WEBVTT 00:00:00.000 --> 00:00:00.974 align:middle line:90% 00:00:00.974 --> 00:00:02.435 align:middle line:90% [SQUEAKING] 00:00:02.435 --> 00:00:03.896 align:middle line:90% [RUSTLING] 00:00:03.896 --> 00:00:05.844 align:middle line:90% [CLICKING] 00:00:05.844 --> 00:00:10.720 align:middle line:90% 00:00:10.720 --> 00:00:13.990 align:middle line:84% SIQI ZHENG: This class is the finance class to Finance Real 00:00:13.990 --> 00:00:16.120 align:middle line:90% Estate as an Asset Level. 00:00:16.120 --> 00:00:19.600 align:middle line:90% And then basically we recap. 00:00:19.600 --> 00:00:21.250 align:middle line:84% I think you are very familiar with this 00:00:21.250 --> 00:00:24.580 align:middle line:84% because it's also popped up in many, many of our sessions, 00:00:24.580 --> 00:00:25.910 align:middle line:90% and even in the midterm. 00:00:25.910 --> 00:00:28.540 align:middle line:84% So basically we are talking about the business case 00:00:28.540 --> 00:00:30.010 align:middle line:90% for sustainable real estate. 00:00:30.010 --> 00:00:33.700 align:middle line:84% For here we have green buildings, healthy buildings, 00:00:33.700 --> 00:00:36.620 align:middle line:84% and also climate-resilient buildings. 00:00:36.620 --> 00:00:40.150 align:middle line:84% And in the mention of sustainable real estate, 00:00:40.150 --> 00:00:42.710 align:middle line:84% we know there is a chain process. 00:00:42.710 --> 00:00:45.250 align:middle line:84% So we have the developer, we have the owner, 00:00:45.250 --> 00:00:46.190 align:middle line:90% we have the tenants. 00:00:46.190 --> 00:00:50.650 align:middle line:84% We always see that the end users matter first. 00:00:50.650 --> 00:00:53.840 align:middle line:84% So that will be the tenants, the users of the space. 00:00:53.840 --> 00:00:58.180 align:middle line:84% If they really value this sustainable real estate, 00:00:58.180 --> 00:01:02.290 align:middle line:84% they are willing to pay a higher rent premium, either because 00:01:02.290 --> 00:01:07.450 align:middle line:84% of the lower operational cost of the lower energy bill or better 00:01:07.450 --> 00:01:10.060 align:middle line:84% indoor air quality and all the things. 00:01:10.060 --> 00:01:15.110 align:middle line:84% And that will be translated to this rental premium 00:01:15.110 --> 00:01:17.510 align:middle line:84% for the owners, then later will be 00:01:17.510 --> 00:01:20.840 align:middle line:84% translated to the higher purchase price 00:01:20.840 --> 00:01:22.440 align:middle line:90% and to the developers. 00:01:22.440 --> 00:01:25.320 align:middle line:84% So at that time, we only look at the cash flow. 00:01:25.320 --> 00:01:27.260 align:middle line:84% We look at this, we understand rationale. 00:01:27.260 --> 00:01:29.790 align:middle line:84% We understand the benefit cost analysis. 00:01:29.790 --> 00:01:32.690 align:middle line:84% Now we need to understand capital. 00:01:32.690 --> 00:01:34.280 align:middle line:90% So that's our finance, right? 00:01:34.280 --> 00:01:38.510 align:middle line:84% You only really need capital to build, to buy, 00:01:38.510 --> 00:01:41.820 align:middle line:84% to invest in those sustainable real estate. 00:01:41.820 --> 00:01:45.050 align:middle line:84% So that will be the focus of these three finance sessions 00:01:45.050 --> 00:01:47.240 align:middle line:90% is money, money, money. 00:01:47.240 --> 00:01:49.610 align:middle line:90% So that's the idea. 00:01:49.610 --> 00:01:54.830 align:middle line:84% So basically, I want to cover three parts, if possible. 00:01:54.830 --> 00:01:57.620 align:middle line:90% And first is a big picture. 00:01:57.620 --> 00:02:00.860 align:middle line:84% So big picture, I want to first let 00:02:00.860 --> 00:02:05.120 align:middle line:84% you know what's the current status of the discussion, 00:02:05.120 --> 00:02:09.169 align:middle line:84% not just in real estate field, but also in the general finance 00:02:09.169 --> 00:02:10.009 align:middle line:90% field. 00:02:10.009 --> 00:02:14.840 align:middle line:84% So the general finance field now is an emerging very, very hot 00:02:14.840 --> 00:02:19.110 align:middle line:84% area, very new area called sustainable finance. 00:02:19.110 --> 00:02:22.920 align:middle line:84% So then there's a general finance, sustainable finance. 00:02:22.920 --> 00:02:25.710 align:middle line:84% All the finance principles, how that 00:02:25.710 --> 00:02:29.250 align:middle line:84% will be applied to start a ESG and sustainability. 00:02:29.250 --> 00:02:34.200 align:middle line:84% And how we plug in, how we plug in real estate asset 00:02:34.200 --> 00:02:38.530 align:middle line:84% as one of the many, many assets into this sustainable finance 00:02:38.530 --> 00:02:40.660 align:middle line:84% big picture and how to think about this. 00:02:40.660 --> 00:02:42.210 align:middle line:90% So that's a big picture. 00:02:42.210 --> 00:02:46.860 align:middle line:84% And then we will talk about the debt side, basically mortgage. 00:02:46.860 --> 00:02:47.850 align:middle line:90% That's mortgage. 00:02:47.850 --> 00:02:51.930 align:middle line:84% And mortgage and then equity side will be private equity. 00:02:51.930 --> 00:02:54.840 align:middle line:84% For the last part, I will try to invite our guest speaker 00:02:54.840 --> 00:02:58.890 align:middle line:84% today actually to talk about PE because I know little about PE, 00:02:58.890 --> 00:03:02.500 align:middle line:84% I know so little and you know more than me. 00:03:02.500 --> 00:03:05.865 align:middle line:90% 00:03:05.865 --> 00:03:12.700 align:middle line:84% So basically, I think the birth of this sustainable finance 00:03:12.700 --> 00:03:17.780 align:middle line:84% field, in academia and also in industry, 00:03:17.780 --> 00:03:21.560 align:middle line:84% I think the early days was from 2020 00:03:21.560 --> 00:03:27.950 align:middle line:84% when this Larry Fink, the CEO of the BlackRock, each year 00:03:27.950 --> 00:03:29.270 align:middle line:90% he wrote a letter. 00:03:29.270 --> 00:03:37.750 align:middle line:84% Each year he wrote a letter to his clients and all the asset 00:03:37.750 --> 00:03:38.720 align:middle line:90% managers. 00:03:38.720 --> 00:03:42.700 align:middle line:84% So in that year, 2020 letters to CEOs. 00:03:42.700 --> 00:03:47.330 align:middle line:84% So his theme was a fundamental reshaping of finance. 00:03:47.330 --> 00:03:49.660 align:middle line:84% So he was one of the first business 00:03:49.660 --> 00:03:52.690 align:middle line:84% people who raised this point and say, 00:03:52.690 --> 00:03:55.270 align:middle line:84% OK, now we need to be very clear. 00:03:55.270 --> 00:03:58.160 align:middle line:84% Climate risk is a financial risk. 00:03:58.160 --> 00:04:00.160 align:middle line:84% So that's basically his main idea, 00:04:00.160 --> 00:04:05.590 align:middle line:84% the point of in his letter to all the other CEOs saying, 00:04:05.590 --> 00:04:11.750 align:middle line:84% we are, BlackRock, is an asset manager and is a fiduciary. 00:04:11.750 --> 00:04:15.490 align:middle line:84% And basically people, all our common people, 00:04:15.490 --> 00:04:18.790 align:middle line:84% will put money in the fund and BlackRock, 00:04:18.790 --> 00:04:20.820 align:middle line:84% they are managing the fund on behalf 00:04:20.820 --> 00:04:25.730 align:middle line:84% of these individual investors so that fiduciary responsibility. 00:04:25.730 --> 00:04:30.340 align:middle line:84% So we really, this is all the old people's pension fund-- not 00:04:30.340 --> 00:04:32.150 align:middle line:84% old people-- all our pension funds 00:04:32.150 --> 00:04:34.310 align:middle line:84% and later we need to use when we retire. 00:04:34.310 --> 00:04:38.210 align:middle line:84% So we really have the clear, very important responsibility 00:04:38.210 --> 00:04:40.020 align:middle line:90% to look into the future risk. 00:04:40.020 --> 00:04:42.920 align:middle line:84% And we need to understand the financial climate 00:04:42.920 --> 00:04:44.430 align:middle line:90% risk is a future risk. 00:04:44.430 --> 00:04:46.760 align:middle line:84% We need to have a deep responsibility 00:04:46.760 --> 00:04:52.020 align:middle line:84% to better manage and control that climate risk. 00:04:52.020 --> 00:04:54.920 align:middle line:84% So from this letter, then it's a trigger 00:04:54.920 --> 00:04:58.550 align:middle line:84% to all these discussions, conversations, in the entry 00:04:58.550 --> 00:05:05.000 align:middle line:84% and later some research on this sustainable finance. 00:05:05.000 --> 00:05:09.620 align:middle line:84% So think about how to plug in real estate 00:05:09.620 --> 00:05:12.830 align:middle line:84% in this big picture of the sustainable finance. 00:05:12.830 --> 00:05:19.610 align:middle line:84% So I showed this diagram from the beginning of our class 00:05:19.610 --> 00:05:21.480 align:middle line:90% to show you the layers. 00:05:21.480 --> 00:05:23.760 align:middle line:84% So it's a kind of a sandwich model. 00:05:23.760 --> 00:05:25.070 align:middle line:90% Remember sandwich. 00:05:25.070 --> 00:05:28.400 align:middle line:90% And this investor in the middle. 00:05:28.400 --> 00:05:32.870 align:middle line:84% And then we talked a lot about the physical side 00:05:32.870 --> 00:05:35.530 align:middle line:84% before the midterm, before spring break. 00:05:35.530 --> 00:05:39.200 align:middle line:84% So that's the end users, the tenants and households. 00:05:39.200 --> 00:05:40.880 align:middle line:90% So those individuals. 00:05:40.880 --> 00:05:44.030 align:middle line:84% So they choose which city to live and work, 00:05:44.030 --> 00:05:47.750 align:middle line:84% and they choose which building to live and work in. 00:05:47.750 --> 00:05:49.500 align:middle line:84% And some are green and some are not green. 00:05:49.500 --> 00:05:52.220 align:middle line:84% So that is they choose in the physical city. 00:05:52.220 --> 00:05:56.150 align:middle line:84% And then if they are willing to pay higher rent, 00:05:56.150 --> 00:05:58.460 align:middle line:84% then that building, that green building, 00:05:58.460 --> 00:06:00.350 align:middle line:84% will get more, like, higher return. 00:06:00.350 --> 00:06:02.990 align:middle line:84% So that's the upper side end users. 00:06:02.990 --> 00:06:05.720 align:middle line:84% And those people are also those people, the same people, 00:06:05.720 --> 00:06:06.630 align:middle line:90% all of us. 00:06:06.630 --> 00:06:11.390 align:middle line:84% So we have money, we have our salary, we have our 401K, 00:06:11.390 --> 00:06:12.960 align:middle line:90% all the money in the pension. 00:06:12.960 --> 00:06:17.150 align:middle line:84% So we put our money in this institutional investors 00:06:17.150 --> 00:06:22.140 align:middle line:84% insurance and all those managing firms like that. 00:06:22.140 --> 00:06:23.750 align:middle line:90% And then they start to invest. 00:06:23.750 --> 00:06:26.520 align:middle line:84% They become giant guys, but their money is from us. 00:06:26.520 --> 00:06:29.880 align:middle line:84% That's why they call them selves as a fiduciary, right? 00:06:29.880 --> 00:06:33.600 align:middle line:84% And then there are two roles, equity and debt. 00:06:33.600 --> 00:06:37.830 align:middle line:84% On the equity side, you have small guys, rich people, 00:06:37.830 --> 00:06:41.520 align:middle line:84% medium-sized guys, private equity, and the big guys, 00:06:41.520 --> 00:06:45.740 align:middle line:84% big company has the rates, and that you have more than the MBS. 00:06:45.740 --> 00:06:48.210 align:middle line:84% So anyway, those, our common people, 00:06:48.210 --> 00:06:51.270 align:middle line:84% we can invest directly into stock market. 00:06:51.270 --> 00:06:53.310 align:middle line:84% If we are rich enough, we are individual, 00:06:53.310 --> 00:06:56.100 align:middle line:84% or we also invest in private equity, 00:06:56.100 --> 00:06:59.250 align:middle line:84% or we just put money in our pension or insurance, 00:06:59.250 --> 00:07:01.540 align:middle line:84% and they will invest on behalf of us. 00:07:01.540 --> 00:07:03.970 align:middle line:90% So they are in the middle. 