another.

Great. Let us wrap up. And as we always do at the end of this podcast, let me ask you our book question, namely, have you had time to read a book that you would like to recommend to the people listening to you?

“If I'm really honest, I'm a big reader, but I read so much for the work I do, that I'm not such a free time reader. I'm more active there. But I must admit, a while back, I read The Hunger Games. It's four books now. I read three of them because three of them were kind of issued around the same time. And the fourth has only been very recently issued. And I must admit I was struck by it. The writer is Suzanne Collins and actually one of my children started reading it-

Mine too.

“... and said, "You need to read it too." So with the whole family, we read the three books. And then there are also a couple of movies I can definitely recommend. It's definitely not realistic, but it struck me.”

Yep. No, no, my kids also read it. So thank you very much, Lisette, for sharing your insights with our audience. And thanks also to our listeners who have tuned in again to our podcast. In our next episode I will be speaking to Tonika Hirdman, the CEO of the Fondation de Luxembourg and we will be talking about philanthropy.To stay up to date with our podcast, please feel free to subscribe on iTunes, Spotify, or Google. You can also find more information on our website, luxembourgforfinance.com.