The pandemic has put the resilience of the big city in the spotlight. The need to protect cities against the challenges of this century remains as great as ever. Schroders is therefore investing in real estate projects in the cities of the future. They are looking for players who push the boundaries and take the most drastic steps towards “net zero”. How? In this case, with a python script and a big database.
Tom Walker, manager of the Global Cities Fund at Schroders, told Fondsnieuws, Investment Officer Luxembourg’s sister publication. “Our database of over 15 billion data points does all the work for us”. The Python script, Schroders’ programming code, continuously scrapes data from more than hundreds of websites designed to give an insight into the cities of the future and real estate projects with potential.
The urban doom, the dissolution of urban agglomerations as a result of the coronavirus, has not materialised. The attraction of large cities remains undiminished. But the long-term investor in real estate must look beyond the pandemic. The real opportunities lie in cities that are armed against the effects of climate change and the political tensions of this century.
Schroders’ data therefore ranges from environmental risks such as floods and earthquakes to welfare risks such as extreme heat and air quality. In addition, Schroders has insight into areas such as water quality and the risks posed by political policies such as those of the US, UK and China.
Universe selection
“We’ve downloaded 20 years of weather history from NASA and others. NASA divides the globe into 27,000 boxes and each box has three data points of daily weather history. We’re scraping huge amounts of data from hundreds of websites all the time,” said Walker. “When we’re looking at real estate, we want to know exactly where each project is located and how it’s affected by climate change, for example.”
Walker then searches the database for the following questions: What are the environmental risks of the investment? How accessible is the site? Is the project located in an innovative, stable and economically powerful region?
The transport impact score is important for two reasons, says Walker. “Properties in more accessible parts of cities have many more alternative destinations. If you think of an office building in the London City at a time when people are increasingly working from home, a good connection makes it much easier to give such an office another use, for example as a flat block or hospital. If the building is not easily accessible, the alternatives are limited and the value quickly drops.”
Walker adds that research by Harvard University has shown that well-connected cities greatly increase social mobility. “It allows low-wage workers to get to work. It gives workers a wider choice of work and it also reduces CO2 emissions.”
Smart Cities
Successful modern economies are constantly looking for good ideas, said Walker. “For this reason, Schroders’ Global Cities fund prefers to invest in cities with high levels of academic activity. Think of Boston, which is one of the best examples worldwide. Harvard and MIT are based there, among other top universities. In addition, Boston scores high on other important factors such as the composition of the labour force and the average family income. These are all things that have a strong positive correlation with rental growth.”
More than 55 per cent of the fund’s real estate investments are in the US, with a solid overrepresentation on the East Coast and California. Asked if the cities of the future are not in emerging markets, Walker answered neither in the negative nor in the affirmative.
“Some companies have very interesting projects in Mexico City and Lagos, for example, but they often lack the minimum criteria we look for in terms of corporate structure, sustainability policy or governance. We want strong, risk-adjusted returns. Interesting opportunities are one thing, but the corporate structures and alignment of interests in many emerging countries mean that as an impact fund we cannot invest in many companies there.” Walker did emphasise investing in emerging markets in Central and South America, Indonesia and China. “We are spending more and more time there, but for now the preference is for developed markets.”
Impact
Schroders’ databases create a score for each of the 530 companies in the universe. Of these, 230 listed companies enter the second stage of the selection process; the ESG and valuation analysis.
“Once a company qualifies for long-term investment, the fund assigns it a position of up to 6 percent in the portfolio. No company is perfect, so once we start the ESG analysis, that 6 per cent is reduced depending on the risk we take. With some companies, like SL-Green, an office rental company in New York, the ESG policies turned out to be so bad that the data forced us to remove the company from the portfolio.”
As an Article 9 fund under the European SFDR directive, the fund excludes companies that have no impact. “It is unrealistic to assume that every investment in this fund is a zero carbon investment but there is a real transition going on in real estate”, Walker said. “We are investing in property companies that are pushing the boundaries and taking the most drastic steps towards net zero carbon emissions. Many of these companies have zero carbon targets for 2025. So they are ahead of the game.”
Launched in 2014, the fund has outperformed the FTSE EPRA NAREIT Developed (Gross TR) Index by an average of 200 basis points since inception. The fund’s three-year cumulative return is a net 39.3 per cent versus 20.9 per cent of the benchmark. Over five years, the fund’s cumulative return is 50.4 per cent where the benchmark returned 34.0 per cent. The ongoing charges are 1.04 per cent.