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With net zero deadlines approaching, investment teams are turning toward renewables for portfolio diversification and growth opportunities. This push for ‘green’, or energy efficient, buildings could increase the appeal of the property sector for insurers.
Opportunities come as the UK’s Department for Energy Security and Net Zero announced in March that it would award £1.8 billion to boost energy efficiency and cut emissions in homes and public buildings across England.
Of this £1.8 billion, £1.4 billion will go to providers of social housing, charities, and local authorities to assist with “energy efficiency measures” – whilst the other £409 million will go toward reducing the carbon emissions of public sector buildings.
“Reaching net zero means considerable action from the public sector as well as the private sector,” said Minister for Energy Efficiency and Green Finance, Lord Callanan, at the time of the announcement. “But we must continue to drive forward progress, setting a standard for other countries to follow.”
Joe Griffin, Credit Analyst at Just Group plc, told Insurance Investor that he saw enormous opportunity in the UK’s social housing sector, in particular – though it was not without headaches and growing pains.
“It’s a highly defensive sector.”
In the past three years, said Griffin, Just Group’s exposure to the Housing Association (HA) sector more than doubled, “both in terms of the number of issuers we hold and the total market value of our exposures”.
“It’s a highly defensive sector,” he added when asked why the area was attractive for institutional investors.
He also noted that it benefitted from a strong regulator. “Because the regulator has strong oversight and regular engagement, [it] can pick up problems before they become significant, particularly with the weaker HAs.”
A final factor for Griffin was the ESG element – which he said were becoming more and more relevant to insurers’ portfolio construction. “We feel that HA investments are making a difference in the lives of others.”
A large part of that difference was funding a safe energy transition. “We’re helping providers fund more affordable housing [and] enabling HAs to improve fire safety [and] decarbonise,” he added.
Rachel Norris, Senior Vice President and Construction Leader in Real Estate at insurance company Lockton echoed some of Griffin’s sentiment on the significance of the ESG angle to the viability of the asset class.
“We have a real affiliation with purpose-built student accommodation
and multifamily residential housing.”
She said she was excited about the room for growth in student accommodation and social housing. “We have a real affiliation with purpose-built student accommodation and multifamily residential housing,” she said. “It goes into the social part of ESG – making sure we have good buildings that are environmentally friendly and in good, affordable areas.”
She made it clear that the ESG considerations she championed were not new – just differently packaged. “They’ve been embedded for a long time,” she said. “Now it’s more about the PR spin.”
This situation wasn’t seen as negative, however. “We need to catch up and we need more education,” she said. “Things are slowly getting there, but they’re still in their infancy at the moment.”
In terms of where the capital for such projects would originate, Norris said she believed there would be a bigger focus going forward, especially as EU regulation developed, on public-private partnerships (PPPs). “We just need to make sure we don’t end up with stranded assets,” she cautioned.
When asked how investment teams should think about allocation decisions to the asset class, Griffin said that he felt a “good balance” was key and stressed the perpetual necessity of diversification. “We have the more volatile, higher spread assets together with the more stable HAs, and we like that balance. It’s important for us to have a diversified portfolio in that area,” he continued.
Eric Souders, Director and Lead Global Unconstrained Fixed Income Strategist at Los Angeles-based asset manager Payden & Rygel said that his team was being cautious with commercial real estate allocation due to the state of global inflation. “We think commercial real estate is vulnerable,” he said.
This vulnerability he attributed mainly to post-Covid working conditions – and the resulting lifestyle uncertainty, especially in the US. “There’s a lot of uncertainty around returning to work,” he said. “Offices [have] been in the headlines for months if not quarters, [and] vacancies are elevated.”
“An area like multifamily commercial real estate has been quite durable,
partially because home affordability is so poor.”
Despite the uncertain outlook around commercial real estate in general, Souders felt there were pockets of attractive return for choosy investors.
“An area like multifamily commercial real estate has been quite durable, partially because home affordability is so poor,” he continued. “The more unaffordable a home is, the more someone must rent an apartment, and the stickier the rent profile of that apartment will be.”
Souders added that whilst his team was not “overly constructive” on commercial real estate as a broad asset class, “certain parts of it, like multifamily apartments, look quite interesting”.
One consideration swaying investors to look at the area was ongoing technology advances for energy efficient buildings.
Norris said new technology around building integrity, maintenance, and risk engineering were emerging. These, she noted, were “patterns we haven’t previously seen” – and meant there was enhanced interest from investors.
Still, she encouraged additional uptake. “[Investment] is getting better, but we need more people to buy into the process. It’s an ESG topic, so it involves good governance. There’s growing awareness, and you must be able to take advice from those in the industry,” she said.
“In terms of deploying capital, we’re seeing more prop-tech
companies emerging [to mitigate traditional risks].”
Norris added that new technology around the property sector – also known as prop-tech – was easing investor worries. “In terms of deploying capital, we’re seeing more prop-tech companies emerging [to mitigate traditional risks]. We’re seeing a lot more technology being deployed,” she continued.
When asked how viable these projects were for institutional investors, Norris identified a few roadblocks: lack of education and prevailing misconception. “It depends on how [investors] see value from it [and] how you mass scale and property adopt [new technology],” she said.
Ultimately, she didn’t see “renewables in the property sector significantly changing allocations to real estate” – thought she did add that her colleagues on the global energy side might have a “very different” stance.
Whilst the energy transition is taking commodities and manufactured goods markets by storm, in the property sector it will likely see a more meandering effect for insurance investment teams.
