Fosun International : Rapid Reaction and Adaptation to the Pandemic, To Be a Socially Responsible Real Estate Investment Owner and Manager

Focus on what matters:

Unlike in previous years, the hard part in drafting this letter was not determining what to discuss-it was determining what not to discuss.

By any measure, 2020 was extraordinary. None of us really thought that we would find ourselves in a board meeting discussing a situation where real estate tenants would stop paying their rents all together. Nor did we forecast that the European GDP would drop by more than -7.4%. I certainly did not plan that I would be drafting this letter from home, as we are still in lockdown after 1 year of pandemic.

Under such environment, corporation reaction to crisis is similar to our reaction to stress. The heart rate increases, the breathing quickens, the muscles tighten, and the blood pressure rises. PAREF was not different. Thanks to the rapid reaction and adaptation of the teams across the company and countries, the impact of the health crisis on PAREF was largely contained in 2020.

In fact, under such environment, PAREF's strategy based on a balanced development of our 3 pillars allowed us to better diversify the sources of revenues and be adapted to the cyclical economic environment, in order to be more resilient during more difficult years like 2020 and to support future revenue growth:

PAREF has generated Euro 8 million net recurring results, which is up by +11% from the previous year of Euro 7.2 million

increased AuM to Euro 2.4 Bn, which is up by +9% vs 2019

But like all periods of difficulty, there are opportunities to emerge clever and more resilient if we embrace the learning opportunities that uniquely come from such difficult periods. Acknowledging the systemic challenges gives us a new motivation to take action and make it right.

Today as a real estate professional with a portfolio of 21,000 clients and 1,500 tenants, we had to innovate by investing into technologies that are necessary to address our clients' needs (digitalized subscription tools, investor portal, marketing tools to remain up to date to facilitate site visit when travel are still restricted, …) but also to maintain business continuity during this difficult period.

Did the pandemic fundamentally change the dynamic of our business? Is it accelerating trends? I do not think so. The real estate industry was operating in the dark. The pandemic simply turned on the light. 'Trends' have been there for years.

What the industry is facing is not necessarily that the work environment will be different after the pandemic. It is that the work environment has been-and will be-constantly changing. The product that we offer to our customer will need to adapt constantly as well. This is not new. This is not a one off. This is not a threat to our industry. It is a disruptive opportunity.

The challenges that are involved in the transformation from a financial asset trader (buy low, build low, and sell high), to a service-oriented business (what does my customer want, and how do I add value to its business and make profit in the process) cannot be overstated. The way we buy, the way we build, the way we finance, and the way we manage assets are changing and will continue to change dramatically.

While we have a decent view of where we are going, we do not know yet how we will get there. However, we start to have an idea about what will be needed to get us through the journey: Permanent capital, low leverage, strong operational capabilities across the entire asset value chain and I think that what will come next, is climate change and ESG measures that must be taken seriously, as it might become the largest risk that the company faces as direct Real Estate owner and manager.

What It Means To Be A Socially Responsible Real Estate Investment Owner and Manager

Now more than ever, business leaders see Environmental, Social and Governance (ESG) as crucial to competitiveness.

Often, conversations about ESG focus on how organizations address Environmental certifications and carbon consumption, but Social and Governance are becoming very much relevant to reflect the best of what we would aspire to see in society and best in class operations.

As CEO of PAREF, I have been confronted to investors requirements, as the commercial real estate industry - and the central role that our buildings play in their surrounding neighbourhoods - has the power to contribute to advancing the economic, environmental, and social well-being of our fellow citizens.

Additionally, institutional investors are increasingly factoring in ESG considerations into real estate manager selections. They want to work with managers who demonstrate a commitment to shared values and to strong governance backed by regulators and consider it their fiduciary duty to invest capital in socially sustainable ways.

We have to Evaluate The Social Impact Of A Real Estate Asset:

Just as investors focus on environmental sustainability over the last several decades with the adoption of sustainability tracking, benchmarking and reporting (BREEAM, Wire Score labels, ….), investment managers must be prepared to use the same rigor to assess how assets measure up against international best practices when it comes to social and governance impacts.

PAREF is starting to measure carbon consumption, funds compliance with ESG, …. and other international best practices, as well as the assessment of the social profile of our assets and governance of our funds.

In fact, to support our growth, PAREF have to incorporate ESG factors in our investments, products and all our activities into all our daily activities:

1) Environment (certifications, energy consumption reduction, …):

a. Our certified or labelled buildings account for more than 85,000 sqm's with 'The Medelan, in Milan' (LEED platimium, WELL and WIRED certified), 'The Go' in Levallois Perret (BREEAM and HQE) and 'Tour Franklin' (Wired Score)

b. We have also implemented Green Leases allowing us to have 117 green leases signed (+50% vs 2019 or 17% of our tenant basis)

c. improve the energetic performance of assets by reducing energy consumption (concerns 410 assets ie 20% of our AUM)

2) Social (Gender equality, affordability, human, happiness, …)

3) Regarding Governance we are compliant with Middle next and we are implementing the new European regulation covering SUSTAINABLE FINANCE DISCLOSURE REGULATION that comes into effect from March 2021

It is not anymore an option not to consider ESG, this is a Must: Our investment and asset management teams are collecting data to better understand how each asset measures up in key areas and to act on tailored ideas:

1. Good health and well-being: Healthy buildings typically include high-quality water and ambient air, healthy food options, fitness amenities, natural light, green walls or indoor plants, … Increasingly, our assessment of good health and well-being needs to be considered to obtain labels, attract tenants and increase asset liquidity to capture higher value.

2. Decent work and economic growth: Social impact can also be measured by its building's contribution to the community, such as how much municipal tax revenue the building's commercial activities generate. It's also important to look at how many local jobs and small businesses the property supports, including local business development opportunities. Well-managed assets are also becoming important contributors to their surrounding communities with thoughtful and targeted programs that address local challenges.

3. Sustainable cities and communities: A property can support the social infrastructure of the surrounding community by leasing space for essential services like healthcare, offering affordable housing ... The presence of sharing economies, such as bike-sharing services and coworking centers, also contribute to sustainability goals.

4. Reduced inequalities: In office properties, it is important to serve the needs of the increasingly diverse employees who work in the building. This means allocating space to lactation rooms, gender-neutral bathrooms and other amenities, as well as ensuring all spaces are accessible to people of all abilities.

Now Is The Time To Embrace ESG Responsible Investing

We are using the ESG word more frequently in business strategy settings, fund raising, financial results disclosures, green leases, carbon consumption, …. and that's a good thing.

As we address equity investments within our own organizations, we must include a plan for integrating ESG criteria into how we invest in and manage real estate assets and funds with an eye to thinking beyond the building to serve 1 billion families.

Failure to act responsibly regarding environmental sustainability has clear and calculable economic impacts: our understanding of sustainability should be no different, and our actions not less urgent.

Thanks

Antoine Castro

CEO PAREF Group