Net-Zero Alignment: Managing Portfolio Risk Along the Net-Zero Journey (MSCI)
This paper from MSCI examines the challenges presented by both climate change and the net-zero transition to investors looking to measure and manage climate risk in their portfolios. Effective management of climate risk requires a clear understanding of its multifaceted nature.
Broadly speaking, climate risk can be broken down into physical risk and transition risk, and it can impact companies and investors via both microeconomic and macroeconomic transmission channels. The transition to net-zero depends on many factors: policymakers’ decisions, the development and economic feasibility of green technologies, investors’ attitude toward climate risk and net-zero investing and consumers’ sentiment toward low-carbon consumption. This and the long horizon mean that investors face an elevated level of uncertainty when making investment decisions.
One approach is to undertake forward-looking scenario analysis, in which various outcomes for uncertain factors such as policy decisions and the development of green technology can be explored, along with their financial impacts. This is becoming a standard tool for climate risk analysis, supported by major organizations such as TCFD.
In this paper, the MSCI Climate Value-at-Risk (Climate VaR) metric is used to examine climate risk in a set of hypothetical portfolios and explore a few strategies to reduce that climate risk. A second approach could be to incorporate a carbon-emission factor in equity risk models to help quantify the impact of emissions on portfolio returns.
As more investors begin to consider the risk of climate change when making investment decisions, financial markets may see a reallocation of capital from carbon-intensive to carbon-efficient investments — and companies’ emission profiles may emerge as a systematic driver of equity returns. Although climate risk management is not yet widespread among investors or fully standardized by regulation, industry trends are pointing in this direction. Investors may therefore wish to be aware of existing approaches for measuring and managing climate risk.
This paper from MSCI seeks to lay out some fundamental principles and best practices for ESG reporting of short positions at a portfolio level, based on the results from MSCI’s consultation with over 20 market participants globally. It also explores related issues that influenced market participants’ views on this topic, including cost of capital, shareholder ownership, engagement and regulation.
The most important principle for long-short portfolio ESG reporting is transparency. Transparency allows both regulators and clients to more accurately assess the ESG risks and opportunities to which the fund is exposed on both the long and the short sides of the portfolio. The main difference in investor views on reporting short positions was whether the investor was assessing a company’s real-world impact or if they were focused solely on its ESG risk/return metrics.
In general, asset owners, asset managers and hedge funds agree that reporting for ESG transparency is different from reporting for ESG risk exposure, with both being important in meeting different ESG investment reporting objectives. It is therefore recommended that long-short portfolios report ESG and climate metrics separately for both the long and short legs, in addition to any preferred aggregation schemes, as this allows the greatest transparency and flexibility for aggregate portfolio reporting under both a double and financial materiality assessment.
With the pandemic now well into its third year, most markets in Asia Pacific have adopted a policy of living with COVID-19 as high vaccination rates, effective medical care and the emergence of weaker variants reduce the severity of the virus and remove the need for lockdowns and other related measures. The findings from CBRE’s 2022 Asia Pacific Occupier Survey, which was conducted from March-April of this year, reflect this new paradigm.The report identifies and explores the five key real estate priorities for Asia Pacific occupiers in the post-pandemic era:
Adopting Flexible Working as the New Normal
Refining Workplace Strategies and Policies
Augmenting Office Wellness and Sustainability
Facilitating a Return to the Office
Pursuing Long-Term Portfolio Expansion
The report also highlights the challenges that companies will need to address during this period of transformation.
Office: The positive momentum from end-2021 carried over to Q1 2022 as Singapore remained on the path to reopen its economy.
Business Parks: Occupier demand has generally improved across all submarkets, with islandwide business parks recording a positive net absorption of 186,982 sq. ft. in Q1 2022.
Retail: While the recovery of the retail market was still capped by restrictions on social gatherings in most of the quarter, leasing activity continued to be stable.
Residential: Private home price growth plateaued in Q1 2022 as cooling measures took effect. 1,716 new private homes (excluding ECs) were sold in Q1 2022, below the 5-year quarterly average of 2,614 units.
Industrial: The industrial market experienced broad-based growth across all segments. Due to limited availability in existing prime logistics buildings, rents inched up by another 1.4% in Q1 2022.
Investment: Preliminary real estate investment volume in the quarter amounted to $9.994 bn, reaching a 4-year quarterly high and just 5.2% below the Q2 2018 peak of $10.542 bn.
