ESG, construction costs to shape global real estate investment: Colliers

Environmental, social and governance (ESG) factors, demand for core-plus offices and rising construction costs are some of the key trends that will shape global real estate investment markets in 2022, according to a new Colliers report.

The real estate investment services company released its 2022 Global Investor Outlook report on Wednesday, which detailed strategies for the year ahead.

“Social and environmental trends are a clear priority, increasingly woven into long-term investment strategies and performance targets,” the report stated. “We expect environmental attributes and asset performance to drive market turnover as investors re-calibrate their assets under management.”

Among the more than 300 global investors surveyed for the report — of which 41.6% were reportedly investment managers — three quarters said they’re taking action when it comes to “investing with intent.” Further, at least 25% were in the “advanced planning stages” regarding whether to hold onto or dispose of assets.

Specifically environmental-related ESG considerations were prominent for the investors polled, with the report noting that three quarters were integrating environmental factors into their strategies.

Implementation was varied, however, with 21% of respondents saying they were still in the ESG consideration stage.

When asked whether they expected ESG-compliant assets to achieve a value premium within the next three years in various sectors, the most common answers from respondents were “0% to 5%,” “no difference” and “I don’t know.”

Of those who didn’t know, 28% said there was a lack of “clear guidelines” for determining what is and isn’t an ESG-compliant asset, while 25% blamed the lack of “effective benchmarking.”

In the social and governance realms, the report results similarly suggested that investment professionals are still in the midst of implementation.

While nearly half (48%) said current benchmarks and reporting help them manage governance factors, 43% were still deciding on what to use. On the social front, 17% had established ways to consider the “health and wellness” of their assets, while 38% and 35%, respectively, were only in the beginning and consideration phases.

Yet, looking at possible market picks, the report said, “Social trends point to affordable housing as a significant growth opportunity globally when expertly managed.”

The report said core and core-plus office spaces — defined as quality office assets in major cities — are the top global strategy picks, with 60% of investors having stated this as their preference (up 50% over last year).

Top cities include London, New York, Tokyo and Paris, the report said.

In the Americas region, office real estate remains attractive in various markets such as New York, Boston, Toronto and Vancouver.

“As competition for core assets heat up, investors should not be surprised to be outbid,” the report noted.

What remains to be seen is how much prices will be discounted, among other factors. Said the report, “Large bid-ask spreads is likely to diminish market activity short-term, but we expect markets to reconcile on pricing by 2023.”

The rising cost of construction was also a major concern for the real estate sector, with 80% of investors citing the issue. This was tied to strong demand for development, for example, leading to construction costs “clearing weighing heavily” on respondents’ minds.

What might help is “tightening supply side conditions” that reinforce existing values, as well as innovation in methods of construction that aim to solve bottlenecks and support sustainability.

The Colliers research also noted how investors were looking for more ways to strengthen and diversify their portfolios, looking at specialized real estate areas such as data centres, life science facilities, and affordable and student housing.

“The path to success for investors will come from effective joint ventures with partners that have operational knowledge, local expertise and skills in related sectors and assets,” the report said.

This was the second edition of Colliers annual global outlook for property investors. Alongside the survey, regional capital markets experts were interviewed.