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Real estate investors push for improved ESG measures in commercial property

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The Canadian construction industry is making strides in adhering to ESG principles.CARLOS OSORIO/Reuters

Canada’s commercial real estate sector is striving to meet increasingly demanding environmental, social and governance standards, but the ESG is still greener on the other side of the world.

For example, experts say Canada is playing catch-up in the use of “green leases” – commercial tenancy agreements in which the landlord and the renter incorporate sustainability, socially responsible management and good governance into their property deals.

According to Tonya Lagrasta, vice-president and head of ESG for Colliers Canada in Toronto, “Canada is behind places such as the European Union. Many Canadian developers are moving ahead anyway – we’re seeing a shift – but the rules and regulations aren’t necessarily in place.”

“In North America we’re seeing more of a push toward stronger ESG standards coming from investors, while in Europe it comes more from regulation,” says Avis Devine, associate professor of real estate finance and sustainability at York University’s Schulich School of Business, in Toronto.

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A study last year by Deloitte, Green Leases – in the ESG Context, found that the European Union Commission gave green leases and other ESG measures in the property sector a boost in December, 2019, when it adopted rules specifying what makes these measures green.

“In North America we’re seeing more of a push toward stronger ESG standards coming from investors, while in Europe it comes more from regulation.

Avis Devine, associate professor, Schulich School of Business, York University

Lenders, developers and tenants can consider deals to be green if they include goals for climate change, protecting and conserving water and biodiversity (on the property), controlling and minimizing pollution and moving toward a circular economy that recycles and reuses materials.

According to the Deloitte report, research by Savills Investment Management found that 73 per cent of the world’s institutional investors expect green lease clauses to be incorporated universally between tenants and real estate investment managers by 2029.

In Canada, the experts say that major commercial developers, such as Oxford Properties, BentallGreenOak and Brookfield Asset Management, are typically ESG leaders. “These tend to be companies that have global assets, including those in places where the ESG rules are more developed than in Canada,” Ms. Lagrasta says.

Developers and institutional lenders in Canada were getting more serious about higher ESG standards before 2019, “but the pandemic set things back,” says Ryan Riordan, finance professor at Queen’s University’s Institute for Sustainable Finance, Smith School of Business, in Kingston.

On the other hand, COVID-19 gave real estate developers the opportunity to look more closely at environmental issues such as indoor air quality, Dr. Devine says.

There’s more interest than ever in commercial property ESG measures, but the challenge now is to make physical changes to buildings, Dr. Riordan says.

“We’re making strides on the construction side of ESG, but it takes a lot of time to retrofit and replace buildings with ones of higher standards,” he says.

Retrofitting is a daunting challenge but one that experts consider necessary because buildings contribute nearly 40 per cent of the world’s carbon emissions that are linked to the global climate emergency.

Canada and other countries are struggling to achieve net-zero emissions by mid-century amid concern that if we don’t succeed, damage to the Earth will be beyond repair.

“We need to retrofit nearly all the standing dwellings in Canada, but we’re doing this at 1 per cent of them per year. If we don’t go faster, it will take about 70 years – we should be going three times as fast every year,” Dr. Devine says.

There’s also a strong business case for retrofitting old office buildings to make them more eco-friendly, Dr. Devine adds. It’s partly good marketing – white-collar employees are still only trickling back to offices in major Canadian cities, and when they do, they want to go back to good quality workplaces, she says.

“There’s a premium earned by environmentally certified buildings,” she explains. It shows up in better occupancy rates, more likely lease renewal and lower costs to finish off rehab work for tenants once the basic environmental work is done, she says.

“And after we account for higher rents or lower water costs, is there a market premium for being a leader in sustainability? Evidence says yes,” Dr. Devine adds.

A study by Smith’s Institute for Sustainable Financing, released in April, shows investing in carbon reduction “more than pays for itself in terms of avoided physical damage alone.”

The Physical Costs of Climate Change: A Canadian Perspective suggests the savings come even before “taking into account the potential economic benefits of transitioning to a low-carbon economy” for Canada’s entire GDP.

But green leases are only a small part of how commercial real estate developers are boosting their ESG credentials, Ms. Lagrasta says. “There’s more attention being paid now to the S [social benefit] and the G [governance],” she says.

Institutional investors are looking more holistically these days at potential risks, for example, the cost of urban sprawl and the potential financial benefits of diversity on corporate boards.

