Nils Kok

More research? More blogs?

I'm now posting my research and blogs on the Maastricht Center for Real Estate (MCRE) website. You can also check out the LinkedIn page of MCRE, with weekly blogs and updates!

U.S. SEC Forces Climate Risk Disclosure – What Does that Mean for Real Estate?

Earlier this week, the U.S. Securities and Exchange Commission, the largest and arguably most powerful regulator of the finance industry proposed legislation to make the disclosure of carbon emissions and climate risk mandatory for publicly traded companies. While some countries around the world had introduced such mandatory disclosure already, this new piece of legislation will be a (transparency) shock to many firms. 

In short, listed companies, including Real Estate Investment Trusts (REITs) will have to report Scope 1 and 2 carbon emissions, and if material, even Scope 3 emissions, i.e., those carbon emissions that are not under their control. In addition to carbon emissions, companies will have to disclose climate risks that may have an impact on their business, how those risks are managed, and what the reduction goals are. Importantly, the financial implications of climate risks also need to be reported. 

For the more than 225 REITs that are listed on of an exchange in the U.S., this new regulation implies that data needs to be collected in all assets that are on the balance sheet, whether these assets are managed by the REIT or not, and notwithstanding the lease structure. While about 50 (mostly large) REITs are consistently reporting to GRESB (the Global Real Estate Sustainability Benchmark), which means data collection on energy consumption and carbon emissions is on their radar, many REITs have yet to begin their data collection and management efforts. Moreover, triple-net leased assets are often excluded from data collection efforts, as tenants in or operators of such buildings are responsible for energy procurement.  

Of course, there will be ample debate on what is material and what is not. Timelines on implementation of the regulation will be stretched out. But ultimately, real estate investors will have to come clean on the energy consumption and carbon intensity of their portfolio, and hence the underlying assets. Private equity real estate investors may be shielded from the climate risk disclosure regulation for now, but likely not for long, as listed REIT investors will demand transparency in ESG KPIs when they acquire new assets.  

Across the pond, European and UK investors are subject to voluntary disclosure mechanisms already, such as the best practice reporting recommendations from EPRA and INREV, and investor-mandated reporting to GRESB. In addition, in most countries, there are regulatory frameworks that require the disclosure of energy performance ratings at the asset level. Those are mostly “design” ratings only, but typically, what happens in the U.S. will come to the U.K. and subsequently mainland Europe – the good, the bad, and the ugly. In this case, views on mandatory climate risk disclosure probably vary from ugly to good, but real estate investors better get in line and start with measuring and managing the energy consumption and carbon emissions of their assets today! 

From Wall Street to Main Street: How Corporate Diversity Shapes Cities

with Avis Devine and Erkan Yonder, Working Paper (2022)

Download

The real estate industry is traditionally considered a male-dominated industry. At the same time, the industry shapes the quantity and quality of space in U.S. cities. In this paper, we study the impact of board gender diversity on the risk management decisions of 180 U.S. Real Estate Investment Trusts (REITs) during the 2001 to 2018 period. Using a bottom-up analysis on the properties in REIT portfolios, we find significant risk-reduction benefits associated with gender diversity, documenting that more gender-diverse REITs are more actively investing in environmentally-sustainable real estate. In addition, female CEOs are less overconfident than their male counterparts, leading to less active trading and a longer hold period of assets. Finally, more gender-diverse REITs are less geographically diversified, focusing capital allocations on a smaller number of states and cities. We conclude that diversity in real estate firms on Wall Street has real-life implications for Main Street, which is important given the growth of REITs and private equity real estate firms.

Neem prikkels tegen samenwonen weg om het woningtekort te verkleinen

De maatschappelijke discussie over het woningtekort gaat bijna altijd over de vraag hoeveel woningen we waar dienen te bouwen. Maar er zijn in Nederland sterke institutionele prikkels tegen samenwonen. Het wegnemen van die prikkels kan een flink deel van het woningtekort oplossen, zonder ook maar één woning te bouwen.

Lees hier het ESB artikel en hier coverage in het FD.

Homes instead of meadows

(Dutch podcast here: Luister ook naar deze podcast door Nils Kok in programma "De Oplossers" op NPO radio1.)

"Incoming government to solve the housing crisis by speeding up construction," Dutch newspapers headlined earlier this week. Such political ambitions can be expected of a brand-new cabinet, but unfortunately, they often fail within months if not weeks after coming into office. In order to be able to build on a truly large scale, a fundamental change is needed in the public debate about land, in the view of researchers Nils Kok and Piet Eichholtz.

They say lessons can be learned from the case of Zeewolde, a town created on the reclaimed land of the old Zuiderzee, where Facebook parent company Meta has been given permission to build a massive data center on farmland. It teaches us that municipalities' views on land use must also change, according to the two scientists.