00:07:03.970 --> 00:07:05.980 align:middle line:90% So this individual is all of us. 00:07:05.980 --> 00:07:09.660 align:middle line:84% If we have a preference for sustainable real estate, 00:07:09.660 --> 00:07:13.230 align:middle line:84% we will direct our capital to those investment 00:07:13.230 --> 00:07:18.120 align:middle line:84% firms and all those places that are more sustainable, greener. 00:07:18.120 --> 00:07:22.920 align:middle line:84% So the capital flow from the lower layer, the people's choice 00:07:22.920 --> 00:07:24.900 align:middle line:84% of the physical space, the upper layer, 00:07:24.900 --> 00:07:27.480 align:middle line:84% then they will push into the middle 00:07:27.480 --> 00:07:32.270 align:middle line:84% and push those investors to invest in sustainable 00:07:32.270 --> 00:07:33.840 align:middle line:90% real estate as an asset. 00:07:33.840 --> 00:07:36.740 align:middle line:90% So that's the big picture. 00:07:36.740 --> 00:07:41.660 align:middle line:84% And today we are looking at small guys. 00:07:41.660 --> 00:07:44.660 align:middle line:84% Thursday, we look at a bigger guys. 00:07:44.660 --> 00:07:48.170 align:middle line:84% Today, the small guys means asset level, either 00:07:48.170 --> 00:07:52.580 align:middle line:84% an individual, wealthy family, family business, 00:07:52.580 --> 00:07:55.610 align:middle line:84% or private equity, on the equity side or the mortgage 00:07:55.610 --> 00:07:57.900 align:middle line:90% or the loan, individual loans. 00:07:57.900 --> 00:08:02.090 align:middle line:84% So that's an asset level financing. 00:08:02.090 --> 00:08:04.110 align:middle line:90% So how to connect? 00:08:04.110 --> 00:08:09.800 align:middle line:84% The thing is, how to connect this side, physical side, 00:08:09.800 --> 00:08:15.260 align:middle line:84% before the spring break, and now the capital market side, 00:08:15.260 --> 00:08:17.010 align:middle line:90% the lower end money? 00:08:17.010 --> 00:08:21.140 align:middle line:84% So just want to show you a basic idea of this, 00:08:21.140 --> 00:08:23.940 align:middle line:84% how to connect capital market and space market. 00:08:23.940 --> 00:08:25.610 align:middle line:84% That's basically a four quadrant model. 00:08:25.610 --> 00:08:28.370 align:middle line:84% If Professor Albert Saiz taught this 00:08:28.370 --> 00:08:30.650 align:middle line:84% in real estate economics, a four quadrant model, 00:08:30.650 --> 00:08:32.490 align:middle line:90% we touched a little bit on that. 00:08:32.490 --> 00:08:35.690 align:middle line:84% So that's a connection, that's a unique feature of real estate 00:08:35.690 --> 00:08:39.080 align:middle line:84% is in the middle, capital market and the space market. 00:08:39.080 --> 00:08:41.429 align:middle line:84% So we talk about lot of building. 00:08:41.429 --> 00:08:43.610 align:middle line:90% Cash flow is cash flow. 00:08:43.610 --> 00:08:45.960 align:middle line:84% Then we use the cost of capital as a discount rate 00:08:45.960 --> 00:08:48.250 align:middle line:90% to calculate net present value. 00:08:48.250 --> 00:08:49.360 align:middle line:90% So that's this side. 00:08:49.360 --> 00:08:53.290 align:middle line:90% So this is the investment asset. 00:08:53.290 --> 00:08:55.090 align:middle line:90% You can put money in this. 00:08:55.090 --> 00:08:57.070 align:middle line:84% And then as an investor, the investor 00:08:57.070 --> 00:08:58.870 align:middle line:84% is looking at this building, that building, 00:08:58.870 --> 00:08:59.790 align:middle line:90% different buildings. 00:08:59.790 --> 00:09:01.040 align:middle line:90% So that's different buildings. 00:09:01.040 --> 00:09:05.410 align:middle line:84% They have different features of the risk and return. 00:09:05.410 --> 00:09:08.980 align:middle line:84% And this person, unless you are so rich, 00:09:08.980 --> 00:09:11.440 align:middle line:84% otherwise you need to raise fund. 00:09:11.440 --> 00:09:13.420 align:middle line:84% You need to go to the capital market 00:09:13.420 --> 00:09:17.110 align:middle line:84% to raise fund so that you can invest, right? 00:09:17.110 --> 00:09:20.230 align:middle line:84% When [INAUDIBLE] found, it's like you think about this, 00:09:20.230 --> 00:09:22.270 align:middle line:90% it's a pizza, it's a big pie. 00:09:22.270 --> 00:09:24.910 align:middle line:84% And always you have some your equity, 00:09:24.910 --> 00:09:28.480 align:middle line:84% then you go to the bank to get loan, that's a debt, right? 00:09:28.480 --> 00:09:32.860 align:middle line:84% And equity even, like, you can still have many slices. 00:09:32.860 --> 00:09:35.720 align:middle line:84% And this person, that person, you put together money. 00:09:35.720 --> 00:09:39.100 align:middle line:84% So that's like several investors put together money 00:09:39.100 --> 00:09:41.210 align:middle line:90% and you go to several loans. 00:09:41.210 --> 00:09:43.430 align:middle line:84% So that's the combination of this. 00:09:43.430 --> 00:09:46.240 align:middle line:90% So the idea is the following. 00:09:46.240 --> 00:09:49.100 align:middle line:90% The logic is very clear. 00:09:49.100 --> 00:09:51.380 align:middle line:90% The logic is the following. 00:09:51.380 --> 00:09:53.620 align:middle line:84% The investor, there's a two criterias, 00:09:53.620 --> 00:09:55.010 align:middle line:90% there is two sides of a coin. 00:09:55.010 --> 00:09:58.060 align:middle line:84% It's the same, equivalent, two sides of the coin. 00:09:58.060 --> 00:10:04.180 align:middle line:84% And so you go to this investor as yourself, this investor, 00:10:04.180 --> 00:10:08.980 align:middle line:84% go to the capital market to raise and these seven pieces. 00:10:08.980 --> 00:10:12.190 align:middle line:84% And then you will have a weighted average 00:10:12.190 --> 00:10:15.140 align:middle line:84% of cost of capital, which is seven pieces. 00:10:15.140 --> 00:10:20.240 align:middle line:84% These are two banks and the five equity investors. 00:10:20.240 --> 00:10:23.250 align:middle line:84% And then you have a weighted average. 00:10:23.250 --> 00:10:26.180 align:middle line:84% Some of the banks, they require lower interest rate 00:10:26.180 --> 00:10:29.600 align:middle line:84% because they are debt and they require higher returns 00:10:29.600 --> 00:10:30.750 align:middle line:90% because their equity. 00:10:30.750 --> 00:10:32.180 align:middle line:90% So you have an average. 00:10:32.180 --> 00:10:34.110 align:middle line:90% So that's a capital requirement. 00:10:34.110 --> 00:10:38.420 align:middle line:84% There are seven people behind this pie, and each of them, 00:10:38.420 --> 00:10:40.230 align:middle line:90% they have a required return. 00:10:40.230 --> 00:10:44.030 align:middle line:84% You go to them, this person go to the seven entities 00:10:44.030 --> 00:10:45.180 align:middle line:90% to ask for money. 00:10:45.180 --> 00:10:48.350 align:middle line:84% They say, OK, my required return is how much, how much, how much, 00:10:48.350 --> 00:10:49.020 align:middle line:90% right? 00:10:49.020 --> 00:10:53.270 align:middle line:84% So then you do a weighted average of your pizza. 00:10:53.270 --> 00:10:55.230 align:middle line:84% Then you have the cost of capital. 00:10:55.230 --> 00:11:00.020 align:middle line:84% That's from the seven people's overall requirement. 00:11:00.020 --> 00:11:05.100 align:middle line:84% And then you compare that with this asset investment. 00:11:05.100 --> 00:11:06.830 align:middle line:90% This is the market, right? 00:11:06.830 --> 00:11:07.740 align:middle line:90% This is the market. 00:11:07.740 --> 00:11:09.730 align:middle line:90% This is an objective thing. 00:11:09.730 --> 00:11:12.440 align:middle line:84% This is the San Francisco Office. 00:11:12.440 --> 00:11:14.250 align:middle line:90% We can see it's so high. 00:11:14.250 --> 00:11:18.350 align:middle line:84% But maybe in Dubai or in Middle East, good. 00:11:18.350 --> 00:11:20.670 align:middle line:90% And so like that. 00:11:20.670 --> 00:11:24.230 align:middle line:84% So this is a market demand, demand, supply, all the things, 00:11:24.230 --> 00:11:25.220 align:middle line:90% now you compare. 00:11:25.220 --> 00:11:31.280 align:middle line:84% If the cost of capital is larger than your market, no 00:11:31.280 --> 00:11:35.250 align:middle line:84% go, because you can only make this much of return. 00:11:35.250 --> 00:11:39.020 align:middle line:84% But your seven guys behind you asking for this, 00:11:39.020 --> 00:11:40.850 align:middle line:90% so you cannot afford. 00:11:40.850 --> 00:11:44.190 align:middle line:84% The cost is much higher than what you can make. 00:11:44.190 --> 00:11:45.380 align:middle line:90% So, no go. 00:11:45.380 --> 00:11:48.780 align:middle line:90% And if this is smaller, then go. 00:11:48.780 --> 00:11:49.310 align:middle line:90% Why? 00:11:49.310 --> 00:11:53.030 align:middle line:84% Because you get money from the seven guys at this rate, 00:11:53.030 --> 00:11:55.560 align:middle line:84% and then you can make much higher return. 00:11:55.560 --> 00:11:58.410 align:middle line:84% So you can own your own money, you can make your own money. 00:11:58.410 --> 00:11:59.800 align:middle line:90% So that's on this side. 00:11:59.800 --> 00:12:01.530 align:middle line:90% That's the idea. 00:12:01.530 --> 00:12:03.850 align:middle line:84% Or another way to think about this. 00:12:03.850 --> 00:12:06.610 align:middle line:84% OK, I raise fund from seven guys. 00:12:06.610 --> 00:12:10.150 align:middle line:84% I have a weighted cost of capital. 00:12:10.150 --> 00:12:12.600 align:middle line:84% Then I use this weighted cost of capital 00:12:12.600 --> 00:12:15.190 align:middle line:84% to discount my cash flow of this asset. 00:12:15.190 --> 00:12:16.830 align:middle line:90% Then I get NPV. 00:12:16.830 --> 00:12:19.950 align:middle line:84% Then if I get NPV, NPV is positive, go. 00:12:19.950 --> 00:12:21.470 align:middle line:90% NPV is negative, no go. 00:12:21.470 --> 00:12:23.400 align:middle line:84% So that's the same, two sides of the coin, 00:12:23.400 --> 00:12:29.740 align:middle line:84% as you learned from the basic 101 of the finance. 00:12:29.740 --> 00:12:32.770 align:middle line:84% So that's basically just a weighted average. 00:12:32.770 --> 00:12:36.180 align:middle line:84% So I don't need to talk too much. 00:12:36.180 --> 00:12:38.940 align:middle line:84% OK, now we jump to sustainable finance 00:12:38.940 --> 00:12:45.000 align:middle line:84% and how to plug-in real estate into this thing. 00:12:45.000 --> 00:12:46.780 align:middle line:90% So this is very high level. 00:12:46.780 --> 00:12:49.770 align:middle line:84% This is a very simplified framework, 00:12:49.770 --> 00:12:53.250 align:middle line:84% but I think that's very useful for us 00:12:53.250 --> 00:12:55.950 align:middle line:84% to understand why we are talking about this, 00:12:55.950 --> 00:12:57.780 align:middle line:84% because we are talking about money. 00:12:57.780 --> 00:13:01.140 align:middle line:84% We are talking about now capital flow is not like buildings, 00:13:01.140 --> 00:13:02.280 align:middle line:90% but it's money. 00:13:02.280 --> 00:13:04.080 align:middle line:84% So we need to have a broader will. 00:13:04.080 --> 00:13:07.600 align:middle line:84% We cannot disregard all we can invest about real estate. 00:13:07.600 --> 00:13:08.250 align:middle line:90% Not true. 00:13:08.250 --> 00:13:11.980 align:middle line:84% We have so many other alternatives. 00:13:11.980 --> 00:13:15.220 align:middle line:84% So think about this, now we have a portfolio. 00:13:15.220 --> 00:13:19.530 align:middle line:84% Everyone in the capital market, they have a portfolio. 00:13:19.530 --> 00:13:21.360 align:middle line:90% Now I still simplify. 00:13:21.360 --> 00:13:24.000 align:middle line:84% It's like 1,000 of assets, maybe, on a menu, 00:13:24.000 --> 00:13:25.770 align:middle line:90% but now we only have this. 00:13:25.770 --> 00:13:30.990 align:middle line:84% We have the bond, relatively lower return, 00:13:30.990 --> 00:13:32.920 align:middle line:90% but lower risk, bond. 00:13:32.920 --> 00:13:36.620 align:middle line:84% Then we have stock market, higher return, higher risk. 00:13:36.620 --> 00:13:37.730 align:middle line:90% That's this. 00:13:37.730 --> 00:13:39.640 align:middle line:90% Then we have real estate. 00:13:39.640 --> 00:13:41.440 align:middle line:90% So now think about real estate. 00:13:41.440 --> 00:13:44.890 align:middle line:84% In general, we can say, real estate, simplified. 