“There is deep corporate finance literature showing that we end up with better risk-balanced outcomes in our real estate [investments] if the management isn’t all male,” Dr. Devine explains.

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'We saved probably close to $100K': Affluent Americans are snatching up prime real estate in other parts of the world — as the US housing market slumps. Here's how to do it too – Yahoo Finance

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Laetitia Laurent knows the value of looking far and wide for a good deal. The Florida-based business owner and her husband had been hunting for a second home for five years before snagging an incredible bargain — in Paris.

She made an offer in January on a 415-square-foot, one-bedroom apartment in the coveted Golden Triangle area between the Champs-Élysées and the Seine, and closed in June.

While the U.S. housing market has been slowing down — thanks to elevated home prices and mortgage rates — there’s been a growing trend of wealthy American buyers investing in overseas homes, buoyed by favorable exchange rates and a strong dollar.

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“I think we saved probably close to $100,000 between the time we made the offer and the time we closed,” says Laurent, who will use the property as a vacation home and a space to host clients for her interior design firm, Laure Nell Interiors. The euro-dollar exchange rate plunged over 12% last year, falling below parity in August.

Whether you’re a retiree looking to spend your golden years somewhere warm and tropical, or someone investing in a second home for some extra rental income, international properties are currently all the rage.

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American buyers are buying properties abroad

The numbers show a clear trend. Coldwell Banker surveyed wealthy American buyers and noted that 67% of respondents own properties outside the U.S. According to Wealth-X figures, the number of high net worth Americans who purchased property abroad in 2022 was also expected to rise by 14% from 2021 and 29% from 2019.

Kelly Cutchin, country manager USA at global payments services provider Moneycorp Americas, says some of these buyers may be looking for an investment property or vacation home, while others could be “jumping the pond” and looking to relocate entirely.

Central America is currently the top preference for affluent Americans, followed by Canada, Mexico, Asia, South America and Europe.

Some countries, such as Portugal, also offer “golden visa” programs, in which wealthy individuals obtain residency or citizenship in exchange for a substantial investment, like in real estate.

The Trend report indicates that while the 55+ age group has the largest share of foreign property ownership, the 25-34 age group has moved up from last to second position.

Cutchin says this is due to generational wealth. “There are a lot more high net worth individuals (HNWI) under the age of 30 than before. These youngsters are looking to diversify their portfolios and starting young is almost never a bad idea.”

An October Bank of America study indicated that rich young Americans are looking to alternative investments, such as real estate and cryptocurrency to boost their wealth.

Why overseas locations may offer more perks

Laurent says that aside from her apartment’s Haussmanian architecture, the declining exchange rate and low mortgage rates in France at the time made it an excellent investment. Even now, French mortgage rates are just above 2%, while American rates remain over 6%.

American home prices, inflation and the political climate may be contributing to buyers looking abroad. If you’re thinking of relocating to a different country, you could sell your home for a high price now and potentially score a lower price elsewhere.

Read more: Rich young Americans have lost confidence in the stock market — and are betting on these assets instead. Get in now for strong long-term tailwinds

The rise of remote work and social media posts with enticing photos and reels of different countries could also encourage buyers to look outside of the U.S.

Cutchin says some buyers may be motivated by others in their social circle buying homes overseas. “We all have a bit of FOMO, right? ‘Everyone in my country club is doing it — so I want to have that same status as Suzy, and so therefore, I too need to buy a property in Paris, and we can vacation together with our families.’”

What US buyers need to know

Cutchin says the most important thing is to do your research. Speak to a real estate agent and an international tax consultant, and look into foreign ownership laws.

In some countries, you may need to afford an all-cash purchase. You could look into financing through your local bank or foreign mortgage products — but Cutchin says these can be limited and could require a larger down payment than what you might see in the U.S. “It’s not uncommon to see a deposit amount of upwards of 30%.”

You may also need to account for extra costs, like translator, tax and legal fees, international bank transfer fees and insurance.

Laurent, who has dual American and French citizenship, went through a French bank to secure her mortgage and needed to purchase life insurance to protect her loan.

Although Laurent benefited from the exchange rate declining last year, Morgan Stanley foreign exchange strategists are predicting it to rise back to $1.15 by the end of 2023. You could consider speaking to a currency expert to lock in your rate before making an investment overseas — for example, Moneycorp allows clients to lock in an exchange rate for up to two years.