The current housing shortage in the Netherlands has several causes, but the most important is the scarcity of land designated for residential construction. If you look at all the land in this densely populated country, you will see that only 7% of its surface area is currently used for housing, 12% is used for trade and industry, infrastructure, and recreation and 15% consists of nature. No less than 66% of all land in this country (that’s a whopping two-thirds!) is used for agriculture.

 

Figure 1: Residential land as a percentage of farmland

This distribution of land must change; we must turn more of the Netherlands into residential land. This can be done in two ways. Either you use the land that is currently used for nature. In other words: the black-tailed godwit making way for housing. Or you use agricultural land for residential construction. Homes instead of meadows.

An additional point is that there isn't much nature in the Netherlands when compared to other European countries. Which doesn’t really help. But then again, we do have a lot of agricultural land in the Netherlands, relatively speaking. We must make use of this land. And it could serve as a double-edged sword. On the one hand, we would solve the chronic shortage of housing land. On the other hand, buying out livestock farmers would also bring about a reduction of nitrate emissions.

It’s important to note here that the conversion of agricultural land must be done for the right purpose: earmarking 201 hectares of land for business parks and data centres near Zeewolde obviously doesn’t contribute to solving the housing shortage. That’s the trouble with Dutch municipalities: they are constantly issuing land for business parks and distribution centres, but are hesitant when it comes to building new homes on a large scale. All this despite the fact that the price of land designated for housing is much higher than farmland and therefore brings more money into the municipal or provincial coffers.

The idea of using agricultural land for new housing may sound frightening, but it is nothing new. The sprawling residential Leidsche Rijn district near Utrecht is a case in point. It just means that the scale and speed of converting the land will have to go up considerably.

This does not mean that all farmers should pack up and leave. In Belgium, where more than 9% of the land is designated for housing, 2% of agricultural land has been converted into residential construction land in recent years. That may seem small, but it's a huge difference. Again: at present, only 7% of the Netherlands is reserved for housing. Having 2% more would make a real difference.

Figure 2: Residential land prices: Netherlands vs Belgium

If we were to copy the Belgian example, agriculture would still make up 64% of our total land. Which means that almost all of our farmers could just keep doing what they're doing – but, more importantly, the rest of the Netherlands population would have affordable homes in the future.

Avoiding Crowded Places During COVID-19: Simple Choice or Complex Strategic Decision?

with Piet Eichholtz and Martijn Stroom, Frontiers in Psychology (2021)

Download

Introduction: Following a period of strict lockdowns during the COVID-19 pandemic, most countries introduced policies in which citizens were expected to avoid crowded places using common sense, as advised by the WHO. We argue that the ambiguity in the recommendation to “avoid crowded places” implicitly forces individuals to make a complex strategic decision. Methods: Using a Dutch representative sample of 1,048 participants [42% male, mean age=43.78years (SD=12.53), we examine the effect of context on the decision to visit a hypothetical recreational hotspot under the policy recommendation to “avoid crowded places.” We randomize four levels of context on the crowdedness “on the streets” (no context, low, medium, and high context). Subsequently, participants are asked to estimate the percentage of others going out in the same situation. Finally, we assess the impact of a selection of personal characteristics on the likelihood of visiting a crowded place. Results: Respondents are proportionally more likely to go in a low context and high context, compared to no context (diff=0.121, p<0.000, and diff=0.034, p<0.05, respectively) and middle context (diff=0.125, p<0.000, and diff=0.037, p<0.05, respectively). Low context information also decreases the expectation of others going out (−2.63%, z=4.68, p<0.000). High context information increases the expected percentage of others going out (significant only for medium to high context; 2.94%, z=7.34, p<0.001). Furthermore, we show that education, age, and health and risk attitude are all predictive of the likelihood to visit a crowded place, notwithstanding the context. Discussion: Although there is a strong inclination to avoid crowded places during the COVID-19 pandemic (81%), we find two context-driven exceptions: when people expect to avoid crowded spots (in the “low” context, i.e., strategical decision-making) and when people expect others to go (social influence). The freedom provided by the ambiguous public policy is implicitly asking more from the population than it initially seems. “Use your common sense” is often the accompanying advice, but our results show that more and better information concerning the context is essential to enable us to make an optimal decision for ourselves, and for society.

The Alternative Future of European Real Estate

After what seems like a long long hiatus, last week I finally had the chance to speak at a conference again. In person. Or I should say, I had the pleasure. Because who knew that getting in a cab, waiting in line for airport screening and boarding, and all of that in reverse at too early an hour, would ever feel like true joy?