Navigating a High Inflation Environment: What’s Next for Owners, Investors and Occupiers in Singapore (Cushman & Wakefield)
Inflation across the world has reached multi-year highs, driven by a confluence of demand and cost factors. Given Singapore’s small open economy as well as dependence on energy and food imports, the city-state’s overall inflation has picked up, rising to 5.4% yoy in March 2022, a decade high.
This report explores the implications of high inflation for real estate, and presents key strategies for owners, investors and occupiers to forge ahead in the inflationary environment.
The Fed moved on its widely anticipated 0.25 percentage point rate hike during the month, the first increase since December 2018, signaling the start of an incremental salvo to address spiraling inflation. However, with the move largely priced in, stocks in the region remained focused on the fallout from the conflict in Ukraine, which has exacerbated inflationary pressures through rising energy and commodity prices, as well as conditions nearer home. Signs of a resurgence in the pandemic across a number of major Chinese cities and the resultant lockdowns also depressed markets. While sentiment was lifted after China tried to shore up private sector confidence after a protracted regulatory crackdown, indicating support for its real estate and internet industries, the region’s equities remained on a down trend as it slumped to its third consecutive month of losses. MSCI’s total return benchmark for the region’s equities fell close to 6% in the first quarter to underperform the region’s property sector.
Major Asia Pacific property markets show gains as recovery builds momentum
Demand for office and industrial assets supports growth across key Asia Pacific markets
HONG KONG, 27 April 2022 – Leading diversified professional services and investment management firm Colliers (NASDAQ and TSX: CIGI) has today released its Asia Pacific Market Snapshot Q1 2022 report, which highlights how major Asia Pacific real estate markets continue to build on a recovery led by gains in the office and industrial segments and are looking forward to a pick-up in dealmaking across segments in the upcoming quarters.
In Australia, easing restrictions brought a return to work and travel, spurring deals worth over USD1 billion in Sydney and Melbourne’s office markets. China too saw demand surge for office space, including in business parks, with key cities witnessing the finalisation of deals worth a combined RMB11 billion (USD1.7 billion). In India, the residential market saw sales surpass pre-2020 levels while strong economic fundamentals triggered an influx of foreign capital. In Singapore, policy measures intended to cool the residential market spurred investments in commercial properties. Japan saw active investment led by REITs across multiple segments, including large office and logistics properties as well as industrial and hotel assets. The report, which examines the previous quarter’s performance of property markets in 16 Asia Pacific countries and territories, also provides forecasts for the current and upcoming quarters.
“In Q4 last year we saw a recovery taking root and, in the first quarter of 2022, that recovery really started to gather momentum across the region,” said John Howald, Executive Director and Head of International Capital, Capital Markets & Investment Services | Asia Pacific. “While the office and industrial segments have led the way so far in dealmaking activity, improving business sentiment and the growth-focused policies of governments throughout the region should come together to make demand more broad-based and spur transactions across segments.”
John Marasco, Managing Director, Capital Markets & Investment Services | Australia and New Zealand noted: “As travel resumes and people head back to the office in greater numbers, we’re seeing a significant increase in interest from both occupiers and investors for office assets. With institutional investors also looking to expand their portfolios, we expect deal volumes to ramp up rapidly as the year progresses. In New Zealand, high-quality commercial assets will attract the attention of investors, including those from overseas once border restrictions ease in the coming months.”
Demand grows in Australia and New Zealand as restrictions ease
Major Australian cities witnessed heightened demand from both occupiers and investors following the reopening of state and international borders, and the return of workers to offices. Colliers expects Sydney and Melbourne to both see substantial increases in deal volume over the year as companies look to encourage more employees back into the workplace and institutional investors seek to expand their portfolios. Demand is particularly apparent for Premium/Prime assets with greater interest emerging for higher quality assets, as well as ESG requirements and a high level of amenities in core locations. In Auckland, demand for retail and office space is being driven by investors looking ahead to the easing of restrictions once Omicron cases subside. Demand for high-quality commercial and industrial properties is also expected to strengthen later in the year when border restrictions could be relaxed, prompting overseas investors to return.