“Let’s face it, if the rate moves against you 10 cents between now and June of next year — when you go to actually facilitate that transaction — it might actually place you in a situation where you can no longer afford to make that investment, or you’re not as comfortable as you were previously,” Cutchin says.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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Irish Commercial Real Estate Deals Plummet as Buyers Bide Time – Bloomberg

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Irish Commercial Real Estate Deals Plummet as Buyers Bide Time  Bloomberg

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Increasingly large down payments could help GTA homeowners weather downturn: Report – CP24

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A new analysis by realtor firm Re/Max says the Toronto real estate market may be better positioned than previously thought to weather the financial downturn expected this year, though there still may be some choppy waters ahead.

The new report compared average price and new mortgage values in different markets across the country between the third quarter of 2012 and the third quarter of 2022.

It found that in Toronto, loan-to-value ratios hovered at around 53 per cent in the third quarter of 2022, compared to 63 per cent 10 years earlier, suggesting people are putting down a higher percentage of the costs of a new home than they were a decade ago.

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Loan to value ratios are used to express how much debt a person holds on an asset compared to its value. The higher the percentage, the greater the debt level on the asset. 

Back in the third quarter of 2012, the average Toronto home price was $483,900, while the average new mortgage amount was $305,776, yielding a loan-to-value ratio of about 63 per cent. 

In the third quarter of last year, the average Toronto home price was 1,079,957 while the average amount for a new mortgage was $567,441, yielding a loan-to-value ratio of about 53 per cent.

So what explains the fact that homebuyers in Toronto are putting down more money even as prices have skyrocketed over the last number of years?

LTV ratios

Rising prices, Re/Max Canada President Christopher Alexander told CP24, are in fact part of the answer.

“Some people have generated a lot of equity over the years,” he said, alluding to people who have made hundreds of thousands of dollars from properties as the housing market took off.

A few other factors have also contributed to people having more money to put toward a home, the report says, including large profits realized in the stock market over a lengthy bull run.

“You’ve had the remote work phenomenon, people are allowed to keep their jobs and move to more affordable markets,” Alexander said.

“And the big, big story is the transition of generational wealth that’s been going on. The ‘bank of mom and dad,’ as we like to call it in the industry, has played a huge role in supporting — whether they’re first time homebuyers or move-up buyers — into purchasing homes at much higher down payment rates with chunks so that they can manage payments a lot easier.”

But while people in the Toronto area may be putting down a higher percentage of a home’s value than they were 10 years ago, there is no getting around the fact that the loans are nevertheless much larger than they were a decade ago — nearly double the size on average.

The report notes that given the steady climb in interest rates last year, “banks are tightening their own lending practices and proceeding with caution when qualifying today’s borrowers.”

The report says some bank appraisals are coming in lower than values paid in recent months, “sending buyers scrambling to make up the difference.”

“With overnight rates poised to climb on at least two more occasions the first half of 2023, market stability will undoubtedly be tested, but the latter half of the year is forecast to improve as homebuyers and sellers continue to acclimatize to new market realities.”

Limited supply of housing and a steady flow of new immigrants to the GTA are expected to buoy the housing market in the next year, the report says.

Alexander said that supply remains “shockingly low” and that some potential sellers may be holding back now because they perceive that they won’t get top dollar for their properties.

“I think the majority of sellers are hoping to get the most for their money just like buyers want to pay the least,” he said. “So you have a lot of them that don’t need to move, just wait. And right now what you’re really seeing is situational transactions. People that have kids, or have gotten married, divorced — the ones that really need to make a move are the ones you’re seeing bringing product to the market right now.”

He said potential job losses triggered by an economic downturn could also send more homes to market if people can no longer afford their payments.

The report noted that mortgage delinquency rates remain low in Canada.

“While challenges certainly exist in today’s high interest rate environment, risk factors for the overall housing market are greatly reduced when homeowners own a larger proportion of their homes,” Alexander said in a statement with the report. “With half of loan-to-value ratios within the 50- and 60-per cent range in Canadian markets, homeowners are better able to withstand downward pressure on housing values and fewer will find themselves underwater, carrying upside down loans.”

Another report from Re/Max several months ago said GTA home prices could drop around 12 per cent in 2023, while one bank recently declared the GTA a buyer’s market.

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