Partner James Routledge was joined by guests for our recent online Annual Property Briefing. The session featured the Head of Global Research and Strategy, Legal & General Investment Management, Rob Martin and one of the UK’s leading Geopolitical & Macroeconomists, Dr Rebecca Harding. We caught up with James to find out more about their market insights and potential future-proofing propositions.
“The four megatrends for 2024 will be:
• Deglobalisation
• Decarbonisation
• Digitalisation
• Demographics”.
Said Rob Martin, LGIM’s Global Head of Investment Strategy & Research in a barnstorming address at the recent Fisher German Property Briefing.
So, how will deglobalisation survive the results of over 70 elections around the globe and the fact that almost half the world’s population will be voting in them?
Elections breed uncertainty, therefore, the theme for the event was, ‘uncertainty & volatility’.
However, Rob Martin did point out that “… the US is the biggest game in town”: whoever wins the US election will have a profound impact on the UK’s and the global economy and trade.
Consider the fact that, post-COVID, we have witnessed an increase in friend-shoring, near-shoring and on-shoring across the globe. This highlights the fact that the orthodoxy which led to the establishment of global trade after the Second World War and the subsequent emergence of Just In Time manufacturing over 50 years ago, is fast disappearing.
Nationalism, which is gathering momentum in politics, cross-border investment, and production, is causing a paradigm shift which can best be described as ‘deglobilisation’.
Decarbonisation for properties can, Rob stated, can be categorised as:
• “Taking gas out of buildings
• Improving energy efficiency
• Integrating on-site renewables with energy storage.”
Both Rob Martin and our other guest speaker Dr Rebecca Harding, a celebrated geopolitical and macroeconomist expert, agreed that net zero and ESG “…are not going to go away in terms of investment or the other drivers of commercial and residential markets”.
Dr Harding pointed out that despite the potential threat of an impeding global recession; wars in the Ukraine and the Middle East; and the emergence of “Green Hushing”, which Dr Harding defined as the adoption of minimum levels of compliance, ESG considerations are still driving investment outcomes and are proving important catalysts for national and global market economies.
There are however at least three paradoxes before us.
Dr Harding suggested that there is a regulatory paradox: “… blunt capital treatment of sustainability reporting requirements…” are based on a backwards-looking risk-based approach. She argued that this mitigates against the longer-term transition towards more sustainable trade and the allocation of around $17tn to achieving Sustainable Development Goals (SDGs), globally.
She spoke of a lack of clarity on reporting standards and metrics, leading to a lack of consistency and understanding of what it truly means to be sustainable. She also spoke of the lack of consistent data, as well as the lack of any modelling to understand the link between sustainability risk and financial risk. But above all, she claimed that there is a lack of clarity about the relationship between “who pays” and “who gains”.
The second paradox concerns the evolution of the ‘S’ in ESG. This has metamorphosed into Social Impact Investments (SII), designed to promote social benefits such as environmental protection, gender equality and human development.
But in the Global South, where many international corporations have extraction and production operations, many locals believe investors benefit more from these initiatives than the intended beneficiaries, feeding boardrooms’ egos and ‘saviour complexes’.
The third paradox is that some politicians believe that ESG promotes sustainability and value creation for firms, whilst others argue that it will not save the planet and it just amounts to empty virtue signalling (the emperor-has-no-clothes syndrome).
Another very telling observation was the need for regulators to create a level playing field, with a clear methodology as to what we measure, how we measure it and what needs to be done.
To quote Rob Martin, “…In property terms:
• Occupiers are increasingly selecting buildings for their ESG characteristics
• Investors are increasingly pricing ESG risks into their CapEx valuations of buildings
• Banks are increasingly pricing their loans on buildings using ESG criteria.”
Digitalisation is almost a byword for the future, as one thing everyone agrees on is that AI and supercomputing power will have a profound impact on all our lives: at home and at work.
Finally, demographics: Rob Martin had a lovely soundbite. ”I could say lots of things about demographics, but I’ll just say three things: resi, resi, resi.”
He went on to explain that, whilst BTR (Build-to-Rent), student accommodation, senior living and single-family rental are all on institutional investors' radars, actual investment in these residential subsectors is “… embryonic”. The other sector which all market commentators forecast will offer investors the best returns will come as no surprise, industrial & logistics.
Sectors such as offices and retail in London and urban areas, which are diverse and already adversely impacted by known obsolescence risks, can however deliver strong returns for entrepreneurs with sharp market acumen.
The 2024 Property Briefing would not be complete without a brief review of global and national macroeconomic instruments.
How great an impact will war; Red Sea skirmishes and supply chain disruptions have on nations’ frail management of inflation?
If the fall in inflation is slowed, or even arrested, could significant interest rate reductions be a distant hope? What impact will external inflationary pressures, such as China’s and Russia’s own economic and non-economic policies and ambitions, have on our economy?
Will COP28 be remembered as COP out?
Given the impending national elections, Dr Harding suggested that “electoral stasis” i.e. policy makers and civil servants can and will do little to pull the levers of economic management, will set in (in the UK, the US and the other 70+ countries holding elections this year).
She advocated that the global economic outlook is fragmented. Even though the US economy has “defied gravity”, growing by almost 3% and its labour market remains strong despite high interest rates, UK, Europe and most of the world have faced high inflation and interest rates.
Global growth is likely to be slower next year with the EU set to grow on average by around 1.3% and the UK by around 0.4%, potentially lower according to some forecasters.
Will the decline in real household incomes in the UK continue to decline? The answer rather depends on which economist you speak to, or which Party Leader.
So, what can we expect in 2024?
To paraphrase Rob Martin, “I could say a lot about the immediate future, but I’ll just say two things: uncertainty and volatility.