00:13:44.890 --> 00:13:48.430 align:middle line:84% One is a brown building, the other is a green building, 00:13:48.430 --> 00:13:51.190 align:middle line:84% it's a traditional one, conventional one, 00:13:51.190 --> 00:13:53.900 align:middle line:90% or relatively sustainable one. 00:13:53.900 --> 00:13:59.750 align:middle line:84% So now the idea is, this investor has so much money, 00:13:59.750 --> 00:14:03.430 align:middle line:84% this may be BlackRock, and this may be a insurance company, 00:14:03.430 --> 00:14:07.600 align:middle line:90% or this is just some Ritz. 00:14:07.600 --> 00:14:13.330 align:middle line:84% So this investor has so much money, then he need to sell. 00:14:13.330 --> 00:14:14.050 align:middle line:90% He need to sell. 00:14:14.050 --> 00:14:16.210 align:middle line:84% Well, capital allocation problem. 00:14:16.210 --> 00:14:21.100 align:middle line:84% He has so much money, to put which money on which, 00:14:21.100 --> 00:14:22.190 align:middle line:90% the capital flow. 00:14:22.190 --> 00:14:25.990 align:middle line:84% So that's basically the sustainable finance one 00:14:25.990 --> 00:14:31.930 align:middle line:84% to solve this problem is, the weights, W1, W2, W3, W4, 00:14:31.930 --> 00:14:34.270 align:middle line:90% altogether will be 100%. 00:14:34.270 --> 00:14:37.690 align:middle line:84% 100% of money to put in which, which, which, which. 00:14:37.690 --> 00:14:42.100 align:middle line:84% So that's the portfolio theory that we learn from finance. 00:14:42.100 --> 00:14:45.070 align:middle line:84% So the key thing is, we just differentiate 00:14:45.070 --> 00:14:49.060 align:middle line:84% in the general thing, in the general, when 00:14:49.060 --> 00:14:52.570 align:middle line:84% you read David Geltner's textbook of real estate finance, 00:14:52.570 --> 00:14:56.710 align:middle line:84% you will see three things real estate stock bond 00:14:56.710 --> 00:14:59.180 align:middle line:90% as very three typical baskets. 00:14:59.180 --> 00:15:02.290 align:middle line:84% Now we just differentiate this real estate into two. 00:15:02.290 --> 00:15:03.790 align:middle line:84% One is green and the other is wrong. 00:15:03.790 --> 00:15:05.250 align:middle line:90% And then what will happen? 00:15:05.250 --> 00:15:08.310 align:middle line:90% 00:15:08.310 --> 00:15:11.580 align:middle line:84% So basically the portfolio theory, 00:15:11.580 --> 00:15:15.750 align:middle line:84% suppose let's think about this step by step, right? 00:15:15.750 --> 00:15:17.460 align:middle line:90% Well, there's no green building. 00:15:17.460 --> 00:15:20.280 align:middle line:84% Like, 30 years ago, 40 years ago, at that time, 00:15:20.280 --> 00:15:23.430 align:middle line:84% no green buildings at all in the entire world. 00:15:23.430 --> 00:15:28.950 align:middle line:84% Then we have this space of the risk and return. 00:15:28.950 --> 00:15:31.560 align:middle line:84% We have this space of the risk and return space, 00:15:31.560 --> 00:15:35.250 align:middle line:84% and we put these three assets, at that time, no green building 00:15:35.250 --> 00:15:38.470 align:middle line:84% yet on this risk and return space. 00:15:38.470 --> 00:15:43.590 align:middle line:84% We have this stock market index as SP500, we have a bond thing, 00:15:43.590 --> 00:15:45.600 align:middle line:90% and we have the building. 00:15:45.600 --> 00:15:49.260 align:middle line:84% So overall, the perception is like this. 00:15:49.260 --> 00:15:50.400 align:middle line:90% The order is like this. 00:15:50.400 --> 00:15:52.040 align:middle line:90% Bond is the safest. 00:15:52.040 --> 00:15:54.060 align:middle line:84% So that's a lower return, lower risk. 00:15:54.060 --> 00:15:56.190 align:middle line:90% And the stock is very high risk. 00:15:56.190 --> 00:15:58.470 align:middle line:84% And the building real estate in the middle. 00:15:58.470 --> 00:15:59.910 align:middle line:90% So that's the idea. 00:15:59.910 --> 00:16:03.120 align:middle line:84% So we know from the portfolio theory 00:16:03.120 --> 00:16:06.540 align:middle line:84% that we have this efficient frontier. 00:16:06.540 --> 00:16:14.560 align:middle line:90% So this is a concave curve. 00:16:14.560 --> 00:16:17.710 align:middle line:84% So if you mix these two together, you have this. 00:16:17.710 --> 00:16:19.690 align:middle line:84% If you mix these two together, you have this. 00:16:19.690 --> 00:16:21.620 align:middle line:84% If you mix these two together, you have this. 00:16:21.620 --> 00:16:24.850 align:middle line:84% But if you mix three things together, 00:16:24.850 --> 00:16:27.340 align:middle line:84% you have this called efficient frontier, 00:16:27.340 --> 00:16:32.980 align:middle line:84% is the most, most northwest possibilities, 00:16:32.980 --> 00:16:33.920 align:middle line:90% the most northwest. 00:16:33.920 --> 00:16:36.380 align:middle line:84% Northwest means higher rate and lower risk. 00:16:36.380 --> 00:16:39.620 align:middle line:84% So because always diversification is good. 00:16:39.620 --> 00:16:42.950 align:middle line:84% So it will reduce your risk and increase your return. 00:16:42.950 --> 00:16:46.720 align:middle line:84% So you mix them together in a certain weights, 00:16:46.720 --> 00:16:48.280 align:middle line:90% then you have this. 00:16:48.280 --> 00:16:50.620 align:middle line:90% This is the efficient frontier. 00:16:50.620 --> 00:16:56.020 align:middle line:84% And this concave curve means on each point, 00:16:56.020 --> 00:17:00.550 align:middle line:84% you cannot find another possible combination of the three assets 00:17:00.550 --> 00:17:02.690 align:middle line:90% can go to the northwest. 00:17:02.690 --> 00:17:04.450 align:middle line:90% Northwest means better. 00:17:04.450 --> 00:17:09.069 align:middle line:84% It's not northwest, it means better. 00:17:09.069 --> 00:17:13.910 align:middle line:84% All the points on this efficient frontier, so-called undominated. 00:17:13.910 --> 00:17:17.079 align:middle line:84% So all the inside of this part, dominated. 00:17:17.079 --> 00:17:20.509 align:middle line:84% Always you can find a better one to go to here. 00:17:20.509 --> 00:17:24.970 align:middle line:84% And then for the investors, you have the indifference curve. 00:17:24.970 --> 00:17:28.600 align:middle line:84% Now, this convex thing means the investors 00:17:28.600 --> 00:17:30.290 align:middle line:90% are indifferent on this. 00:17:30.290 --> 00:17:32.990 align:middle line:84% Also higher return and higher risk. 00:17:32.990 --> 00:17:36.380 align:middle line:84% So then you have a tangent point here. 00:17:36.380 --> 00:17:42.560 align:middle line:84% That's the optimal allocation of your portfolio money 00:17:42.560 --> 00:17:46.280 align:middle line:84% into this point, because in this point, you are indifferent, 00:17:46.280 --> 00:17:50.000 align:middle line:84% but then you see what's the best, the best combination 00:17:50.000 --> 00:17:51.090 align:middle line:90% of the three things. 00:17:51.090 --> 00:17:57.560 align:middle line:84% This tangent point here highers the return lowers the risk 00:17:57.560 --> 00:18:00.110 align:middle line:84% given the return, because no other point can 00:18:00.110 --> 00:18:02.840 align:middle line:90% be achieved beyond this. 00:18:02.840 --> 00:18:04.460 align:middle line:90% So that's the idea. 00:18:04.460 --> 00:18:06.230 align:middle line:90% Then you just solve this. 00:18:06.230 --> 00:18:08.960 align:middle line:84% So that's the traditional portfolio theory. 00:18:08.960 --> 00:18:11.270 align:middle line:84% AUDIENCE: In order to get to P1, how 00:18:11.270 --> 00:18:13.520 align:middle line:84% are you supposed to diversify the portfolio? 00:18:13.520 --> 00:18:16.130 align:middle line:84% SIQI ZHENG: So then you use a formula to calculate 00:18:16.130 --> 00:18:18.450 align:middle line:90% W1, these three ways. 00:18:18.450 --> 00:18:20.440 align:middle line:84% Then you combine these three, then you get P1. 00:18:20.440 --> 00:18:23.170 align:middle line:90% 00:18:23.170 --> 00:18:28.930 align:middle line:84% So think about now suddenly, it's not three assets, 00:18:28.930 --> 00:18:32.740 align:middle line:84% but then you plug-in a new asset, a new thing, 00:18:32.740 --> 00:18:36.650 align:middle line:84% which is a green building, which is a green building. 00:18:36.650 --> 00:18:38.750 align:middle line:84% Then think about this green building. 00:18:38.750 --> 00:18:41.830 align:middle line:84% This is totally brand new asset to the Wall Street, for example. 00:18:41.830 --> 00:18:44.260 align:middle line:84% At first, the investor didn't know anything about this. 00:18:44.260 --> 00:18:47.440 align:middle line:84% Then they suddenly have the fourth choice instead of three. 00:18:47.440 --> 00:18:51.130 align:middle line:84% Then the investor are looking at this formula. 00:18:51.130 --> 00:18:52.930 align:middle line:90% You are so familiar with this. 00:18:52.930 --> 00:18:56.500 align:middle line:84% And how this knew how to price that asset, 00:18:56.500 --> 00:18:58.660 align:middle line:90% how to price that asset. 00:18:58.660 --> 00:19:02.920 align:middle line:84% Then we look at this formula, and then think about this. 00:19:02.920 --> 00:19:06.250 align:middle line:84% What parts in this formula will change 00:19:06.250 --> 00:19:12.080 align:middle line:84% if this is a true green, not greenwashing, true green asset? 00:19:12.080 --> 00:19:14.295 align:middle line:90% Please. 00:19:14.295 --> 00:19:15.170 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:19:15.170 --> 00:19:17.090 align:middle line:90% SIQI ZHENG: All right. 00:19:17.090 --> 00:19:19.340 align:middle line:90% And a denominator. 00:19:19.340 --> 00:19:20.100 align:middle line:90% Which one? 00:19:20.100 --> 00:19:20.600 align:middle line:90% This part? 00:19:20.600 --> 00:19:21.267 align:middle line:90% AUDIENCE: Right. 00:19:21.267 --> 00:19:22.700 align:middle line:90% [INAUDIBLE] 00:19:22.700 --> 00:19:25.470 align:middle line:84% SIQI ZHENG: OK, will it go up or go down? 00:19:25.470 --> 00:19:26.910 align:middle line:90% AUDIENCE: It'll go down? 00:19:26.910 --> 00:19:27.967 align:middle line:90% SIQI ZHENG: Why? 00:19:27.967 --> 00:19:29.970 align:middle line:84% AUDIENCE: Process safer, less risk. 00:19:29.970 --> 00:19:31.000 align:middle line:90% SIQI ZHENG: Less risk. 00:19:31.000 --> 00:19:32.820 align:middle line:90% Yes. 00:19:32.820 --> 00:19:33.570 align:middle line:90% [INAUDIBLE] 00:19:33.570 --> 00:19:35.160 align:middle line:90% AUDIENCE: NOI should go up. 00:19:35.160 --> 00:19:36.120 align:middle line:90% SIQI ZHENG: Why? 00:19:36.120 --> 00:19:38.700 align:middle line:84% AUDIENCE: Because if it's a true green building 00:19:38.700 --> 00:19:42.370 align:middle line:84% and there's not information [INAUDIBLE] 00:19:42.370 --> 00:19:44.990 align:middle line:84% our willingness to pay for an extra property. 00:19:44.990 --> 00:19:46.960 align:middle line:84% SIQI ZHENG: Yeah, and other things. 00:19:46.960 --> 00:19:50.090 align:middle line:90% 00:19:50.090 --> 00:19:51.340 align:middle line:90% So, yes, that's true. 00:19:51.340 --> 00:19:53.960 align:middle line:90% So basically, it will say this. 00:19:53.960 --> 00:20:00.540 align:middle line:84% So the entire thing of the system of sustainable finance, 00:20:00.540 --> 00:20:01.820 align:middle line:90% now I'm talking about general. 00:20:01.820 --> 00:20:04.362 align:middle line:84% If you go to Sloan School, they have the sustainable finance, 00:20:04.362 --> 00:20:04.980 align:middle line:90% a small group. 00:20:04.980 --> 00:20:07.790 align:middle line:84% Now we are a part of that group to talk 00:20:07.790 --> 00:20:09.060 align:middle line:90% about sustainable real estate. 00:20:09.060 --> 00:20:11.990 align:middle line:84% But in general, the sustainable finance group, 00:20:11.990 --> 00:20:14.990 align:middle line:84% they are talking about externality. 00:20:14.990 --> 00:20:18.800 align:middle line:84% So they say, traditional finance they don't consider externality, 00:20:18.800 --> 00:20:19.430 align:middle line:90% right? 00:20:19.430 --> 00:20:23.300 align:middle line:84% Now sustainable, we talk about externality. 00:20:23.300 --> 00:20:26.280 align:middle line:84% Now it's positive externality because this is green building. 00:20:26.280 --> 00:20:29.120 align:middle line:84% If it's a brown building, that is a negative externality. 