The drive towards a sustainable, low-carbon economy presents both risks and opportunities for commercial real estate investors. Here, we consider the potential impacts on rental income, capital value and future investment returns.
One year ago, we published Investing in Climate Change: An Asset Management Perspective. We argued that the growing investment opportunities in climate change were driven by long-term mega-trends that would continue into the foreseeable future.
One year on, the absolute necessity to act now to mitigate and adapt to climate change is even more urgent, and the opportunities generated by the sector continue to increase. New evidence has established that carbon in the atmosphere has reached an 800,000 year high (see graph below).
The leading scientific research shows that we are careening towards the tipping point where average global temperatures are likely to rise by 2°C or more. Beyond 450 ppm CO2e, it is increasingly likely that a series of macro-climatic shifts will set up a self-sustaining cycle of rapid global warming. Without significant and immediate action, or some unforeseen miracle, this tipping point stands no more than 15 to 20 years away.
We study the possibility that, aside from standard sources of utility, investors also derive utility from realizing gains and losses on assets that they own.
We propose a tractable model of this “realization utility,” derive its predictions, and show that it can shed light on a number of puzzling facts. These include the poor trading performance of individual investors, the disposition effect, the greater turnover in rising markets, the effect of historical highs on the propensity to sell, the negative premium to volatility in the cross-section, and the heavy trading of highly valued assets.
Underlying some of these applications is one of our model’s more novel predictions: that, even if the form of realization utility is linear or concave, investors can be risk-seeking.
This paper examines the stock price impact of 163 announcements of Sovereign Wealth Fund (SWF) investments. We document an average positive risk-adjusted return of 2.1 percent for target firms during two days surrounding SWF acquisition announcements.
The announcement effect is both statistically and economically significant. A multivariate analysis shows that the degree of transparency of SWF activities is an important determinant of the market reaction, and both the SWF and the existing shareholders of the target firm benefit from improved SWF disclosure.
In addition, target firms’ profitability, growth, and governance do not change significantly in the three-year period following the SWF investment relative to a control sample.
These results are robust to a battery of tests. Overall, our findings suggest that SWF investments convey a positive signal to market participants about the target firm, increased SWF transparency is enjoyed by both the SWF and existing shareholders, and SWFs are passive investors.
The goal of the research was to drill deeply into the evolving forces in the industry and present a plausible picture of its future landscape, through both near-term and longer-term trends.
Our time horizon looked out towards 2020. We, however, acknowledge the considerable difficulties with longer-range forecasting given the increasing pace of change.
There is one word that captures the flavour of the next few years in the financial industry – complexity.
US investors have increased their sophistication in real estate investing – more private real estate, a greater risk appetite and use of synthetic investment tools. Rob Kochis and Christopher Lennon report.