The value of social factors may also come in with respect to resolving difficulties in rent payments. For some tenants who are unable to make their monthly dues, the problem stems from a language barrier that hinders them from getting government aid they’re entitled to, in which case the landlord can step in and provide assistance, especially in cases where the tenant has been historically conscientious and trustworthy.
Going beyond specific tenant-landlord relationships, Floyd said real estate companies can also reap long-term benefits from becoming established pillars of the community. Embedding themselves and establishing goodwill through local engagement, she said, can make it easier to get approval for projects or rezoning requests from city and local officials, reducing risks and costs to future developments.
“We’re in the earlier stages of putting a number to social factors, but we can already feel or see its value in the returns of the capital market of the companies over long time periods,” Floyd said. “But this is becoming even more effective now. People will be increasingly conscious about putting money into companies that don’t consider those concerns. In effect, those who invest in such companies will see them as riskier, which means they’ll have to offer a richer risk premium.”
There are also issues to consider from a governance standpoint. Aside from questions of corruption, executive pay, ownership, and control, real estate companies are feeling the effects of a broader push for better diversity and gender representation at the board level. Diversity regulations are generally applied in Europe, though they aren’t much of a concern; real estate companies in certain Asian jurisdictions, Floyd said, generally require more encouragement.
Tracking ESG data and performance, she added, has become a key concern for European firms who seek to attract institutional investment. The European experience already shows how money flows can be influenced not just by a demonstrated history and potential for returns, but also compliance with regulatory standards defined by non-financial factors. Frameworks such as those established through the Paris agreements, as well as the UN Sustainable Development Goals and the new EU taxonomy for sustainable activities, have quickly become targets to hit for European companies, as well as North American equity and debt issuers who do not want to fall behind.