00:20:29.120 --> 00:20:31.670 align:middle line:84% Anyway it's because of the externality, 00:20:31.670 --> 00:20:34.550 align:middle line:84% this pricing equation will change. 00:20:34.550 --> 00:20:36.650 align:middle line:90% How that will change? 00:20:36.650 --> 00:20:41.710 align:middle line:84% So for this green building, just now we already 00:20:41.710 --> 00:20:43.600 align:middle line:90% talked about a lot about this. 00:20:43.600 --> 00:20:50.710 align:middle line:84% So we have regulation, for example, Local Law 97. 00:20:50.710 --> 00:20:54.820 align:middle line:84% All this Europe, that thing, say if you cannot reach like a Level 00:20:54.820 --> 00:20:57.400 align:middle line:84% E of the energy efficiency, you cannot lease out, 00:20:57.400 --> 00:20:59.240 align:middle line:90% this kind of regulation. 00:20:59.240 --> 00:21:02.440 align:middle line:84% So which means compared to our conventional building, 00:21:02.440 --> 00:21:08.350 align:middle line:84% this green building will have a higher cash flow, NOI, right, 00:21:08.350 --> 00:21:10.240 align:middle line:90% because you can lease out. 00:21:10.240 --> 00:21:13.067 align:middle line:84% You can still lease out and you don't need to pay penalty. 00:21:13.067 --> 00:21:14.900 align:middle line:84% Then you compare it to the conventional one. 00:21:14.900 --> 00:21:19.150 align:middle line:84% You have this incremental income. 00:21:19.150 --> 00:21:21.180 align:middle line:90% And then that's a regulation. 00:21:21.180 --> 00:21:23.680 align:middle line:84% That's true no matter whether you care about the environment 00:21:23.680 --> 00:21:24.290 align:middle line:90% or not. 00:21:24.290 --> 00:21:25.060 align:middle line:90% That's very clear. 00:21:25.060 --> 00:21:26.930 align:middle line:84% That's a very important distinction. 00:21:26.930 --> 00:21:30.220 align:middle line:84% The distinction is, no matter whether you care, 00:21:30.220 --> 00:21:32.650 align:middle line:84% whether you internally care about the society 00:21:32.650 --> 00:21:39.720 align:middle line:84% or the global thing, good or not, this is such a harsh thing. 00:21:39.720 --> 00:21:40.710 align:middle line:90% This is real. 00:21:40.710 --> 00:21:42.820 align:middle line:84% So no matter whether you are environmental, 00:21:42.820 --> 00:21:45.920 align:middle line:84% you are climate deniers or climate believers, 00:21:45.920 --> 00:21:49.630 align:middle line:84% no matter what, you will have this objective thing here. 00:21:49.630 --> 00:21:51.940 align:middle line:84% And then another thing is preference. 00:21:51.940 --> 00:21:54.190 align:middle line:90% That one is subjective. 00:21:54.190 --> 00:21:57.460 align:middle line:84% Subjective means that depends on whether you really 00:21:57.460 --> 00:22:00.356 align:middle line:84% prefer whether you have that preference. 00:22:00.356 --> 00:22:04.780 align:middle line:84% So if you are consumer, like tenants, they really prefer, 00:22:04.780 --> 00:22:06.710 align:middle line:84% for example, they really think this 00:22:06.710 --> 00:22:10.610 align:middle line:84% is so important for their value or this is so important 00:22:10.610 --> 00:22:14.180 align:middle line:84% for their employees' health, all those things they prefer. 00:22:14.180 --> 00:22:16.050 align:middle line:84% So they are going to pay higher rent. 00:22:16.050 --> 00:22:19.550 align:middle line:84% So you will have other incremental positive saying. 00:22:19.550 --> 00:22:23.330 align:middle line:84% And the investor, if you really from your heart, 00:22:23.330 --> 00:22:25.640 align:middle line:84% you really think that's so important 00:22:25.640 --> 00:22:28.310 align:middle line:84% and you understand from your investor 00:22:28.310 --> 00:22:30.800 align:middle line:84% fiduciary point of view that's less 00:22:30.800 --> 00:22:35.000 align:middle line:84% risky because think about long term, it's less risky. 00:22:35.000 --> 00:22:37.490 align:middle line:84% Later, the gas price will skyrocket 00:22:37.490 --> 00:22:40.410 align:middle line:84% and then the climate risk will be so high. 00:22:40.410 --> 00:22:44.060 align:middle line:84% So we understand this is such a safe investment. 00:22:44.060 --> 00:22:48.170 align:middle line:84% We are willing to accept a lower cost of capital 00:22:48.170 --> 00:22:49.670 align:middle line:90% or lower expected return. 00:22:49.670 --> 00:22:52.260 align:middle line:84% So that means this is a negative. 00:22:52.260 --> 00:22:57.920 align:middle line:84% So altogether, we will change the formula in a way 00:22:57.920 --> 00:23:01.550 align:middle line:84% that the value, the pricing asset, pricing model value, 00:23:01.550 --> 00:23:02.870 align:middle line:90% will go up. 00:23:02.870 --> 00:23:03.710 align:middle line:90% Positive? 00:23:03.710 --> 00:23:05.240 align:middle line:90% Negative, it'll go up. 00:23:05.240 --> 00:23:08.940 align:middle line:84% So that's the fundamental thing of this sustainable finance. 00:23:08.940 --> 00:23:12.760 align:middle line:84% When they talk about this, they use a stock as an example. 00:23:12.760 --> 00:23:14.510 align:middle line:84% Now we are using a building as an example, 00:23:14.510 --> 00:23:19.140 align:middle line:84% but it is very similar, a stock like Tesla or a stock like that. 00:23:19.140 --> 00:23:20.540 align:middle line:90% So you have this positive thing. 00:23:20.540 --> 00:23:23.600 align:middle line:84% You have this negative thing as a discount rate. 00:23:23.600 --> 00:23:25.350 align:middle line:84% Then you have your stock price go up. 00:23:25.350 --> 00:23:27.490 align:middle line:84% Now we have the building asset price go up. 00:23:27.490 --> 00:23:30.100 align:middle line:90% 00:23:30.100 --> 00:23:33.380 align:middle line:84% Then think about the negative externality, 00:23:33.380 --> 00:23:34.480 align:middle line:90% like a brown building. 00:23:34.480 --> 00:23:35.470 align:middle line:90% You are so dirty. 00:23:35.470 --> 00:23:38.410 align:middle line:84% You make so much carbon emission or something 00:23:38.410 --> 00:23:40.670 align:middle line:90% like you are in a flood plan. 00:23:40.670 --> 00:23:41.920 align:middle line:90% You have the hurricanes. 00:23:41.920 --> 00:23:46.270 align:middle line:84% You have the flooding, like a Boston seaport, 00:23:46.270 --> 00:23:48.050 align:middle line:90% your final product. 00:23:48.050 --> 00:23:53.730 align:middle line:84% So in this way, we have the negative externality. 00:23:53.730 --> 00:23:56.900 align:middle line:84% That's a similar thing, regulation, or penalty, 00:23:56.900 --> 00:23:59.570 align:middle line:84% or it's like you cannot lease out. 00:23:59.570 --> 00:24:06.020 align:middle line:84% You lose your revenue and no one wants to get here, 00:24:06.020 --> 00:24:09.240 align:middle line:84% then no one wants to lease, rent your space. 00:24:09.240 --> 00:24:12.260 align:middle line:84% All the tenants, they are fleeing your building. 00:24:12.260 --> 00:24:15.680 align:middle line:84% And then the investor is so bad as that, so risky, 00:24:15.680 --> 00:24:17.930 align:middle line:90% then have a risk premium. 00:24:17.930 --> 00:24:20.960 align:middle line:84% And then all those things say, go down. 00:24:20.960 --> 00:24:24.350 align:middle line:84% So that's the key thing is how to plug in from the sustainable 00:24:24.350 --> 00:24:29.630 align:middle line:84% finance perspective is how to plug in this externality thing 00:24:29.630 --> 00:24:33.050 align:middle line:90% into this asset pricing model. 00:24:33.050 --> 00:24:33.800 align:middle line:90% Question? 00:24:33.800 --> 00:24:34.425 align:middle line:90% AUDIENCE: Yeah. 00:24:34.425 --> 00:24:44.220 align:middle line:84% So is delta c then a preference, like separate variables? 00:24:44.220 --> 00:24:45.120 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:24:45.120 --> 00:24:47.740 align:middle line:90% SIQI ZHENG: Customer. 00:24:47.740 --> 00:24:49.210 align:middle line:90% C, customer. 00:24:49.210 --> 00:24:49.710 align:middle line:90% Yes. 00:24:49.710 --> 00:24:53.470 align:middle line:84% So preference is two people, two groups of people. 00:24:53.470 --> 00:24:55.030 align:middle line:90% Customers, like tenants. 00:24:55.030 --> 00:24:57.750 align:middle line:90% They don't want to rent. 00:24:57.750 --> 00:25:02.430 align:middle line:84% All the investors, they don't want to buy because it's bad. 00:25:02.430 --> 00:25:03.490 align:middle line:90% Any questions? 00:25:03.490 --> 00:25:06.080 align:middle line:90% 00:25:06.080 --> 00:25:07.540 align:middle line:90% OK, now think about this. 00:25:07.540 --> 00:25:11.150 align:middle line:84% At first, there were only three assets in the space. 00:25:11.150 --> 00:25:18.410 align:middle line:84% Now we have the fourth one with a new asset 00:25:18.410 --> 00:25:21.210 align:middle line:84% that all this portfolio thing is, 00:25:21.210 --> 00:25:23.510 align:middle line:84% there's so many assets, there's this new assets, 00:25:23.510 --> 00:25:25.760 align:middle line:84% and how the capital will like that asset 00:25:25.760 --> 00:25:28.640 align:middle line:90% will flow to that asset. 00:25:28.640 --> 00:25:31.970 align:middle line:84% So then, as you know, the green building 00:25:31.970 --> 00:25:34.840 align:middle line:84% is superior to the brown building. 00:25:34.840 --> 00:25:36.230 align:middle line:90% It has lower risk. 00:25:36.230 --> 00:25:37.880 align:middle line:90% It has higher return. 00:25:37.880 --> 00:25:43.400 align:middle line:84% So it will be to the northwest, northwest, 00:25:43.400 --> 00:25:44.820 align:middle line:90% above the brown building. 00:25:44.820 --> 00:25:47.490 align:middle line:90% The brown building is here. 00:25:47.490 --> 00:25:48.810 align:middle line:90% Pushed to here. 00:25:48.810 --> 00:25:50.820 align:middle line:90% Northwest. 00:25:50.820 --> 00:25:53.230 align:middle line:90% Lower return. 00:25:53.230 --> 00:25:55.020 align:middle line:90% Lower risk, higher return here. 00:25:55.020 --> 00:25:58.180 align:middle line:84% Then because one, two, three, four. 00:25:58.180 --> 00:26:01.770 align:middle line:84% Now four assets, money still that money, then 00:26:01.770 --> 00:26:07.570 align:middle line:84% you will push this efficient frontier towards that direction, 00:26:07.570 --> 00:26:08.850 align:middle line:90% northwest direction. 00:26:08.850 --> 00:26:10.750 align:middle line:90% This is the original one. 00:26:10.750 --> 00:26:11.650 align:middle line:90% Now it's here. 00:26:11.650 --> 00:26:14.850 align:middle line:84% Then of course, the investors will choose here 00:26:14.850 --> 00:26:16.650 align:middle line:84% and that will be combination, then 00:26:16.650 --> 00:26:19.020 align:middle line:84% you'll calculate the combination. 00:26:19.020 --> 00:26:22.890 align:middle line:84% Then this green building will absorb capital, 00:26:22.890 --> 00:26:26.100 align:middle line:84% will absorb capital because it's a superior asset, 00:26:26.100 --> 00:26:30.240 align:middle line:84% absorb capital, which means money flow into that. 00:26:30.240 --> 00:26:34.440 align:middle line:84% So that's basically this, we call this brown building 00:26:34.440 --> 00:26:38.130 align:middle line:84% asset will be dominated by the green building because bad, 00:26:38.130 --> 00:26:39.900 align:middle line:90% worse. 00:26:39.900 --> 00:26:42.750 align:middle line:84% But this is not the end of the story. 00:26:42.750 --> 00:26:48.210 align:middle line:84% This is like we are talking about the frontrunner, 00:26:48.210 --> 00:26:51.480 align:middle line:84% means the first, the first wave of the investors, 00:26:51.480 --> 00:26:54.510 align:middle line:84% the first investors who identify this good. 00:26:54.510 --> 00:26:55.890 align:middle line:90% It's a good asset. 00:26:55.890 --> 00:26:59.970 align:middle line:84% And then the initial several first wave of investors 00:26:59.970 --> 00:27:01.710 align:middle line:84% running into this green building asset 00:27:01.710 --> 00:27:04.500 align:middle line:90% and they allocate the capital. 00:27:04.500 --> 00:27:05.160 align:middle line:90% Julio. 00:27:05.160 --> 00:27:06.990 align:middle line:84% AUDIENCE: Wouldn't you have a higher return 00:27:06.990 --> 00:27:10.620 align:middle line:84% on the brown building because you increased the hurdle rate 00:27:10.620 --> 00:27:12.700 align:middle line:90% and decreased the value? 