Commentary: How to Impact European Real Estate in a COVID-19 World

By John Levy, Director of Impact Investing for Franklin Real Asset Advisors

SOURCE: Franklin Templeton


Originally published on September 22, 2020 in Pensions & Investments

The economic implications of COVID-19 are yet to be fully realized, but the expectations of the detrimental impact are sobering. The pandemic has not only shaken up reality but has woken the world up to addressing underlying societal and economic issues that may have previously been dismissed.

The virus is a major global threat, but it will not be the last such threat that we face in the coming years. Climate change, pollution, and growing social and economic inequality, among other issues, all have the power to massively disrupt our way of life. But from these threats comes greater awareness of the need for reinvention, and with reinvention comes great opportunity to align and contribute toward our modern, more sustainable future.

A key opportunity for investors to combat the effects of the pandemic is through real estate investing. This can be achieved in a multitude of ways, such as providing low income housing options, rent-relief for hospitals and built-for-purpose medical centers for pandemic efforts, with climate change efforts at the core of each investment. During times of distress, there is a silver lining: unique industry advancements and unprecedented innovation. We have seen strides in technological development and increased private market participants, all working together to fill gaps caused by the pandemic.

Pandemic-imposed challenges

Urbanization and associated community and environmental issues are central to impact investing. Many dense regions globally suffer from lack of amenities such as fresh water supplies, inadequate waste disposal, high prices of basic goods and not enough affordable housing. As a direct consequence of the pandemic, many people have lost their jobs and ability to afford housing at all, further adding to the problem. For example, one in four Europeans are considered "rent burdened"— spending more than 40% of disposable incomes on rent — while ballooning housing costs are increasing the number of people at risk of poverty. Many teachers, health-care professionals and emergency workers struggle to find affordable living near their place of work, making many urban areas less inclusive and resilient. Investing in social infrastructure can directly add to the stock of affordable and workforce housing, helping to create lasting impact in urban communities.

In addition, at least half of the global population does not have access to essential health services despite the significant advances in medicine and medical technology. Even where health services do exist, there is an ongoing discrepancy between regions on whether quality health care exists. This has been accelerated even further by COVID-19. As the medical technology and the world adjusts to future risks of global pandemics, demand for more and better health-care related infrastructure and services will only increase.

Coinciding with the challenges presented, companies around the globe are looking for ways to directly address COVID-19 and future pandemics and have taken ongoing precautions to reduce this risk. For example, for health-care assets that included the suspension of outside visitors, temporary closures of the outpatient facilities, restricted admissions of new patients and ensuring that employees wear masks and eye goggles where necessary to protect from possible transmission. Many of these precautions are not specific to COVID-19 and will be essential in fighting future pandemics and other health-care related challenges.

Technological advancements ease societal stress

With strife comes great innovation and the global community has made strides in technological advancements to cope with pandemic-induced challenges. Even before COVID-19, the world was making constant technological advancements, including the implementation of digital technology, artificial intelligence and 5G telecommunications. COVID-19 has brought these technologies to the forefront as they have direct applications in creating safer working environments, improved health-care systems, and more connected communities. We are now seeing a shift to online "visits" to physicians and other medical professionals to minimize in-person contact. 5G will open the doors for more and better remote access to financial, health care and education services in rural and underserved communities.

On the environmental side, thanks to technological advancements, the cost of renewables is dropping below that of fossil fuel plants in much of the world. COVID-19 has the potential to put sustainability at the forefront of business operations, likely spurring stakeholders' decisions to hasten shifts to more sustainable products and services.

Private market providers need to work to fill gaps

COVID-19 has only highlighted the power of private investment, particularly as governments are stretched to their limits. While social infrastructure is crucial to the health and vibrancy of communities, the asset class has suffered from underinvestment in the decade prior to the pandemic. According to a 2018 report from the High-Level Task Force on Investing in Social Infrastructure in Europe, the annual investment gap in social infrastructure was estimated to be a minimum of €142 billion $168 billion).

Public investment alone is not sufficient to fill this gap, and social infrastructure has emerged as an important, institutional-scale opportunity for private investors to align their portfolios with societal benefits and achieve competitive financial performance. In such a crucial time in history, social infrastructure offers investors the opportunity to contribute to the United Nations sustainable development goals, making a positive social and environmental impact, in addition to achieving an uncorrelated financial return.

Investor demand is only set to increase

Before the pandemic, we saw a slow but steady increase in demand for impact products and the pandemic has further put these strategies on the radar of investors. With greater demand comes greater opportunity for investors. For instance, as more money seeks impactful investments, and the green economic plans begin to kick-start the global recovery, we are seeing an increasing amount of opportunities for impact investors. In addition, long-term investors are now focusing on ways to meet their sustainable development goal contribution targets that may soon be a regulatory requirement.

The pandemic has not only reinforced why impact is a compelling long-term investment opportunity but also how the role of private capital can support communities and societies. At the same time, the defensive nature of many sustainable and impact products has helped to provide some much-needed support during this extremely volatile period, such as assets seeking to improve the quality of social services provided to local communities, while reducing the carbon footprint of the built environment. In the coming years, we believe impact investing needs to be considered as part of an investor's core portfolio.

John Levy is Director of Impact at Franklin Templeton Social Infrastructure Fund, Franklin Real Asset Advisors, San Mateo, Calif. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.

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KEYWORDS: NYSE:BEN, Franklin Templeton, COVID-19, european real estate, Franklin Real Asset Advisors

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