New York - Many of the world's largest businesses, governments and investors have committed to achieving carbon neutrality by 2050 — and this has significant implications for global real estate. In view of this trend, and to provide investors with exposure to a broad cross section of sustainability-focused real estate securities worldwide in a cost-effective and liquid manner, we recently launched Calvert Global Real Estate Fund.
Managed by Laurel Durkay, CFA, Head of Global Listed Real Assets, the fund will invest primarily (80%) in real estate securities, including real estate investment trusts (REITs), and other real estate industry companies located in North America, Europe and Asia and, to a lesser extent, potentially emerging markets.
In terms of strategy, along with total return, dividend income is a key objective. The fund's bottom-up, fundamentally driven investment approach includes consideration of environmental, social and governance (ESG) factors, using the Calvert Principles for Responsible Investment.
Below, portfolio manager Laurel Durkay discusses why it is an opportune time to invest in real estate, and particularly REITs, in view of inflation and ESG considerations, and why active management is key.
Momentum Behind "Greener" Real Estate
The United Nations Environment Program estimates that in 2020, building operations and construction represented 37% of global greenhouse gas (GHG) emissions, and that direct building carbon emissions will need to be cut by half by 2030 to meet the Paris Agreement goal of global carbon neutrality by 2050. Overall, we see demand for green building features growing among commercial properties as more businesses prioritize health, safety and wellness for their workers and tenants.
Over the next decade, we believe global real estate investment will be supported by:
- A long-term cycle of "green capital expenditure" as demand for green buildings grows in both the commercial and residential sectors.
- Greater focus on energy efficiency, best-in-class air filtration, and water and waste reduction features by landlords and tenants. Property owners who have already invested significantly in these areas may enjoy competitive market advantages.
- Ongoing public demand for companies to optimize their operations not only for profitability but also for societal impact. We believe this synergy between corporate and social responsibility will continue and ultimately become self-reinforcing.
REITS: The Right Place to Be
REITs offer a broad range of attractive features, which may be even more appealing during inflationary periods. Many REITs are structured to lease space and collect rent on their underlying real estate holdings, which may provide a steady stream of income. Other REITs, like mortgage REITs, finance real estate transactions. By law, REITS are required to pay out at least 90% of their taxable income to shareholders annually.
In addition, REITs can help investors diversify traditional equity and bond portfolios as they typically do not perform in lockstep with these assets.
Attractive yield opportunity: Historically, REITs have paid a high dividend yield relative to stocks in the S&P 500. According to the National Association of Real Estate Investment Trusts (Nareit), REIT dividend yields averaged approximately 2.6% in 2021, or more than twice the 1.2% yield of the S&P 500.
Inflation buffer: REITS generally can sustain high payouts over long periods because they derive steady income from long-term leases on their properties and are required to pay out much of this income. Moreover, REITs may have lease escalators that cause rents to rise annually. Many companies link rent increases to the consumer price index (CPI), making REITs attractive investments during times of higher inflation, like today.
Moreover, as the chart below shows, research indicates that REITs have historically posted positive returns in most inflationary environments, suggesting real estate may be a potential hedge against inflation.
Complexity Calls for Active Management
While their basic structure is fairly straightforward, REITS are subject not only to local regional market conditions but a plethora of variables related to a particular country's regulations related to zoning, land use, rents and environmental liabilities, among others. Beyond macro considerations, a REIT investor needs to assess the management skill and creditworthiness of the issuer and whether specific requirements for favorable tax treatment have been met.
For the Calvert Global Real Estate Fund, we conduct extensive fundamental analysis in addition to macro analysis. Each prospective investment is evaluated on building quality and location, local market fundamentals, tenant health, balance sheet, capital allocation, environmental and climate risks, management quality and corporate structure and governance, among other factors.
From an ESG perspective, we look at how a company tracks key environmental performance indicators and whether its properties adhere to green building standards, such as LEED, BREEAM and Energy Star. LEED (Leadership in Energy and Environmental Design) certification is the standard green building rating system used in nearly every market except the UK, where BREEAM is more widely used. We also look at where the company stands in relation to various industry standards as set forth by various third-party ESG research providers.
Bottom line: In the wake of COVID-19, we believe sustainability will remain top of mind for investors and corporations as well as local and federal governments. We seek to take advantage of these trends, leveraging our ESG and global real estate expertise, with the launch of Calvert Global Real Estate Fund.
For more information about Calvert Global Real Estate Fund click here.
The FTSE EPRA Nareit Developed Extended Net Total Return Index is a market capitalization weighted index designed to represent general trends in eligible real estate stocks worldwide. Relevant real estate activities are defined as the ownership, trading and development of income-producing real estate. The FTSE EPRA Nareit Developed Extended Index represents the extension of real estate property sectors (e.g. Infrastructure and Timber) and additional securities beyond what is currently eligible for the FTSE EPRA Nareit Developed Index. It is not possible to invest directly in an index.