Major Chinese markets witness strong demand for office space
Foreign buyers accounted for almost two thirds of the total transaction value of RMB2.94 billion (USD462 million) in Beijing while occupiers stepped up leasing of large office spaces. In Shanghai, office and business park offices made up 60 percent of the overall transaction value of RMB5.98 billion (USD939 million). In the Pearl River Delta, Shenzhen recorded transactions worth RMB785 million (USD123 million) and Guangzhou recorded one transaction worth nearly RMB300 million (USD47 million). Colliers expects continued strong demand for office space in central business districts (CBD) and business parks across major cities, including Chengdu and Xi’an in the country’s west.
Hong Kong investors turn to hotels, industrial assets
Investment activity in Hong Kong dropped 46 percent QOQ and 6 percent YOY to HKD11.2 billion (USD1.4 billion) in Q1, after investor sentiment was hurt by a surge in Omicron cases, global geopolitical tensions and stock market volatility. At the same time, investors turned to hotel assets due to their potential to generate steady revenue as co-living or quarantine facilities. As restrictions are relaxed and macro headwinds ease, Colliers expects transaction volumes to recover in H2. Hotels will continue to attract institutional investors and industrial properties, including data centres and cold-storage facilities, and will regain the spotlight while local investors will likely continue to be focused on retail assets.
Foreign capital flows back into Singapore
Private funds and family offices snapped up prime locations as demand shifted into the commercial sector in response to government measures introduced in December 2021 to rein in the residential sector. Commercial sales drove transaction volumes, which grew 34.4 percent QOQ to SGD10.6 billion (USD7.8 billion) in Q1, boosted by the sale of the mixed-use Tanglin Shopping Centre to Indonesia’s Royal Golden Eagle for SGD868 million (USD645.6 million) in February. As borders reopen, corporate M&A and cross-border activity will fuel capital growth, and demand will increase for retail and hospitality assets. However, prices and volumes will be capped by rising interest rates and geopolitical tensions.
Fewer deals but higher volumes in Seoul office market
Deal volumes in Seoul’s office market stood at a robust KRW4.5 trillion (USD3.6 billion) following the successful closure of a few deals involving large, premium properties. Rising interest rates and dwindling supply could suppress transaction numbers going forward, but mega deals in the works involving prime assets, such as the Brookfield-owned IFC in Yeouido Business District valued at approximately KRW4 trillion (USD3.2 billion), could keep total volumes high. Office prices will continue to trend upward, mainly in the Gangnam area popular with technology companies.
Japanese REITs drive investment across multiple sectors
Japan’s real estate market saw a number of investments in the office, residential and logistics sectors, driven by strong interest from Japanese REITs (J-REITs). Investments also flowed into the hotel and retail sectors, which stand poised for a sustained recovery in line with an overall improvement in the economic outlook as the country seeks to leave Covid-19 concerns behind. Colliers expects to see an increase in cross-border transactions following the easing of restrictions on business travel to Japan. J-REITs will continue to invest in the office and logistics sectors, and interest from foreign investors is already ramping up – as demonstrated by GIC’s purchase of Seibu Group’s hotels and ancillaries for JPY150 billion (USD1.2 billion) and KKR’s plans to acquire all outstanding shares of Mitsubishi Corporation-UBS Realty for JPY230 billion (USD1.9 billion).
Download the Asia Market Snapshot Q1 2022 report here
A megatrend that emerged from the last decade and continues to gain momentum is the pivot by investors to non-traditional forms of real estate. The onset of the pandemic has notably accelerated the focus on new economy assets, including those that provide vital infrastructure to the digital economy, such as data centers and logistics. Another powerful trend is the move towards ESG initiatives.
APREA took the opportunity to convene a panel of experts during the association’s annual Asia Pacific Market Outlook 2022 conference to explore how investors are leveraging on these shifts in their investments.
The World is Data Hungry
The increased digitalization of the global economy, driven by the rapid adoption of technologies such as cloud computing and data analytics, has increased the importance of data where it can be considered the lifeblood of the modern global economy. According to Equinix, Asia Pacific could generate up to 6,000 terabits of data per second by the middle of the decade. This will continue to drive demand for the vital pieces of infrastructure that facilitates this – data centers.
All three panelists agreed that data centers will continue to be built across the region. Patrick Boocock, Chief Executive Officer, Private Equity Alternative Assets, Real Assets at CapitaLand Investment, said “We purchased a portfolio of data centers in Europe and China, and we are currently developing two data centers in Korea. We have people looking at assets in every market as part of growing a broader data center platform as we see increasing demand for data in both developed markets and developing markets.” However, Ivy Min, Account Director, Alternative Investments at SS& C Intralinks, who moderated the discussion noted that investments have so far mainly been concentrated in the developed markets.
