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Transcript of 1 Sustainability and real estate investment performance Dr Paul McNamara OBE Head of Research,...
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Sustainability and real estate investment performance
Dr Paul McNamara OBEHead of Research, PRUPIM
Co-Chair, UNEP FI Property Working GroupSPR RESEARCH BRIEFING - London, October 1st 2009
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Agenda
Property – a key part of the problem and the solution
Can investing responsibly in real estate enhance performance?
Approaches to responsible real estate investment
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Property and Climate Change
Source: UJNEP SBCI (2006) , pg 5
Being a significant part of the problem….
…makes property a significant part of the solution
Share of the built environment in resource use
Share of the built environment in pollution emission
0 20 40 60 80 100
Water effluents
Solid waste generation
CO2 emissions
0 20 40 60 80 100
Land
Water use
Raw materials use
Energy use
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Property – a key contributor to climate change mitigation
Source: IPCC, 2007
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So – it is hardly a surprise that property is a key focus of attention
European & UK Government bodies
Activists/Opinion
Formers/NGOs
Tenants
Community
Business Partners/
Suppliers
Property Investors
Investors/
Shareholders
Customers/
Policyholders
Employees
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The twin paradoxes
“98% of the debate has focussed on 2% of the problem”
“Those with the power don’t have the knowledge….and those with the
knowledge don’t have the power.”
The need is to see this as an investment issue relating to existing stock
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Can investing responsibly in real estate enhance
performance?
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Behaving ResponsiblyEnhances Fund
Performance
Behaving ResponsiblyHas No Effect on Fund
Performance
Behaving ResponsiblyHarms Fund Performance
Fiduciary DutyFiduciary Dutyto act this wayto act this way
““Moral” Duty toMoral” Duty toact this wayact this way
DilemmaDilemma
Consider three possibilities….
Can we find a logic for this?
Can we invert this logic and find things to do that don’t affect fund performance?
Sadly, many start here…
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RPI can have a positive effect on property values and returns
Factor Investment Implications Underlying effectsTenants prefer green buildings Rental differentials emerge
between green and non-green buildings
Green assets quicker to re-let
Rental growth higher, depreciation lower
Shorter interruptions to cash-flow, lower risk premium
Green buildings are cheaper to run
More money available for rent Rental growth higher
Impending government regulation and legislation
Greener assets de-risked through better tenant retention/attraction
Reduced risk premium
Other investors prefer ‘green’ buildings
Green properties quicker to transact Greater liquidity, lower opportunity cost and risk premium
• Green assets likely to have lower yields, higher values over time
• As differences in value emerge, green assets should outperform
The more it matters, the more values and performance will be affected
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Early evidence of possible benefits
Results for buildings with Energy Star ratings
Variable Impact of being ‘green’
Rent per square foot +3%
Effective rental income (adjusted for prevailing occupancy levels)
+6%
Sale prices +16%
Source: Eichholz P, Kok N and Quigley J (2009) Doing Well by Doing Good? Analysis of the Financial Performance of Green Office Buildings in the USA, RICS Research Report, London, March 2009, pp 9 and 28
• Total sample of 9,998 office buildings throughout the USA – 893 “green”
• 1,816 offices sold between 2004 and 2007 – 199 “green”
• Rental information on 8,182 – 694 “green”
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But is knowing about the effects the same as being responsible?
Sustainability is changing the entire context for property investment
Successful investors need to at least understand how sustainability will affect asset pricing and prospective performance
Responsible investors will go further and look for economic ways to work with assets and tenants to improve the environmental and social credentials of assets and, thereby, protect or enhance future returns
Responsible property investment is quintessentially active
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Approaches to responsible real estate investment
“investment where social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments, and the responsible use of rights…......…attaching to investment” (Mansley M., 2000, pg 3)
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Responsible Investment
‘Engagement’ Screening ‘Best in Class’ Enhanced Analysis
Positive Negative
Direct Action Indirect Pressure
Forms of Socially Responsible Investment
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Relationship between Investor and Invested Asset
Property as a ‘Binary’ (Tertiary?) Asset
Property as a Concatenation of Time-limited Investments
Differential Liquidity and Transaction Costs
Property as a ‘Legacy Asset’
Five differences between property and equities
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Three forms of ‘Engagement’ in Property
Engagement with the Tenant (occupiers)
Engagement with the ‘Legal Structure’ (leases)
Engagement with the Built Structure (buildings)
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On Site New building Refurbishment Property management
“Situation” Benefits of landlord expenditures can accrue to the
tenant. Timing, scale and nature affected by the lease
Engagement with buildings
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Leases are socio-cultural in nature
commonly grants occupation rights more restrictions can reduce attractiveness (rent and
value)
Green leases/Memoranda of Understanding
obligations on both tenant and landlord, agreed at the outset and enforced through the term of the lease.
Engagement with leases
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Occupiers are crucial to the environmental and social impact of a property.
The lease greatly determines what can be achieved
‘Informal engagement’ with tenants No ‘voting’ rights, as in equities Dialogue to persuade or educate tenants how to utilise
their premises in a more environmentally responsible way.
Engagement with occupiers
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Limited and uniform investable stock
creates risk for investors
Tenant screening
What to do about mixed occupied assets Rights to occupy and assign Capital already invested
Limited availability of data – on buildings or tenants
Difficulties with Screening in Property
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Conclusions
Property is a major element of both the problem of, and the solution to, increasing CO2 emissions A very major user of resources generally and conduit for CO2 emissions The lowest cost per unit impact on the problem
Setting aside increasingly stringent government regulations – ‘green’ property investments should perform better Higher net income growth at lower risk
Savvy investors will profit from this knowledge; responsible investors will strive to ‘do well by doing good’ – especially through improving existing stock