00:27:12.700 --> 00:27:16.080 align:middle line:84% So the investment in the end would yield a higher return, 00:27:16.080 --> 00:27:17.392 align:middle line:90% right? 00:27:17.392 --> 00:27:19.600 align:middle line:84% SIQI ZHENG: No, you cannot just increase by yourself. 00:27:19.600 --> 00:27:21.400 align:middle line:84% You need to raise fund from the market. 00:27:21.400 --> 00:27:25.018 align:middle line:84% So that's an equilibrium rate of return as your required return. 00:27:25.018 --> 00:27:25.810 align:middle line:90% AUDIENCE: No, yeah. 00:27:25.810 --> 00:27:30.850 align:middle line:84% But on the previous slide, we were 00:27:30.850 --> 00:27:34.300 align:middle line:84% playing with the NOI and the [INAUDIBLE]. 00:27:34.300 --> 00:27:36.550 align:middle line:84% We said the hurdle rate for the brown buildings, 00:27:36.550 --> 00:27:37.930 align:middle line:90% which was higher, right? 00:27:37.930 --> 00:27:38.650 align:middle line:90% SIQI ZHENG: Yes. 00:27:38.650 --> 00:27:40.570 align:middle line:84% So that means higher risk, right? 00:27:40.570 --> 00:27:42.220 align:middle line:84% AUDIENCE: They added penalties as well. 00:27:42.220 --> 00:27:43.595 align:middle line:84% AUDIENCE: But higher return, too, 00:27:43.595 --> 00:27:45.130 align:middle line:84% because you're decreasing the value. 00:27:45.130 --> 00:27:47.860 align:middle line:84% So ultimately, you're [INAUDIBLE] 00:27:47.860 --> 00:27:50.200 align:middle line:84% SIQI ZHENG: No, if you think your asset holder, 00:27:50.200 --> 00:27:52.390 align:middle line:84% you are holding this and the value is going down, 00:27:52.390 --> 00:27:54.880 align:middle line:84% and you already bought that, and later the value goes down. 00:27:54.880 --> 00:27:56.380 align:middle line:84% AUDIENCE: But for the next investor, 00:27:56.380 --> 00:27:58.960 align:middle line:84% it would be higher return on investment. 00:27:58.960 --> 00:28:01.690 align:middle line:84% SIQI ZHENG: If you can do an arbitrage, right? 00:28:01.690 --> 00:28:05.303 align:middle line:84% No others want to pay that higher money to you. 00:28:05.303 --> 00:28:08.480 align:middle line:90% AUDIENCE: All right. 00:28:08.480 --> 00:28:10.630 align:middle line:84% SIQI ZHENG: So now this is the first 00:28:10.630 --> 00:28:13.580 align:middle line:84% of several we call the frontrunners who 00:28:13.580 --> 00:28:18.470 align:middle line:84% can make this actual return because they identify, 00:28:18.470 --> 00:28:21.080 align:middle line:90% they put the money into that. 00:28:21.080 --> 00:28:24.410 align:middle line:84% And then if there's so many new investors, 00:28:24.410 --> 00:28:26.180 align:middle line:84% all the investors just found out. 00:28:26.180 --> 00:28:27.950 align:middle line:90% It's no longer very new. 00:28:27.950 --> 00:28:30.170 align:middle line:84% And increased demand, all the capital 00:28:30.170 --> 00:28:31.970 align:middle line:84% want to flow into the green building, 00:28:31.970 --> 00:28:36.140 align:middle line:84% they will push down the equilibrium expected return. 00:28:36.140 --> 00:28:40.070 align:middle line:84% So then the frontrunner will get some actual return 00:28:40.070 --> 00:28:43.850 align:middle line:84% for the first several information advantages 00:28:43.850 --> 00:28:45.120 align:middle line:90% and things like that. 00:28:45.120 --> 00:28:48.620 align:middle line:84% And then if later all the information is so transparent, 00:28:48.620 --> 00:28:51.620 align:middle line:84% so then you will go back a little bit, 00:28:51.620 --> 00:28:54.000 align:middle line:84% but not to go to the brown building point. 00:28:54.000 --> 00:28:55.050 align:middle line:90% It's still here. 00:28:55.050 --> 00:28:56.540 align:middle line:84% It's better still building better, 00:28:56.540 --> 00:29:00.320 align:middle line:84% but the market equilibrium will have a lower return, a lower 00:29:00.320 --> 00:29:01.250 align:middle line:90% risk. 00:29:01.250 --> 00:29:04.590 align:middle line:84% So that will go back a little bit. 00:29:04.590 --> 00:29:06.740 align:middle line:84% So that is market dynamics, right? 00:29:06.740 --> 00:29:07.450 align:middle line:90% I don't know. 00:29:07.450 --> 00:29:09.660 align:middle line:84% For each market, it's not very clear 00:29:09.660 --> 00:29:11.770 align:middle line:84% now which market is in equilibrium. 00:29:11.770 --> 00:29:13.620 align:middle line:84% But overall, you are thinking like this. 00:29:13.620 --> 00:29:19.530 align:middle line:84% When some new asset first emerge, good, and push up, 00:29:19.530 --> 00:29:26.650 align:middle line:84% push to the northwest of this frontier. 00:29:26.650 --> 00:29:30.330 align:middle line:84% And then if too many capital, too many investors, 00:29:30.330 --> 00:29:33.330 align:middle line:84% and too much capital just flow into that asset, 00:29:33.330 --> 00:29:36.300 align:middle line:84% then you push back a little bit, but it's still better. 00:29:36.300 --> 00:29:41.370 align:middle line:84% So that's the overall idea how to plug in sustainable real 00:29:41.370 --> 00:29:43.270 align:middle line:90% estate into this diagram. 00:29:43.270 --> 00:29:45.810 align:middle line:84% So you are thinking, when you invest in, 00:29:45.810 --> 00:29:50.070 align:middle line:84% where you are in this diagram and how you allocate 00:29:50.070 --> 00:29:54.120 align:middle line:90% your capital into those assets? 00:29:54.120 --> 00:29:59.730 align:middle line:84% So when you locate, we have this 2 by 2 matrix as vehicles. 00:29:59.730 --> 00:30:03.300 align:middle line:84% So that's basically private and the public. 00:30:03.300 --> 00:30:05.490 align:middle line:84% I think you already know this structure. 00:30:05.490 --> 00:30:08.380 align:middle line:90% Equity side and that side. 00:30:08.380 --> 00:30:10.440 align:middle line:84% That side is basically the loans from the banks 00:30:10.440 --> 00:30:12.270 align:middle line:90% and the securities. 00:30:12.270 --> 00:30:15.180 align:middle line:84% And the equity market will be your own money 00:30:15.180 --> 00:30:18.060 align:middle line:84% and without a guarantee of the return. 00:30:18.060 --> 00:30:21.570 align:middle line:84% And then on both sides, you have the public. 00:30:21.570 --> 00:30:26.950 align:middle line:84% Public go to public, means stock market or the bond market. 00:30:26.950 --> 00:30:28.690 align:middle line:84% AUDIENCE: Oh, if the green building 00:30:28.690 --> 00:30:33.700 align:middle line:84% is better to brown building, why is that manager put 00:30:33.700 --> 00:30:35.913 align:middle line:90% the brown building in there? 00:30:35.913 --> 00:30:37.330 align:middle line:84% SIQI ZHENG: Information asymmetry, 00:30:37.330 --> 00:30:41.290 align:middle line:84% and all these market frictions, and also not enough supply 00:30:41.290 --> 00:30:44.770 align:middle line:90% of those good, better assets. 00:30:44.770 --> 00:30:46.540 align:middle line:90% It's not an unlimited supply. 00:30:46.540 --> 00:30:48.760 align:middle line:84% If you have limited supply of the better assets, 00:30:48.760 --> 00:30:52.480 align:middle line:84% then money all push into that, then the price will go up, 00:30:52.480 --> 00:30:54.070 align:middle line:90% then the return will go down. 00:30:54.070 --> 00:30:55.880 align:middle line:90% That will become an equilibrium. 00:30:55.880 --> 00:30:58.480 align:middle line:84% AUDIENCE: I mean, if the asset manager 00:30:58.480 --> 00:31:02.580 align:middle line:84% can put the total [INAUDIBLE] building in their portfolio, 00:31:02.580 --> 00:31:03.948 align:middle line:90% but no. 00:31:03.948 --> 00:31:05.490 align:middle line:84% SIQI ZHENG: Because all the investors 00:31:05.490 --> 00:31:07.020 align:middle line:90% are thinking the same way. 00:31:07.020 --> 00:31:09.390 align:middle line:84% So they are competing for limited supply 00:31:09.390 --> 00:31:13.280 align:middle line:90% of green buildings. 00:31:13.280 --> 00:31:16.500 align:middle line:84% So now we are focusing this class, 00:31:16.500 --> 00:31:18.200 align:middle line:84% we are focusing on private sector, 00:31:18.200 --> 00:31:20.490 align:middle line:90% not to go to the public sector. 00:31:20.490 --> 00:31:25.070 align:middle line:84% Public sector will be the stock market and the bond market. 00:31:25.070 --> 00:31:28.500 align:middle line:90% So now going to do that part. 00:31:28.500 --> 00:31:35.500 align:middle line:84% So basically, this cell, this cell, that, but mark it here. 00:31:35.500 --> 00:31:38.180 align:middle line:90% So in this cell, two things. 00:31:38.180 --> 00:31:41.620 align:middle line:84% One is brown thing, the other is green thing. 00:31:41.620 --> 00:31:45.460 align:middle line:84% So think about this, I'm talking about vehicles, remember? 00:31:45.460 --> 00:31:47.770 align:middle line:90% The space of the risk return. 00:31:47.770 --> 00:31:51.880 align:middle line:84% And what are the assets you can put your money on? 00:31:51.880 --> 00:31:56.710 align:middle line:84% And then this one is climate risk, bad. 00:31:56.710 --> 00:31:59.180 align:middle line:90% Default risk go up and so bad. 00:31:59.180 --> 00:32:02.180 align:middle line:84% And then the flow, the capital is leaving. 00:32:02.180 --> 00:32:04.420 align:middle line:90% The capital is leaving. 00:32:04.420 --> 00:32:06.040 align:middle line:90% This green building, good. 00:32:06.040 --> 00:32:08.310 align:middle line:90% The capital is moving in. 00:32:08.310 --> 00:32:13.060 align:middle line:84% So that's the two assets, two opposite things. 00:32:13.060 --> 00:32:17.050 align:middle line:84% So the mortgage actually, and we already 00:32:17.050 --> 00:32:23.750 align:middle line:84% talked a lot about this in the climate third session, remember? 00:32:23.750 --> 00:32:25.900 align:middle line:84% So I will just quickly go through. 00:32:25.900 --> 00:32:29.980 align:middle line:84% So the key thing is default risk. 00:32:29.980 --> 00:32:32.890 align:middle line:84% I want you to understand the rationale, the default risk 00:32:32.890 --> 00:32:35.080 align:middle line:90% thing. 00:32:35.080 --> 00:32:38.620 align:middle line:84% So basically what I'm talking about, for those areas 00:32:38.620 --> 00:32:42.350 align:middle line:84% with higher climate risk, you name, what kind of risk? 00:32:42.350 --> 00:32:47.020 align:middle line:84% Flooding, hurricane, wildfire, all the things. 00:32:47.020 --> 00:32:49.970 align:middle line:84% And the key thing is the mortgage market, 00:32:49.970 --> 00:32:53.060 align:middle line:84% when you price a mortgage, very important thing is the risk. 00:32:53.060 --> 00:32:55.640 align:middle line:84% There's a major three risk not opposed 00:32:55.640 --> 00:32:59.130 align:middle line:84% to two because those two are relevant. 00:32:59.130 --> 00:33:01.508 align:middle line:84% Do you know what's the third one, the risk? 00:33:01.508 --> 00:33:03.140 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:33:03.140 --> 00:33:05.540 align:middle line:90% SIQI ZHENG: No. 00:33:05.540 --> 00:33:07.930 align:middle line:90% Prepayment risk, right? 00:33:07.930 --> 00:33:12.060 align:middle line:84% So I'm not sure whether this was taught in the finance class. 00:33:12.060 --> 00:33:15.330 align:middle line:84% So we have a delinquency, basically temporary. 00:33:15.330 --> 00:33:20.720 align:middle line:84% You cannot pay your monthly payment or finally, you default. 00:33:20.720 --> 00:33:24.410 align:middle line:84% Or you prepay, if you prepay, it's also a risk for the bank 00:33:24.410 --> 00:33:27.560 align:middle line:84% because you prepay, then bank has your money and no other ways 00:33:27.560 --> 00:33:28.940 align:middle line:90% to invest. 00:33:28.940 --> 00:33:31.970 align:middle line:84% But for this climate risk, basically delinquency 00:33:31.970 --> 00:33:36.170 align:middle line:84% and the default, temporary or permanent, 00:33:36.170 --> 00:33:37.860 align:middle line:84% you just cannot pay your default. 00:33:37.860 --> 00:33:40.640 align:middle line:84% Think about this value of a property. 00:33:40.640 --> 00:33:43.760 align:middle line:84% If you borrow money from the bank, 00:33:43.760 --> 00:33:45.820 align:middle line:90% which is half million money. 