One reason for this is that, given the higher risks a developer would have to assume in growth markets, it is easier to build scale in the developed markets, said Tak Murata, Co-head of Asia Pacific Private Investing, Head of Asia Pacific Real Estate at Goldman Sachs Asset Management.
Another reason is that there remain significant opportunities in developed markets where supply continue to lag demand. Greater Tokyo, for example, is the world’s second-largest data center market after North Virginia, he added. Ambika Goel, a Managing Director in Blackstone’s Real Estate Group, agreed as she noted that even in Japan, the per capita supply of data centers is 60% below comparable cities.
Prospects in the emerging markets are also promising as there remains significant capacity headroom. Ambika noted that in India, there are about 500 megawatts of deployed data center capacity which is similar to the city of Las Vegas.
“It’s a function of underlying demand and in developing markets where you have a rising middle classes, everyone’s got a mobile phone and potentially a tablet, of course, the need for data centers is going to increase,” Patrick agreed.
More Structured Approach to ESG Agenda
With investors ploughing increasingly more funds into ESG-compliant investments, it is only right that they get what they are paying for. And it is not just about the environment. According to Bain & Co, the measurable impact of ESG will evolve to have a similar level of importance to financial return and risk. However, differing standards and regulations continue to present challenges
Ambika reveals that Blackstone has a structured approach to upholding transparency to investors and stakeholders. The firm, for example, has partnered with Schneider Electric to track its utility spend and carbon footprint, which is “definitely industry-leading”.
Patrick agreed as he noted that the view of investors is critical of what managers are doing to quantify, understand and address ESG issues on their assets. Now there’s far more discipline going into understanding and analyzing ESG implications on real assets, whether its infrastructure or real estate.
“Going forward, we are going to start seeing lots more robust Capex plans for the future to reduce the carbon footprint on the built environment,” he said.
Tak reminded that whilst the Environment component is important, the Social and Governance aspects also need to be addressed. These considerations are necessary to evoke change as the ESG the footprint of a company could reverberate beyond its corporate walls and extends across a company’s value chain as well as its various stakeholders.
“The impact that real estate properties have on the community is something that we think about and measure and try to implement,” he said. . Net Zero a Major Investment Driver
As evidence mounts globally on the effects of climate change, investors in recent years are voluntarily embracing targets to reach net-zero emissions on their assets. Ivy noted that this could introduce investment opportunities for asset managers.
“We’re entering an interesting time across real estate and infrastructure. The world is committed to transitioning to net zero. Assets that are not part of the transition face the risk of obsolescence. CapitaLand Investment is looking at opportunities in renewables and continuing to feed and increase the use of renewable energy from our projects into our logistics and business parks,” Patrick said.
Ambika observed that in the US, occupiers are making the move into more multi-tenanted data centers to focus on access to renewables. She revealed that Blackstone’s data center platform in the US is looking to procure 100% of its power from renewable sources and looking to get green\ certification for 90% of the QTS portfolio, which the firm acquired last year.
All three panelists agreed that massive amounts of investments will be needed to transition the global economy to net zero, with close to US$10 trillion in the next decade; Ambika estimated that close to US$100 trillion is needed to power this to the middle of the century.
However, Tak opined that importantly is where such massive spending will be channeled into. He believes that some of these have to be made in more cutting-edge technologies to put the world through an energy shift, such as hydrogen fuels, to reverse climate change. That means taking more risks on projects. However, he is hopeful that the wave of investments could make such developments more viable.
“That’s another opportunity, where capital that is less financially driven could bring interesting ways to backstop some of these technologies and get it going. It’ll be interesting for us as alternative managers to put these together to bring the next energy shift to the world,” he said
Alternatives – A Good Hedge
Even as the world continues to forge a path toward endemic living and risks from the pandemic subsides, 2022 has opened with renewed threats, first from inflationary pressures and most recently, the Russian incursion into Ukraine. This weakens the economic recovery from the pandemic and heightens stagflation risks.
“This is just going to continually boost some of the current trends,” said Ambika, as she pointed out that the merits of investing in alternatives will be reinforced. She cited that just as what had occurred during the pandemic, the case for supply chain resilience will gain further traction.