The IPE Conference in Copenhagen felt like the first sunny day in Spring, with almost 300 real estate investors getting together to learn about the post-pandemic state of the European real estate market. And of course to mix, mingle, laugh, and have the occasional drink. COVID-19 felt like something from the distant past, as did some of the direst predictions about the future of the real estate sector. (I made my own predictions in March 2020.)

Indeed, most property types have flourished in the face of the pandemic. First and foremost, the much-discussed logistics sector, benefitting from a dramatic surge in online shopping, but the residential sector also has done quite well, flying high on the tailwinds of very limited construction during the post-GFC years. Not great for tenants, but undersupply is driving up rents for both logistics and residential real estate. Pricing of logistics and multifamily assets has also skyrocketed, in large part thanks to the largesse of the European Central Bank and local governments, lowering the cost of debt and leading to a wall of capital flowing in from institutional investors, eager to earn some form of return on their capital.

 

The black sheep of the real estate sector, or sheeps I should say, retail and lodging, seem to have weathered the crisis somewhat better than expected. Hotels are slowly filling up again, and there is a very limited number of distressed assets on the market (of course, Blackstone swooped in to take some hospitality REITs private, taking advantage of the dislocation of pricing in the public market). Most types of retail weren’t doing great to begin with, but the pandemic hasn’t led to the total bloodbath that we all expected, with most tenants remaining in business and rental payments starting to pick up again. As long as nobody sells, the pain of capital depreciation can be pushed down the road (of course, not so for listed retail REITs like Unibail Rodamco Westfield, which is still down more than 50% compared to pre-crisis levels, reflecting what valuations in the private market should really look like. But hey, let’s not spoil the party...).

Investors though, have moved on from the retail debacle. And they are also less excited about offices as a core building block of their portfolio. The extent of “the return to the office” will be the ultimate determinant for the long-term success of the office sector, and the jury is still out. The real estate sector seems to believe that we will all be back in the office in short order, with limited work from home, but employees may think about this differently. A hybrid form of work, with the majority at home, would lead to a substantial change in the demand for offices. Remember, in real estate, small changes in demand can have a big impact. So, there is a lot of uncertainty about rent growth and the pricing path in the office sector. What seemed to be “core,” or stable assets, now come with potential volatility.

If not office and retail, what else are investors allocating their capital to? Enter the rise of “alternatives.” Think data centers, healthcare, senior housing, medical offices, life science parks,  self storage, student housing, cold storage, etc. All of that is bundled together under the banner “alternatives,” but the reality is that all these other property types constitute an increasingly large share, compared to some of the “traditional” property types. A quick look at the composition of the European listed property market shows that retail represents just 7.5% of the total market cap of the FTSE EPRA Index (107 listed property companies). Residential is almost 30% (thank the big German residential owner/operators for that). Healthcare is 3.5%, self storage 2.3%. Diversified is 28%. There are very few data center owners in Europe, but in the U.S., they represent 9% of the FTSE EPRA Nareit Index already, whereas healthcare is at 8.4% and self storage at 6.6%. 

Beyond the fact that office and retail have become less attractive from a demand perspective, there’s another thing to note about the attractiveness of “alternative” property types. Their capital expenditure requirements are MUCH lower! As shown below (shoutout to Brian Klinksiek of LaSalle for these numbers), the average capex expenditures as a percentage of net operating income are 20% for office, retail, etc, as compared to just 10.7% for storage, single-family rental and healthcare. That’s a direct and significant return enhancement. (Many of the alternative property types are “triple net,” which means the tenant takes care of equipment and its maintenance.) Looking at NOI forecasts over the next couple of years, the numbers look much more attractive for “alternatives,” with average growth of 5.7% on an annual basis, as compared to what I think is an optimistic 3.7% for traditional property types (traditional includes logistics and multifamily, which likely skews the average). 

Looking ahead, when it comes to the securitization, or investability, of commercial real estate, the U.S. seems a forebode of what is to come, with much more capital flowing into non-traditional property types. And for good reason: there are attractive returns to achieve! I’m curious how quickly we’ll change our vocabulary of what is traditional and what is alternative -- what are “alternatives” now are poised to become “traditional” in this decade. That doesn’t mean the end of retail or office, but likely an increase in yield (or lowering of prices) to reflect their increased risk and lower rent growth.

The (long) road to net zero for the real estate sector

A couple of weeks ago, I gave a talk for a group of executives at Blackrock, on the topic of “the road to net zero” for commercial real estate. The long road, that is, because the real estate sector is a large consumer of electricity, which is to a large extent produced by gas (and coal)-fired power plants.

While the presentation touches upon many drivers of and barriers on the road to net zero, economists would argue that simply putting a price on carbon, thereby increasing the cost of electricity, goes a long way toward reducing the energy intensity of the real estate sector. Alas, if only life were that simple, and if only policymakers would listen to economists… Current policies mostly focus on subsidies, on decreasing information asymmetry, and on hitting the inefficient part of the real estate market with a stick (e.g. making it unlawful to rent out or sell office buildings that are inefficient, in the Netherlands and the UK).