00:33:45.820 --> 00:33:48.770 align:middle line:90% 00:33:48.770 --> 00:33:55.150 align:middle line:84% And then because of the climate risk, that area is declining. 00:33:55.150 --> 00:33:58.510 align:middle line:84% It's not a rich town like Miami, but it's a poor town. 00:33:58.510 --> 00:34:01.660 align:middle line:84% And the cities cannot do anything to help. 00:34:01.660 --> 00:34:05.240 align:middle line:84% So people are leaving, jobs are leaving and declining. 00:34:05.240 --> 00:34:07.120 align:middle line:90% No public service, it's bad. 00:34:07.120 --> 00:34:09.770 align:middle line:84% Then the lower demand of real estate. 00:34:09.770 --> 00:34:12.889 align:middle line:84% Real estate price will go down, for sure. 00:34:12.889 --> 00:34:14.840 align:middle line:84% So basically the conceptual level thing 00:34:14.840 --> 00:34:21.800 align:middle line:84% is the value of the property at first is higher than 0.5, 00:34:21.800 --> 00:34:22.540 align:middle line:90% half million. 00:34:22.540 --> 00:34:25.340 align:middle line:84% That's why, for example, your property value at first 00:34:25.340 --> 00:34:26.889 align:middle line:90% is 0.8 million. 00:34:26.889 --> 00:34:29.400 align:middle line:84% Then you borrow 0.5 million from the bank. 00:34:29.400 --> 00:34:33.080 align:middle line:84% And then suddenly, because of all the things going on, 00:34:33.080 --> 00:34:37.250 align:middle line:84% your value is pushed down to this low, even lower 00:34:37.250 --> 00:34:38.520 align:middle line:90% than your loan value. 00:34:38.520 --> 00:34:40.370 align:middle line:84% Then from a rational perspective, 00:34:40.370 --> 00:34:41.420 align:middle line:90% not because you are bad. 00:34:41.420 --> 00:34:44.030 align:middle line:90% 00:34:44.030 --> 00:34:45.960 align:middle line:90% It's not moral perspective. 00:34:45.960 --> 00:34:47.730 align:middle line:90% It's a rational perspective. 00:34:47.730 --> 00:34:52.580 align:middle line:84% If your value of your house is lower than the loan, 00:34:52.580 --> 00:34:54.050 align:middle line:90% what's the rational choice? 00:34:54.050 --> 00:34:56.270 align:middle line:90% Is to default, right? 00:34:56.270 --> 00:34:58.430 align:middle line:84% You default, you give the house to the bank 00:34:58.430 --> 00:35:00.920 align:middle line:84% because if you still keep paying back, 00:35:00.920 --> 00:35:03.480 align:middle line:84% you need to pay back one half million. 00:35:03.480 --> 00:35:06.647 align:middle line:84% But if you give the house to the bank, say I default, 00:35:06.647 --> 00:35:07.980 align:middle line:90% then you don't need to pay back. 00:35:07.980 --> 00:35:13.330 align:middle line:84% And the bank has your house, but it's only 0.3 million value. 00:35:13.330 --> 00:35:16.320 align:middle line:84% The bank has to resell your house, get 0.3 million. 00:35:16.320 --> 00:35:18.510 align:middle line:90% That's a big damage to the bank. 00:35:18.510 --> 00:35:22.470 align:middle line:84% So the bank, of course, the banks, they don't like default. 00:35:22.470 --> 00:35:23.540 align:middle line:90% It's too bad. 00:35:23.540 --> 00:35:25.160 align:middle line:84% Especially when you default, when 00:35:25.160 --> 00:35:29.880 align:middle line:84% the value is so low in the flood zone and flooded. 00:35:29.880 --> 00:35:34.030 align:middle line:84% So there are many, many new research in this area. 00:35:34.030 --> 00:35:37.500 align:middle line:84% Last December, I hosted the climate real estate symposium 00:35:37.500 --> 00:35:40.480 align:middle line:84% here, and some scholars came and they present this. 00:35:40.480 --> 00:35:43.360 align:middle line:84% Nancy Wallace is a professor at UC Berkeley. 00:35:43.360 --> 00:35:47.040 align:middle line:84% They have very good, strong group to study this. 00:35:47.040 --> 00:35:48.870 align:middle line:84% And then they studied the wildfires 00:35:48.870 --> 00:35:51.000 align:middle line:90% because they are in California. 00:35:51.000 --> 00:35:54.900 align:middle line:84% They studied a wildfire and they compared the performance 00:35:54.900 --> 00:35:58.470 align:middle line:84% in the fire zone, not a flood zone, but a fire zone, 00:35:58.470 --> 00:36:00.790 align:middle line:90% and no fire zone. 00:36:00.790 --> 00:36:02.940 align:middle line:84% Then you see the default really increase 00:36:02.940 --> 00:36:05.170 align:middle line:90% by 1% in the treatment group. 00:36:05.170 --> 00:36:07.160 align:middle line:90% So that's basically very clear. 00:36:07.160 --> 00:36:11.190 align:middle line:90% 00:36:11.190 --> 00:36:13.830 align:middle line:90% This one is a wildfire. 00:36:13.830 --> 00:36:16.690 align:middle line:84% You just decline your property value. 00:36:16.690 --> 00:36:22.350 align:middle line:84% Then all the people, 1% of the people, they chose to default. 00:36:22.350 --> 00:36:25.710 align:middle line:84% So then we talk about Fannie Mae and Freddie Mac. 00:36:25.710 --> 00:36:29.920 align:middle line:84% And Ed Golding from Sloan last time 00:36:29.920 --> 00:36:33.360 align:middle line:84% gave a very brief, quick overview of their role. 00:36:33.360 --> 00:36:37.840 align:middle line:84% So you understand if the mortgages all went default, 00:36:37.840 --> 00:36:42.580 align:middle line:84% went bad, then this bank, this mortgage 00:36:42.580 --> 00:36:46.630 align:middle line:84% based securities will also lose value because all default, 00:36:46.630 --> 00:36:50.650 align:middle line:84% then they will be in big trouble. 00:36:50.650 --> 00:36:55.540 align:middle line:84% So that's why now we have the big problem about all the things 00:36:55.540 --> 00:36:58.970 align:middle line:84% the mortgage and all the flood insurance, 00:36:58.970 --> 00:37:01.700 align:middle line:84% they are all backed by the federal government. 00:37:01.700 --> 00:37:03.940 align:middle line:90% That's all subsidized. 00:37:03.940 --> 00:37:07.900 align:middle line:84% So especially for middle and low-income people's houses, 00:37:07.900 --> 00:37:10.600 align:middle line:84% they got subsidized loan from the government. 00:37:10.600 --> 00:37:13.900 align:middle line:84% And then because they are marginalized, 00:37:13.900 --> 00:37:16.000 align:middle line:84% they couldn't get the good location. 00:37:16.000 --> 00:37:18.530 align:middle line:84% They live in relatively risky location. 00:37:18.530 --> 00:37:20.570 align:middle line:90% So they have higher flood risk. 00:37:20.570 --> 00:37:24.280 align:middle line:84% And then they have the national flood insurance program, also 00:37:24.280 --> 00:37:26.230 align:middle line:90% subsidized by the government. 00:37:26.230 --> 00:37:27.890 align:middle line:90% And they have higher risk. 00:37:27.890 --> 00:37:32.440 align:middle line:84% They need to insure their house, but this national program also 00:37:32.440 --> 00:37:34.820 align:middle line:90% no money, run out of money. 00:37:34.820 --> 00:37:37.360 align:middle line:84% And they had to go to Congress to get more money, 00:37:37.360 --> 00:37:39.110 align:middle line:84% but they couldn't get enough money. 00:37:39.110 --> 00:37:43.210 align:middle line:84% This will result in a lot of uninsured properties 00:37:43.210 --> 00:37:45.100 align:middle line:90% in the flood zones. 00:37:45.100 --> 00:37:50.510 align:middle line:84% So double subsidized, one by the government, by the mortgage, 00:37:50.510 --> 00:37:54.740 align:middle line:84% the other is subsidized by the insurance national program. 00:37:54.740 --> 00:37:57.160 align:middle line:90% So that's all the problem. 00:37:57.160 --> 00:38:00.340 align:middle line:84% Then we understand the counterpart of this 00:38:00.340 --> 00:38:09.370 align:middle line:84% is, they still don't know how to assess this climate 00:38:09.370 --> 00:38:11.170 align:middle line:90% risk in the mortgages. 00:38:11.170 --> 00:38:14.620 align:middle line:84% That's why our new project is now working with Fannie Mae 00:38:14.620 --> 00:38:18.930 align:middle line:84% to do this appraisal thing, to say, OK, the traditional model, 00:38:18.930 --> 00:38:19.850 align:middle line:90% not enough. 00:38:19.850 --> 00:38:21.960 align:middle line:84% We need to incorporate climate risk 00:38:21.960 --> 00:38:23.880 align:middle line:84% into the traditional appraisal model 00:38:23.880 --> 00:38:27.630 align:middle line:84% to assess the impact of the climate risk into the properties 00:38:27.630 --> 00:38:31.230 align:middle line:84% so that when you do this later for your new mortgage, 00:38:31.230 --> 00:38:34.390 align:middle line:84% you'll know how to price climate risk. 00:38:34.390 --> 00:38:37.380 align:middle line:84% So after we do the research, we'll 00:38:37.380 --> 00:38:43.480 align:middle line:84% go there to train the appraisers so that they understand. 00:38:43.480 --> 00:38:47.560 align:middle line:84% And then we know there is a counter-argument 00:38:47.560 --> 00:38:50.410 align:middle line:84% that say, OK, we understand this is science, 00:38:50.410 --> 00:38:54.160 align:middle line:84% but we also need to understand this social side, 00:38:54.160 --> 00:38:58.540 align:middle line:84% because if the Fannie Mae and Freddie Mac, they really price 00:38:58.540 --> 00:39:01.360 align:middle line:84% very, very accurately the climate 00:39:01.360 --> 00:39:08.620 align:middle line:84% risk into when they make the loans, and then the poor people, 00:39:08.620 --> 00:39:14.290 align:middle line:84% they will suffer because they need to live in those places. 00:39:14.290 --> 00:39:17.290 align:middle line:84% And they are poor, they cannot afford then at first 00:39:17.290 --> 00:39:17.990 align:middle line:90% the subsidized. 00:39:17.990 --> 00:39:19.907 align:middle line:84% Now you are saying because they are high risk, 00:39:19.907 --> 00:39:22.190 align:middle line:84% I'm going to charge you a higher interest rate. 00:39:22.190 --> 00:39:24.410 align:middle line:84% So that will have a burden on them. 00:39:24.410 --> 00:39:26.680 align:middle line:90% So I feel it's a dilemma. 00:39:26.680 --> 00:39:33.220 align:middle line:84% And that's the equity, social justice side of this dilemma. 00:39:33.220 --> 00:39:36.880 align:middle line:84% And we also know from Ed's talks that it's not just 00:39:36.880 --> 00:39:39.380 align:middle line:90% a social justice problem. 00:39:39.380 --> 00:39:42.220 align:middle line:84% It's also a politics problem because it's 00:39:42.220 --> 00:39:47.080 align:middle line:84% very hard to say in the Congress that in some areas of the city, 00:39:47.080 --> 00:39:49.390 align:middle line:84% in some areas of the country, you 00:39:49.390 --> 00:39:52.540 align:middle line:84% have different interest rate for mortgages. 00:39:52.540 --> 00:39:53.830 align:middle line:90% It's very hard. 00:39:53.830 --> 00:39:56.530 align:middle line:84% You will face a lot of pushback on this. 00:39:56.530 --> 00:40:00.040 align:middle line:84% But my other point is, as the scholars, 00:40:00.040 --> 00:40:05.560 align:middle line:84% as MIT, we first establish a science and to see these models 00:40:05.560 --> 00:40:09.740 align:middle line:84% how to work and how to really do the science in your real work, 00:40:09.740 --> 00:40:10.930 align:middle line:90% that's a long way to go. 00:40:10.930 --> 00:40:13.700 align:middle line:90% 00:40:13.700 --> 00:40:16.190 align:middle line:84% Finally, I want to use a few minutes to talk 00:40:16.190 --> 00:40:18.150 align:middle line:90% about the positive side. 00:40:18.150 --> 00:40:25.280 align:middle line:84% Remember, we have bad asset, inferior asset 00:40:25.280 --> 00:40:28.520 align:middle line:90% which is some higher risk. 00:40:28.520 --> 00:40:34.370 align:middle line:84% And then we have a good asset, a superior asset 00:40:34.370 --> 00:40:36.110 align:middle line:90% is a sustainable building. 00:40:36.110 --> 00:40:39.000 align:middle line:84% So here is a very clear rationale is the following. 00:40:39.000 --> 00:40:41.480 align:middle line:84% I just want you to understand the rationale. 00:40:41.480 --> 00:40:44.030 align:middle line:84% The rationale is green financing. 00:40:44.030 --> 00:40:46.650 align:middle line:84% Now it's many banks, they are doing so. 00:40:46.650 --> 00:40:49.850 align:middle line:84% They are doing this is the common business right now 00:40:49.850 --> 00:40:54.650 align:middle line:84% is that if you the conventional mortgage, 00:40:54.650 --> 00:40:57.710 align:middle line:84% and then they have the energy efficient mortgage, 00:40:57.710 --> 00:40:59.360 align:middle line:90% called green mortgage. 