“What’s happening globally is that we have to think about having more supply chain shocks in the future; Covid has seen that and I think the situation over Ukraine is another reminder,” she elaborated.
She revealed that Blackstone has committed over US$54 billion of equity to thematic investments, with about 70% of its portfolio in logistics, residential, and life sciences. Aside from these, Blackstone is also betting on the content creation industry. Last year, the firm acquired the Eclipse (formerly known as the Sandcrawler) building in Singapore, which counts Disney and Lucasfilm as tenants.
“This is where growth is far outpacing inflation and we think inflation is something to keep an eye on and we’re watching that as we make our investments,” she pointed out.
Tak agreed as he believes oil price volatility also heightens the case for and accelerates the move to renewables even further. Real estate will also continue to shine in the current environment given new economic trends and the abundance of capital.
“Real estate in terms of an inflation environment is a very interesting asset class; it gives you a bit more equity-like return but still maintains some fixed income-like nature as well,” he elaborated.
By Hiroshi Torii Senior Analyst, Equity Research/REITs SMBC Nikko Securities Inc.
10 Sep 2021 is the 20th anniversary of the creation of the J-REIT market, which was born on 10 Sep 2001 with the TSE listing of Nippon Building Fund (8951, NBF) and Japan Real Estate (8952, JRE). Amid changing externals, the J-REIT market has passed through periods of stability, frenetic activity, and sluggishness, and has steadily grown in size while working to improve unresolved market issues. Total J-REIT market cap was just Y250bn (acquisition value Y320bn) at end-September 2001, but expanded to Y17.6tn (Y20.9tn) by end-August 2021.
Though the market has good and bad years in terms of performance, income gains (dividends) have built up steadily and the total return (incl dividends) over the 20 years from 10 Sep 2001 to end-August 2021 was +416%, much higher than the +166% for TOPIX. We think the size of J-REIT income gains (incl compound interest) deserves another look.
J-REITs play a crucial role as buyers of domestic real estate. The growth of the J-REIT market has not only revitalized the Japanese real estate market, but has also helped significantly improve market transparency by enhancing disclosure around property transactions and earnings. This has expanded the opportunities for a wide range of investors to access the total returns generated by J-REITs. We look for continued improvement of unresolved issues to unlock further market growth and higher profile.
In this report, we review various aspects of the J-REIT market over the past 20 years. We also look at the 20 biggest events impacting the J-REIT market over the past two decades, and rank the J-REITs based on their performance on several key metrics over the past 20 years. We also highlight issues that the J-REIT market needs to address in the next 10 years.
ISCA Climate Disclosure Guide – Taking First Steps Towards Climate-related Disclosures
With increasing attention on the effects of climate change, decision-makers are urgently demanding climate-related information. This is reaffirmed by the introduction of mandatory climate reporting by the Singapore Exchange (SGX) and the prioritisation of climate-related disclosures in the International Sustainability Standards Board (ISSB)’s highly anticipated IFRS Sustainability Disclosure Standards proposals, both of which are based on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD Recommendations). ISSB’s proposals also incorporate industry-based disclosure requirements derived from Sustainability Accounting Standards Board.
This guide seeks to help Singapore-listed companies meet SGX’s requirements for climate reporting. In addition, given the strong signals from key stakeholder groups, even non-listed companies must consider if sufficient climate-related information is available to meet stakeholder expectations, and this guide will be useful for voluntary adoption of the TCFD Recommendations as well.
To provide practical guidance on how to adopt the TCFD Recommendations, the guide features exemplary disclosures sourced from local forerunners and global exponents that illustrate how the various recommended disclosures can be met.
Also covered in the guide are the learning experiences of advanced adopters, with practical considerations gleaned from their experiences and other observations to further smoothen the journey for new adopters.
This guide is developed with the support of SGX, ISCA’s Sustainability and Climate Change Committee (SCCC) and the SCCC Sustainability Excellence Sub-Committee, in support of the Singapore Green Plan 2030.
Kemmu Kawai joined Longevity Partners Japan in September 2022 as the Country Director. Based in Tokyo, he oversees all operations and activities in Japan, the Asia-Pacific region and beyond. He brings him more than 16 years of experience in finance where he specialised in real estate and credit investments. Before joining Longevity Partners, he served as a Portfolio Manager at Norinchukin Bank and as Investment Manager at Center Point Development.