But recently, vital signs of carbon pricing for real estate have emerged. The city of New York is leading the way here, with Local Law 97 (check this blog by CodeGreen for a detailed description). Under that law, buildings are required to meet carbon emission intensity standards set by the local government, with an initial period from 2024-2029 and the second period (with much lower carbon intensity levels) from 2030-2034. Buildings that have carbon emissions above the threshold will pay $268 per metric ton of CO2. That sounds low, but could run into millions of dollars for large buildings. There is no easy way out for landlords, given that “green” electricity can only be sourced locally, and there is no way there is sufficient generation of fossil-free electricity in the state of New York. Watch this space, as many high-profile landlords will be affected, and opposition is loud.

More recently, the European Commission announced that it will introduce a “mini-ETS” for cars and buildings. The European Union already has an emission trading scheme (ETS), but that only affects heavy industry (and the price of the emission rights remains too low). In the new scheme, slated to be introduced on July 14 this year, CO2 cap-and-trade would apply directly to buildings, putting an additional price on the cost of running a building, thereby incentivizing landlords and tenants to invest in energy efficiency measures. More details to follow (knowing the EU, don’t hold your breath).

Both examples are bringing the real estate sector closer to a world where carbon emissions are becoming a carbon liability, and where inefficient buildings are facing a significant “transition risk” (that is, either a significant capital outlay to reduce emissions, or the risk of a large carbon liability). CRREM, the Carbon Risk in Real Estate Monitor, has developed “carbon pathways” for specific property types in specific countries. Conceptually, these pathways look like this:

Where the black line represents the carbon pathway (or: carbon intensity) of the asset, over time. The carbon intensity may increase following hot weather (more cooling needed) or may decrease as the grid decarbonizes (more renewables, fewer coal and gas-fired power plants). Comparable assets are on the downward-sloping red line, and assuming that the sector as a whole becomes less carbon-intensive over time, there comes a point when the asset is above the threshold or benchmark (similar to Local Law 97 in New York). At that point, the delta between the asset and the threshold becomes the carbon liability, which translates into fines or costly offsets. As an alternative, and assuming efficient markets, landlords will start to invest in the energy efficiency of their buildings, which is of course the desirable outcome.

While carrots and sticks are still the preferred policy measures today, the energy efficiency of the commercial real estate sector is slated to become an even “hotter” topic in the years to come, as carbon pricing and related mechanisms emerge. Buyer beware: the pricing of commercial real estate will increasingly be affected by the extent of its carbon liability.  

Turning Up the Heat: The Impact of Indoor Temperature on Cognitive Processes and the Validity of Self-Report

with Piet Eichholtz, Martijn and Martin Stroebl, Judgment and Decision Making (2021)

Download

Indoor climate interventions are often motivated from a worker comfort and productivity perspective. However, the relationship between indoor climate and human performance remains unclear. We assess the effect of indoor climate factors on human performance, focusing on the impact of indoor temperature on decision processes. Specifically, we expect heat to negatively influence higher cognitive rational processes, forcing people to rely more on intuitive shortcuts. In a laboratory setting, participants (N=257) were exposed to a controlled physical environment with either a hot temperature (28ºC) or a neutral temperature (22ºC), in which a battery of validated tests were conducted. We find that heat exposure did not lead to a difference in decision quality. We did find evidence for a strong gender difference in self-report, such that only men expect that high temperature leads to a significant decline in performance, which does in fact not materialize. These results cast doubt on the validity of self-report as a proxy for performance under different indoor climate conditions.

Three Decades of Institutional Investment in Real Estate

with Alexander Carlo and Piet Eichholtz, Journal of Portfolio Management (2021)

Download

Alternative assets represent an increasing share of pension fund balance sheets all over the world, and real estate is a cornerstone of that allocation. This paper investigates the development in pension fund real estate investments over the last three decades, both in private and in public real estate, focusing on the performance of the asset class for the ultimate asset owners. The development of pension funds’ allocation to real estate differs across regions, with allocations increasing in Canada, stationary in the U.S., and shrinking in Europe. Just over 10% of the real estate exposure is through publicly listed vehicles. For the real estate portfolio as a whole, we observe a continuing increase in the use of external fund managers. Investment costs are stationary, with pension funds in the U.S. structurally paying more to their external private real estate managers than their peers in Canada and Europe. Costs relating to public real estate are more equal across regions. In terms of performance, we observe rather stable total returns for both private and listed real estate over the last three decades. Intermediated investment management for private real estate is costly, leading to disproportionately lower net returns.