00:40:59.360 --> 00:41:03.800 align:middle line:84% So if you go to a bank, you show some evidence, 00:41:03.800 --> 00:41:06.440 align:middle line:84% show your house is more energy efficient, 00:41:06.440 --> 00:41:09.180 align:middle line:84% they are willing to reduce their interest rate. 00:41:09.180 --> 00:41:12.890 align:middle line:84% They say, OK, come, I will lend a mortgage to you 00:41:12.890 --> 00:41:14.880 align:middle line:84% and I will charge lower interest rate. 00:41:14.880 --> 00:41:17.150 align:middle line:84% So that's the current business, common business 00:41:17.150 --> 00:41:19.940 align:middle line:90% is called green mortgage. 00:41:19.940 --> 00:41:22.220 align:middle line:90% Give you an example. 00:41:22.220 --> 00:41:24.770 align:middle line:84% I think it's a very tangible example. 00:41:24.770 --> 00:41:29.150 align:middle line:84% For example, a household, a family in the US 00:41:29.150 --> 00:41:30.870 align:middle line:90% go to a bank to get a mortgage. 00:41:30.870 --> 00:41:34.870 align:middle line:84% Then they found they have two options. 00:41:34.870 --> 00:41:38.790 align:middle line:84% So this household, this family, has a total monthly income, 00:41:38.790 --> 00:41:41.400 align:middle line:90% like $5,000. 00:41:41.400 --> 00:41:45.600 align:middle line:84% $5,000, that's this family, typical family. 00:41:45.600 --> 00:41:50.580 align:middle line:84% Then if you finance, if your house is regular, 00:41:50.580 --> 00:41:55.710 align:middle line:84% then the bank says, OK, the maximum allowable monthly 00:41:55.710 --> 00:41:58.360 align:middle line:90% payment is 29%. 00:41:58.360 --> 00:42:01.200 align:middle line:84% I think we got this data from Massachusetts. 00:42:01.200 --> 00:42:07.200 align:middle line:84% So the bank says, we can only lend you this maximum mortgage 00:42:07.200 --> 00:42:12.070 align:middle line:84% as 207K for you to buy the house. 00:42:12.070 --> 00:42:16.710 align:middle line:84% And if you show them your HERS report, 00:42:16.710 --> 00:42:20.190 align:middle line:84% a Home Energy Rating System, HERS report, 00:42:20.190 --> 00:42:23.190 align:middle line:84% say my house is energy efficient. 00:42:23.190 --> 00:42:24.990 align:middle line:90% So you show them. 00:42:24.990 --> 00:42:27.370 align:middle line:84% And then the bank says, OK, good. 00:42:27.370 --> 00:42:32.460 align:middle line:84% Now I'm willing to lend you 33% of your income. 00:42:32.460 --> 00:42:33.670 align:middle line:90% That's this money. 00:42:33.670 --> 00:42:37.260 align:middle line:90% Then you can get a loan of 235K. 00:42:37.260 --> 00:42:38.970 align:middle line:90% So there's two options. 00:42:38.970 --> 00:42:42.100 align:middle line:84% So you can say that that's a bank's choice. 00:42:42.100 --> 00:42:44.320 align:middle line:90% The bank says, OK, no, good. 00:42:44.320 --> 00:42:47.040 align:middle line:84% So since you give me, you show me 00:42:47.040 --> 00:42:49.510 align:middle line:84% you have an energy efficient house, 00:42:49.510 --> 00:42:52.920 align:middle line:84% we are willing to lend you a higher 00:42:52.920 --> 00:42:57.240 align:middle line:84% loan to value ratio, basically a higher loan, like this. 00:42:57.240 --> 00:43:01.060 align:middle line:84% Then this household, if you choose this option, 00:43:01.060 --> 00:43:05.900 align:middle line:84% is able to buy a bigger house, a more expensive house. 00:43:05.900 --> 00:43:06.630 align:middle line:90% A bigger house. 00:43:06.630 --> 00:43:09.070 align:middle line:90% A house in a better location. 00:43:09.070 --> 00:43:11.260 align:middle line:84% So now I'm going to pause a little bit 00:43:11.260 --> 00:43:14.140 align:middle line:90% to ask you, why this bank? 00:43:14.140 --> 00:43:16.030 align:middle line:84% This bank stupid or the bank is smart? 00:43:16.030 --> 00:43:17.750 align:middle line:90% I'll give you these two options. 00:43:17.750 --> 00:43:21.070 align:middle line:84% Why for this green option, the bank 00:43:21.070 --> 00:43:24.530 align:middle line:84% is willing to lend you more money, like in this way, 00:43:24.530 --> 00:43:26.950 align:middle line:84% the same household with the same income? 00:43:26.950 --> 00:43:30.080 align:middle line:90% Any thoughts on this? 00:43:30.080 --> 00:43:30.870 align:middle line:90% Yeah. 00:43:30.870 --> 00:43:33.590 align:middle line:84% AUDIENCE: Is it backed by a lot of searching. 00:43:33.590 --> 00:43:35.070 align:middle line:90% Like a lot of banks [INAUDIBLE]. 00:43:35.070 --> 00:43:39.300 align:middle line:90% 00:43:39.300 --> 00:43:41.100 align:middle line:90% SIQI ZHENG: What's your point? 00:43:41.100 --> 00:43:42.425 align:middle line:90% Andy? 00:43:42.425 --> 00:43:43.800 align:middle line:84% AUDIENCE: The assumption could be 00:43:43.800 --> 00:43:46.800 align:middle line:84% that once you have the home, HERS rater come in and assess 00:43:46.800 --> 00:43:49.300 align:middle line:84% the house, they're going to show it's more energy efficient. 00:43:49.300 --> 00:43:51.100 align:middle line:90% So utility cost could be less. 00:43:51.100 --> 00:43:53.280 align:middle line:84% So your overall carry cost of your house 00:43:53.280 --> 00:43:56.380 align:middle line:84% over the course of a month would be lower on a green building. 00:43:56.380 --> 00:43:58.717 align:middle line:84% So you could attribute that extra $200 a month 00:43:58.717 --> 00:44:01.050 align:middle line:84% to your mortgage payment instead of paying for utilities 00:44:01.050 --> 00:44:02.160 align:middle line:90% and repairs, et cetera. 00:44:02.160 --> 00:44:02.868 align:middle line:90% SIQI ZHENG: Yeah. 00:44:02.868 --> 00:44:03.390 align:middle line:90% Good. 00:44:03.390 --> 00:44:04.000 align:middle line:90% Yeah. 00:44:04.000 --> 00:44:04.500 align:middle line:90% Sal? 00:44:04.500 --> 00:44:10.170 align:middle line:84% AUDIENCE: Isn't it just because option two has less default risk 00:44:10.170 --> 00:44:12.462 align:middle line:90% because there's no climate? 00:44:12.462 --> 00:44:13.170 align:middle line:90% SIQI ZHENG: Nice. 00:44:13.170 --> 00:44:16.980 align:middle line:84% OK, you two cover the two major points. 00:44:16.980 --> 00:44:17.795 align:middle line:90% I'm not sure. 00:44:17.795 --> 00:44:20.550 align:middle line:84% Maybe also your point is following. 00:44:20.550 --> 00:44:24.270 align:middle line:84% The same points is the following two aspects. 00:44:24.270 --> 00:44:25.740 align:middle line:90% See? 00:44:25.740 --> 00:44:31.650 align:middle line:84% Because you are a green house, a green housing, right? 00:44:31.650 --> 00:44:33.580 align:middle line:90% So there are two aspects. 00:44:33.580 --> 00:44:38.860 align:middle line:84% One is your value will go up, if the market is efficient. 00:44:38.860 --> 00:44:40.280 align:middle line:90% If the market efficient. 00:44:40.280 --> 00:44:42.210 align:middle line:84% So if the green building, the same building, 00:44:42.210 --> 00:44:44.130 align:middle line:84% the same location, all the things are same, 00:44:44.130 --> 00:44:49.300 align:middle line:84% then you will have a higher value. 00:44:49.300 --> 00:44:53.160 align:middle line:84% If you have a higher value, then the bank 00:44:53.160 --> 00:44:57.570 align:middle line:84% is willing to lend a higher loan to you, a bigger loan to you, 00:44:57.570 --> 00:45:01.200 align:middle line:84% because they always look at the loan to value ratio. 00:45:01.200 --> 00:45:04.700 align:middle line:84% So this is a very key thing is loan to value ratio. 00:45:04.700 --> 00:45:09.350 align:middle line:90% 00:45:09.350 --> 00:45:12.680 align:middle line:84% The bank always look at this as a way to control the risk. 00:45:12.680 --> 00:45:17.720 align:middle line:84% So they say, OK, if you are green, this one goes up. 00:45:17.720 --> 00:45:24.010 align:middle line:84% And then I'm willing to loan you, lend you a bigger loan 00:45:24.010 --> 00:45:25.370 align:middle line:90% because this one go up. 00:45:25.370 --> 00:45:29.410 align:middle line:84% If we say, OK, this must be 80%, always say 00:45:29.410 --> 00:45:33.010 align:middle line:84% 80%, 75% like that, your loan to value ratio. 00:45:33.010 --> 00:45:35.290 align:middle line:84% Now the value is higher, then good. 00:45:35.290 --> 00:45:38.800 align:middle line:84% I'm going to lend you a bigger loan. 00:45:38.800 --> 00:45:40.520 align:middle line:84% Another thing is the energy bill. 00:45:40.520 --> 00:45:41.410 align:middle line:90% That's monthly thing. 00:45:41.410 --> 00:45:43.130 align:middle line:90% This is a total value thing. 00:45:43.130 --> 00:45:44.600 align:middle line:90% Then it's a monthly thing. 00:45:44.600 --> 00:45:49.130 align:middle line:84% Monthly thing says, OK, now your energy bill will go down. 00:45:49.130 --> 00:45:52.780 align:middle line:84% So although you are the same income, right, the same income, 00:45:52.780 --> 00:45:56.740 align:middle line:84% but now you spend less money on energy bills, 00:45:56.740 --> 00:45:59.570 align:middle line:84% so you are able to pay back more. 00:45:59.570 --> 00:46:02.240 align:middle line:84% You won't go, like, no money for food. 00:46:02.240 --> 00:46:06.290 align:middle line:84% You still have food money and all the daily necessities, 00:46:06.290 --> 00:46:07.630 align:middle line:90% but you can pay back more. 00:46:07.630 --> 00:46:11.050 align:middle line:84% So because you can pay back more, the bank is confident 00:46:11.050 --> 00:46:13.700 align:middle line:84% and feel comfortable to lend more money to you. 00:46:13.700 --> 00:46:15.400 align:middle line:90% So that's the logic. 00:46:15.400 --> 00:46:20.440 align:middle line:84% This logic is backed by some science, scientific research. 00:46:20.440 --> 00:46:24.920 align:middle line:84% So for example, this 2014, one of the first papers they 00:46:24.920 --> 00:46:28.126 align:middle line:84% evaluate, they evaluate the energy efficiency. 00:46:28.126 --> 00:46:31.700 align:middle line:90% 00:46:31.700 --> 00:46:35.780 align:middle line:84% They got a lot of mortgage data from CoreLogic. 00:46:35.780 --> 00:46:41.390 align:middle line:84% They got so much data from CoreLogic for 71,000 loans. 00:46:41.390 --> 00:46:43.890 align:middle line:84% Then they evaluate each of the house. 00:46:43.890 --> 00:46:46.010 align:middle line:84% They know their Energy Star rating. 00:46:46.010 --> 00:46:48.980 align:middle line:84% So they run a regression, as you did. 00:46:48.980 --> 00:46:52.310 align:middle line:84% The regression, they show energy efficient houses are 00:46:52.310 --> 00:46:56.130 align:middle line:84% one-third less likely to those non-energy efficient to default. 00:46:56.130 --> 00:46:57.470 align:middle line:90% So that's big. 00:46:57.470 --> 00:47:00.360 align:middle line:84% One-third of the default risk deduction. 00:47:00.360 --> 00:47:03.380 align:middle line:84% So less likely to default, then we 00:47:03.380 --> 00:47:09.570 align:middle line:84% are happy to offer you a lower interest rate. 00:47:09.570 --> 00:47:11.020 align:middle line:90% Now a new paper. 00:47:11.020 --> 00:47:16.320 align:middle line:84% This paper also has similar results, but with more data, 00:47:16.320 --> 00:47:17.280 align:middle line:90% I guess. 00:47:17.280 --> 00:47:19.830 align:middle line:84% So this is "The Journal of Real Estate Finance and Economics" 00:47:19.830 --> 00:47:23.700 align:middle line:84% paper to study the same thing, energy efficiency to default 00:47:23.700 --> 00:47:24.690 align:middle line:90% risk. 00:47:24.690 --> 00:47:28.770 align:middle line:84% And then they also found a very interesting thing is not just 00:47:28.770 --> 00:47:30.660 align:middle line:84% the overall effect, but also they 00:47:30.660 --> 00:47:32.610 align:middle line:84% look at different income households, 00:47:32.610 --> 00:47:35.460 align:middle line:84% different disposable income groups. 00:47:35.460 --> 00:47:38.010 align:middle line:84% They found this effect is much larger 00:47:38.010 --> 00:47:43.300 align:middle line:84% for the low-income households because very clear, 00:47:43.300 --> 00:47:47.050 align:middle line:84% low-income households, they have very big budget constraints. 