UK property fund managers are in a spin over green-certified buildings. Do they really produce more income than their less energy-efficient counterparts and, if so, what does that mean for their portfolios?
While some investors are pushing their money managers to become eco-pioneers, many others are more hesitant, according to panellists at an Urban Land Institute discussion on sustainability held at Governors House, EC4, last week.
Abigail Dean, head of sustainability at Nuveen Real Estate, said her investors are in the former camp. They want Nuveen to invest more of their money in environmentally friendly buildings.
“This has been a factor for some time, but it is notable how in the last couple of years it has risen up the agenda, particularly for Dutch, Scandinavian and Australian institutional investors. For some this is now a deciding factor in their decisions over where to place capital and we must therefore be transparent about sustainability performance.
“This has also led to some funds having a very specific and ambitious focus on sustainability, in order to cater to that demand from investors.”
Under pressure
With the built environment responsible for almost 40% of energy consumption in the EU, real estate investors are under pressure to commit to making their portfolios more sustainable.
Several of the world’s biggest cities, including London, have agreed to make all buildings carbon-neutral by 2050 as part of the 2015 Paris Climate Agreement, an ambitious global action plan to fight climate change.
But from a financial perspective, and in a city like London, where only a small percentage of buildings are certified, compared to Vancouver or Toronto, it is not yet clear how to make it work.
Several firms have produced data sets suggesting that investing in green-certified buildings produces more income, but the data is in its infancy, based on limited portfolio sizes.
At the ULI event, M&G Real Estate presented research that indicates green-certified buildings carry higher operating expenses but can also generate a higher distributable income to investors (by as much as 19 basis points).
The fund carried out analysis on the performance of green buildings in a portion of its Continental European property portfolio, of which green-certified buildings make up a quarter.
Shorter void periods
Nuveen Real Estate has carried out analysis on its US portfolio, which found that void periods are noticeably smaller in green-certified buildings. Dean said: “We suspect that is because some tenants will only occupy certified buildings.”
Meanwhile, Aberdeen Standard Investments is another fund that has added sustainability criteria to its prospectus. Dan Grandage, head of environmental, social and governance real estate strategies at the firm, said: “We have created our own ESG rating scoring system, which looked at similar aspects to green building certificates, but included all assets – with or without a certificate.
“There has been a big shift in recent years compared with previous attitudes going back to, say, 2008, when the UK energy performance certificates came into force, when the driver was all about compliance and ticking boxes. The level of engagement and understanding has risen exponentially with investors, fund managers and occupiers.”
Cautious clients
However, not all firms are rushing to embrace green investments in real estate. Lucy Winterburn, director of investments at Savills Investment Management, argued that her clients are more cautious.
“I have looked after a pension fund’s property portfolio for a number of years and I can add that the client got on board with ESG (being a FTSE 100 company, it was on its agenda) but they were very clear to say, ‘Look, we are a pension fund’. So at end of day you have to do what’s best for the pension fund, which is fundamentally financially driven by income return growth and capital preservation. We don’t want to necessarily be green pioneers or trailblazers, we love the ideas, but if it doesn’t make sense financially then we are not going to say you must do it.”
She added that as its investment manager, the firm was prepared to “explore the options and review the portfolio” but there were still challenges remaining. “When you are looking after a portfolio of standing investments and a lot assets are single-let, there is very little you can do to force a tenant to change its building. The tenant has to want to cooperate with a landlord to make a meaningful difference. From a client point of view, you also can’t say, ‘We have a blank cheque book let’s make your building greener’. So from a return perspective there’s a really fine line between what you can and can’t do while buildings are occupied.”
Winterburn also said that there was greater opportunity to make a building more sustainable once it becomes vacant. “This is where we can become more creative and go the extra mile to future-proof our client’s buildings.”
We need more data
EG also caught up with Asif Din, sustainability director at US architecture and design firm Perkins+Will, after the event. Din, who was an audience member at the ULI discussion, supported the latest data findings by M&G but added that he remained “very cautious”.
He said: “There is too much noise and you can’t always say it’s the green feature that makes a building a good investment. I think [the M&G data] is a fantastic attempt at a first go though. I do agree that rental values are higher in something that is certified, I think that it is just not clear how much more income this generates for shareholders.”
Din added that he hoped the industry would come together and produce a more “coherent and robust data set” to provide a business case for green investments. “Property owners should be thinking of the whole lifespan of a portfolio. It is sad that some are thinking just of their bottom line and dividends for next year or even next quarter and not seeing beyond that,” he said.
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