The last time EG sat down with Madeleine McDougall was in December 2017. Freshly appointed as Lloyds Bank’s head of commercial real estate, McDougall lamented the difficulty of getting a precise read on property cycles, but highlighted the importance of constantly stress-testing the books to prepare for the worst.
That preparedness has likely come in handy over the years, especially as no one could have foreseen the changes to come. McDougall’s division itself has undergone structural changes, with her role now overseeing the merged housing and commercial real estate teams. She is also navigating her division through a market hindered by Brexit uncertainty, as well as contending with a global pandemic. Not to mention the ever-growing issue of the climate change emergency – a topic that McDougall is particularly passionate about.
In January at JLL’s 2020 Property Predictions event, McDougall urged the industry to place sustainability at the forefront of decision-making, or risk struggling to get financial backing for new schemes. This set the tone for the bank’s key priorities for the year ahead.
What McDougall could not have predicted, however, was just how much more critical the sustainability agenda would turn out to be this year.
Just over two months after she spoke out about property’s role in tackling the climate emergency, coronavirus had spread across the world, forcing many countries into lockdown.
Covid-19 forced workers to cut their commutes to the office and instead work from home, limit the number of journeys taken, and has shown just how crucial green spaces and clean, healthy buildings really are.
For McDougall, the key positives that have come out of the pandemic are the acceleration of the sustainability agenda and “a renewed sense of importance” around the issue.
Lloyds, she says, must continue to help drive this change. Indeed, the bank says sustainability is the foundation upon which the UK should build its post-Covid-19 future and in its first half results for 2020, published last week, said it would play “a leading role in financing the UK’s green recovery”.
But how exactly does the bank plan to do this? And to what extent has coronavirus changed its approach to financing real estate projects in general?
Covid-19 disruption
Since lockdown, Covid-19 has slammed the brakes on the country’s economy, and the property market has seen enquiries dive, investment activity dampen and development put on pause.
The pandemic has affected the number of financing deals that Lloyds struck over the lockdown period. McDougall says deals that were signed off during this time were in the pipeline pre-Covid, adding that there was a “significant dip” in transaction and investment volumes between March and May.
The bank agreed some £13.8bn in loans to the UK real estate market in H1 2020, down from £15.8bn the previous year.
McDougall says transaction volumes will be significantly down on the previous year but she remains optimistic of the market bouncing back post-Covid.
“We are already seeing the green shoots and more activity out there in the market,” she says.
“At the moment we are probably seeing a larger volume of smaller ticket sizes,” says McDougall. “Because of the environment we are in at the moment, doing larger ticket sizes is slightly more challenging.
A green game changer
While coronavirus may have slowed down real estate deals, Lloyds has been busy ramping up its green financing initiatives during lockdown.
Lloyds’ sustainability journey started in March 2016, when the bank pledged to deploy £1bn of financing at a discounted margin to clients that commit to improving the energy efficiency of their buildings.
McDougall says the bank has exceeded this target, having deployed around £1.3bn of green loans. This has meant that funding has been provided to make roughly 18.6m sq ft of buildings greener. It is now taking the next step forward in its green financing offerings.
“One of the things we want to do is make it a fair and level playing field,” she says. “What you find with the bigger clients is that they already have a sustainability team, but what about the clients who know they want to do more on sustainability but don’t know where to start and how to deliver action?”
This challenge has led to Lloyds rolling out a green building tool to its customers, who can use it to check the sustainability credentials of their portfolio and see what they need to focus on to make their properties greener.
“Clients wanted something that gave them a snapshot of their sustainability and what they needed to do to make a difference, so that’s why the tool is so powerful,” she says, adding that this method of data collection is critical.
“Data is key and is always key,” she says. “It helps you make more informed decisions and choices and, in addition to that, this is not a localised issue.”
However, what McDougall describes as the real “game-changing” initiative that the bank is now offering to the built environment is its retrofitting financing measures.
McDougall says the bank will give developers 100% of the financing needed to retrofit their buildings to make them more sustainable.
It is a “pretty bold move” that McDougall hopes will incentivise property companies to become more sustainable, which in the long term, makes good business sense.
“If you make your building more sustainable, you are going to have tenants more likely to stay,” she says. “Because of that, you are more likely to have a longer-term income with low operating costs.”
McDougall says it would be naïve to think the world will return to the way it was pre-coronavirus. Everyone has emerged from this crisis questioning the way we used to live – from rethinking where we work, to skipping after-work pints on a Friday in the interests of safety – and property must respond to this change.
But as the industry faces this need to change, it also has the opportunity to plot a brighter future. And that future, says McDougall, is one that is greener.
The office is not dead
Lloyds Banking Group has joined the growing number of corporates that are taking a fresh look at their real estate portfolios as a result of the coronavirus pandemic.
Chief executive António Horta-Osório last week said the bank was reviewing its property strategy following the results of a poll of its 65,000 staff. It revealed that two-thirds of its employees were keen to work more regularly from home in the future.
“As more of our colleagues are able to work flexibly and remotely, we are becoming less reliant on office space,” said Horta-Osório. “And also the type of office space we will need in the future is likely to change to reflect changing working styles. We will be working to understand what the future of work and the office looks like, which will also help to inform our decision.”
The bank is already working on a plan to consolidate its offices into six strategic hubs in London, Scotland, West Yorkshire, the North West, West Midlands and the South West.
McDougall says the office is far from dead, but the asset class will definitely be affected by the change in attitude to home working.
“You would be naïve to think there would be no impact at all,” she says. “A consistent view we hear is that people are missing the office and want to go back in. But do we want to work in the same way we used to? Absolutely not.”
She adds: “You’re not going to see an overnight shift but will we over the next five years see less office space being needed? Yes, but not significantly. It’s not the death of the office.”
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