00:47:47.050 --> 00:47:50.560 align:middle line:84% So then this energy bill deduction really matters a lot 00:47:50.560 --> 00:47:51.670 align:middle line:90% to low-income households. 00:47:51.670 --> 00:47:55.220 align:middle line:84% They free up their income for them to do other things. 00:47:55.220 --> 00:47:57.165 align:middle line:84% So they keep paying back the loan. 00:47:57.165 --> 00:47:59.730 align:middle line:90% 00:47:59.730 --> 00:48:03.340 align:middle line:84% And in commercial real estate is not about household. 00:48:03.340 --> 00:48:07.750 align:middle line:84% But my friend-- first also is my good friend-- 00:48:07.750 --> 00:48:10.590 align:middle line:84% and they publish a new paper to look 00:48:10.590 --> 00:48:14.490 align:middle line:84% at commercial real estate, office buildings, all the things 00:48:14.490 --> 00:48:15.910 align:middle line:90% and the shopping centers. 00:48:15.910 --> 00:48:18.990 align:middle line:84% They find the same thing because they are looking at companies. 00:48:18.990 --> 00:48:21.810 align:middle line:84% For the companies, if they have a more energy efficient 00:48:21.810 --> 00:48:25.710 align:middle line:84% building, like Energy Star, and the LEED, all these ratings 00:48:25.710 --> 00:48:27.540 align:middle line:84% because they have commercial buildings. 00:48:27.540 --> 00:48:31.860 align:middle line:84% And they also found lower default risk. 00:48:31.860 --> 00:48:34.470 align:middle line:84% So that's because the companies, they also 00:48:34.470 --> 00:48:35.790 align:middle line:90% have budget constraints. 00:48:35.790 --> 00:48:39.480 align:middle line:84% So if they have less operational expense 00:48:39.480 --> 00:48:42.180 align:middle line:84% on energy-related things, they free up money, 00:48:42.180 --> 00:48:43.800 align:middle line:90% they pay back the loan. 00:48:43.800 --> 00:48:45.880 align:middle line:90% So that's the idea. 00:48:45.880 --> 00:48:50.480 align:middle line:84% So then, final idea is the following. 00:48:50.480 --> 00:48:57.410 align:middle line:84% Given this logic behind, given this logic behind, 00:48:57.410 --> 00:49:01.470 align:middle line:84% if it's a greener building, your value will go up, 00:49:01.470 --> 00:49:04.200 align:middle line:84% your loan to value ratio will go down, 00:49:04.200 --> 00:49:06.700 align:middle line:90% your default risk will go down. 00:49:06.700 --> 00:49:12.170 align:middle line:84% And also another channel is the income will free up. 00:49:12.170 --> 00:49:15.850 align:middle line:84% Then you have lower monthly energy bill, 00:49:15.850 --> 00:49:19.250 align:middle line:90% you can pay back your loan. 00:49:19.250 --> 00:49:23.110 align:middle line:84% So all the things altogether, then there's a new idea. 00:49:23.110 --> 00:49:24.770 align:middle line:90% I think it's very innovative. 00:49:24.770 --> 00:49:27.560 align:middle line:84% No, it's not new, but at that time, by Juncker, 00:49:27.560 --> 00:49:30.480 align:middle line:90% he's a European commissioner. 00:49:30.480 --> 00:49:32.630 align:middle line:84% And many years ago when he pushed 00:49:32.630 --> 00:49:36.230 align:middle line:84% his agenda, when he advocated for his agenda 00:49:36.230 --> 00:49:39.410 align:middle line:84% of the green renovation, remember? 00:49:39.410 --> 00:49:41.690 align:middle line:90% EU has this renovation wave. 00:49:41.690 --> 00:49:45.950 align:middle line:84% They put a lot of money for the existing buildings to renovate. 00:49:45.950 --> 00:49:50.750 align:middle line:84% And they have a logic as the following. 00:49:50.750 --> 00:49:57.650 align:middle line:84% Traditional way, you alternate a loan, like your house is $100. 00:49:57.650 --> 00:50:01.010 align:middle line:90% You borrow $80 from the bank. 00:50:01.010 --> 00:50:03.410 align:middle line:84% Then your loan to value ratio is 80%. 00:50:03.410 --> 00:50:05.510 align:middle line:90% That's very traditional. 00:50:05.510 --> 00:50:09.000 align:middle line:84% And then after a year, you pay back $3. 00:50:09.000 --> 00:50:13.080 align:middle line:90% Now you have $77 balance. 00:50:13.080 --> 00:50:17.060 align:middle line:84% But your house, because you have some renovation, 00:50:17.060 --> 00:50:20.100 align:middle line:84% your house appreciated to become $110. 00:50:20.100 --> 00:50:23.480 align:middle line:84% So then your loan to value ratio decrease a lot. 00:50:23.480 --> 00:50:26.420 align:middle line:84% You pay back a little bit and your house appreciates more, 00:50:26.420 --> 00:50:29.000 align:middle line:84% then your loan to value ratio go down a lot. 00:50:29.000 --> 00:50:31.225 align:middle line:84% Let's say, OK, let's take advantage of that. 00:50:31.225 --> 00:50:34.070 align:middle line:90% 00:50:34.070 --> 00:50:37.100 align:middle line:90% This is exposed, right? 00:50:37.100 --> 00:50:40.380 align:middle line:84% First, do this and then you go up like that. 00:50:40.380 --> 00:50:43.700 align:middle line:84% Now think about this because we understand that if you renovate, 00:50:43.700 --> 00:50:45.620 align:middle line:90% your housing price will go up. 00:50:45.620 --> 00:50:48.050 align:middle line:84% Then the bank feel more confident to loan 00:50:48.050 --> 00:50:51.390 align:middle line:84% you money upfront for you to do the renovation 00:50:51.390 --> 00:50:54.190 align:middle line:84% with the expectation after the renovation, 00:50:54.190 --> 00:50:56.710 align:middle line:90% your housing price will go up. 00:50:56.710 --> 00:50:58.350 align:middle line:90% So that's the following. 00:50:58.350 --> 00:51:02.200 align:middle line:84% Now you go to the bank, the same house, 00:51:02.200 --> 00:51:06.010 align:middle line:84% but you can borrow $88 instead of 80. 00:51:06.010 --> 00:51:07.910 align:middle line:90% You borrow $88. 00:51:07.910 --> 00:51:11.170 align:middle line:84% At first, the bank says, I can only lend you 00:51:11.170 --> 00:51:13.730 align:middle line:90% $88 because your house is 100. 00:51:13.730 --> 00:51:17.060 align:middle line:84% Now the bank says, OK, although your house now is 100, 00:51:17.060 --> 00:51:19.270 align:middle line:84% but I understand after renovation, your house 00:51:19.270 --> 00:51:24.060 align:middle line:84% will cost 110, so now I'm willing to lend you $88. 00:51:24.060 --> 00:51:27.240 align:middle line:84% Then you have $8 more actual money. 00:51:27.240 --> 00:51:31.330 align:middle line:84% Then you use $8 to renovate your house because you need money 00:51:31.330 --> 00:51:32.800 align:middle line:90% to renovate your house. 00:51:32.800 --> 00:51:36.540 align:middle line:84% Then you renovate the house, the house really becomes 110. 00:51:36.540 --> 00:51:38.260 align:middle line:90% So the bank is happy. 00:51:38.260 --> 00:51:40.720 align:middle line:84% So this is the logic of the story 00:51:40.720 --> 00:51:43.060 align:middle line:84% say, OK, given that we understand, 00:51:43.060 --> 00:51:45.370 align:middle line:84% later we will appreciate, now the bank 00:51:45.370 --> 00:51:48.930 align:middle line:84% should lend more money to the household to do the renovation. 00:51:48.930 --> 00:51:50.150 align:middle line:90% So that's the idea. 00:51:50.150 --> 00:51:53.740 align:middle line:84% This is a new, like, a financing vehicle for the household 00:51:53.740 --> 00:51:56.750 align:middle line:90% to do the renovation. 00:51:56.750 --> 00:51:57.320 align:middle line:90% OK. 00:51:57.320 --> 00:51:59.740 align:middle line:84% Now, I talked about all the mortgage. 00:51:59.740 --> 00:52:01.700 align:middle line:84% Now I'm going to pass on to Akrisht 00:52:01.700 --> 00:52:06.020 align:middle line:84% to talk about private equity fund because I said, 00:52:06.020 --> 00:52:07.140 align:middle line:90% I know so little. 00:52:07.140 --> 00:52:08.940 align:middle line:84% And many of you took Norris class. 00:52:08.940 --> 00:52:11.250 align:middle line:84% I think many of much better than me. 00:52:11.250 --> 00:52:12.740 align:middle line:90% OK, can you stop a little bit? 00:52:12.740 --> 00:52:14.210 align:middle line:90% I have another slide to show. 00:52:14.210 --> 00:52:16.920 align:middle line:84% To show I still know some basics. 00:52:16.920 --> 00:52:18.650 align:middle line:90% [LAUGHS] 00:52:18.650 --> 00:52:19.970 align:middle line:90% I'm not that stupid. 00:52:19.970 --> 00:52:21.440 align:middle line:90% I still know some basics. 00:52:21.440 --> 00:52:24.230 align:middle line:84% So we will talk about private equity. 00:52:24.230 --> 00:52:29.150 align:middle line:84% That's a very important private side of the financing way, 00:52:29.150 --> 00:52:34.010 align:middle line:84% because next on Thursday, we will go to public totally, not 00:52:34.010 --> 00:52:35.120 align:middle line:90% on the private side. 00:52:35.120 --> 00:52:36.770 align:middle line:90% We talk about that mortgage. 00:52:36.770 --> 00:52:39.050 align:middle line:90% Now we talk about equity. 00:52:39.050 --> 00:52:41.820 align:middle line:84% Then we know some basic of real estate, private equity. 00:52:41.820 --> 00:52:45.170 align:middle line:84% I learned from Charles last year and also 00:52:45.170 --> 00:52:48.140 align:middle line:84% from Norris class and the textbook, 00:52:48.140 --> 00:52:51.530 align:middle line:84% we have this direct investing and the indirect investing, 00:52:51.530 --> 00:52:53.900 align:middle line:90% and we focus on the investor. 00:52:53.900 --> 00:52:57.500 align:middle line:84% Many, many know the piece on the indirect investing type 00:52:57.500 --> 00:52:59.220 align:middle line:90% under the commingled fund. 00:52:59.220 --> 00:53:03.560 align:middle line:84% We have a GP that have investment 00:53:03.560 --> 00:53:06.780 align:middle line:84% a little bit, 5 to 10% have a stake in that. 00:53:06.780 --> 00:53:10.160 align:middle line:84% And then you have many LPs put money as a passive investors, 00:53:10.160 --> 00:53:13.280 align:middle line:84% then the GP will manage all the things. 00:53:13.280 --> 00:53:18.230 align:middle line:84% And then so that's we focus on the commingled. 00:53:18.230 --> 00:53:20.880 align:middle line:84% My understanding is last year, right? 00:53:20.880 --> 00:53:25.820 align:middle line:84% Then they do think ESG is important, not because they 00:53:25.820 --> 00:53:27.810 align:middle line:90% think this is a social value. 00:53:27.810 --> 00:53:29.960 align:middle line:84% They align social value with the business value 00:53:29.960 --> 00:53:32.240 align:middle line:84% because this equity will show you 00:53:32.240 --> 00:53:35.420 align:middle line:84% they think the green real estate will make higher return 00:53:35.420 --> 00:53:38.530 align:middle line:90% for the private equity. 00:53:38.530 --> 00:53:42.280 align:middle line:84% And actually, one student last year 00:53:42.280 --> 00:53:47.410 align:middle line:84% did his MSRED thesis that he went 00:53:47.410 --> 00:53:53.500 align:middle line:84% to interviews of all the private equity firms and also the CBRE. 00:53:53.500 --> 00:53:58.720 align:middle line:84% And then they have this report to show how this piece now 00:53:58.720 --> 00:54:03.800 align:middle line:84% is incorporating ESG in their investment memo. 00:54:03.800 --> 00:54:05.830 align:middle line:84% That's important because this is what you want 00:54:05.830 --> 00:54:07.330 align:middle line:90% to do for the final project. 00:54:07.330 --> 00:54:12.070 align:middle line:84% Of course, like in this acquisition period stage, 00:54:12.070 --> 00:54:15.700 align:middle line:84% the due diligence and then later the management disposition, 00:54:15.700 --> 00:54:17.090 align:middle line:90% they have different actions. 00:54:17.090 --> 00:54:18.740 align:middle line:90% That's very practical actions. 00:54:18.740 --> 00:54:20.440 align:middle line:84% For example, investment memo, you 00:54:20.440 --> 00:54:24.850 align:middle line:84% need to produce at least one page on ESG, you illustrate. 00:54:24.850 --> 00:54:26.950 align:middle line:84% And then how you are taking actions 00:54:26.950 --> 00:54:31.240 align:middle line:84% to reduce your physical risk and to reduce your transition risk. 00:54:31.240 --> 00:54:32.570 align:middle line:90% They have all the tools. 00:54:32.570 --> 00:54:35.400 align:middle line:90% Later, we will discuss more. 00:54:35.400 --> 00:54:54.000 align:middle line:90%