How can the real estate industry become more resilient? An expert explains

The risk spectrum is both broadening and deepening and the last several years especially have been fraught with unpredictable risks, from public health to geopolitical unrest, that have impacted commercial real estate. No longer can the industry overlook the concept of resilience and view it as an added feature versus a core tenant of portfolio management.

Climate risk is probably the most recognized area of resilience for the real estate sector as it has become hard to deny that the frequency and severity of extreme weather events such as wildfires and hurricanes is on the rise. While insurance can help to manage some of those risks, premiums have skyrocketed and investors are increasingly looking at the ability of properties to adapt to and withstand both acute and chronic climate events.

Forthcoming measures to limit climate change are also going to have a major impact. Real estate has been a major emitter, with buildings and new construction responsible for about 38% of global CO2 emissions.

As governments draw up plans for transitioning to a net zero economy, there are going to be very real costs for property owners and developers that do not embark on transitioning their assets. The Urban Land Institute recently warned that property groups across Europe will face major write downs if they don't take steps to reduce carbon emissions from the buildings that they own. Efficient assets are less costly to own and will retain their value, reducing the risk of asset stranding.

In addition to climate, myriad risks exist that can accelerate asset obsolescence. In the wake of COVID-19 and the acceleration of hybrid work, commercial office, a traditionally ‘core’ investment (stable returns with minimal risk) is now seen as much riskier, impacting value.

Real estate leaders must embrace the new normal and fortify their portfolios to withstand inevitable uncertainty.

We asked Ahmed Galal Ismail, CEO of Majid Al Futtaim Properties, a leading developer of shopping malls and leisure facilities across the Middle East, Africa and Asia, to explain how he sees the challenges and opportunities ahead for the real estate sector. Here's what he told us.

Below are several key points on resilience in the real estate industry that Ismail discusses. The transcript has been edited for clarity.

"The impact of climate change on the real estate industry is undeniable. We have traditionally looked at investments as a trade-off between sustainability and efficiency, or customer experience. It's very clear that we need to shift our mindset: sustainability is actually a trade on. In the long term, sustainable assets are more efficient, more valuable, more resilient, and certainly offer a better customer experience.

"So I would say that resilience for any asset is not optional anymore. Long-term trends in consumer habits, in response to climate change, are here to stay. So we have to make these investments early on, and I'm confident that the long term returns are going to be there."

"The other aspect of resilience that has really influenced our thinking on resilience is investing in the data, digital infrastructure and capabilities to make sure that our assets are not just physically very attractive but digitally relevant. We want to offer a great, seamless and personalized experience both for our tenants as well as for consumers.

"The real estate industry has been quite a laggard in the adoption of technology and digital. Proptech investments, for instance, until recently were only several billion dollars across the world. That figure has doubled recently to over $12 billion, but is still relatively small compared to the total investment in real estate. Real estate is the largest investment asset class in the world."

"Geopolitical risk for Middle Eastern companies has always been a hot topic. We've dealt with it over the years, throughout a number of crises and we believe that geopolitical risk in our part of the world has been historically overpriced. The performance and resilience of our assets and business does not reflect the very high risk premium usually associated with the Middle East. Cities like Dubai are global gateway cities. We do not really see why an asset in Dubai should be valued at less than an asset of a similar quality and commercial return in Singapore or Hong Kong. The reason that this still persists today is, in our own assessment, an overestimation of the risk premium for emerging market assets."

"I think what will happen in the industry over the medium term is there will be a recalibration of the relative risk and rewards criteria for investors, while overall the risk premiums may rise. Middle Eastern markets have proven to be more resilient than expected, as their economies have been able to absorb the COVID shock and the geopolitical risks that surround us and bounce back. I think we will see the risk premiums narrow over the medium term."

"Leadership resilience and cultural resilience combines to form what we refer to as organizational resilience. This is all that really matters on the leadership front. It is very important for all leaders across all levels within our organization to invest in their own self awareness and their own self-care, to build personal resilience, to be able to deal with an increasingly volatile, uncertain and complex world."