Maximising opportunity from direct and indirect real estate using our scale and presence across local markets
Environmental, social and governance policies (ESG) have become an indispensable part of real estate management. In part, this is a result of global environmental targets, and legislation at a national and European level, but wider influences have become just as important. Investors, such as pension funds, are now taking a much more holistic view when it comes to deciding where to put their money. This trend is being driven by their clients, who view stewardship as a top priority. A clear and detailed policy that is backed up by international rating standards – usually 4 or 5 stars from the Global Real Estate Sustainability Benchmark (GRESB) – is vital.
Modern and efficient buildings tend to attract the best clients, which means that rental income is more secure.
Good ESG policies are not only being driven by investors, though. Occupiers expect good-quality space that is modern and efficient. This helps them to manage their costs while helping to attract and retain the best staff. Meanwhile, landlords are also part of the drive towards embedding ESG policies into real estate. Modern and efficient buildings tend to attract the best clients, which means that rental income is more secure. And a building that is kept up to international standards is far more likely to retain its value should we decide to sell it. In short, interested parties now expect and demand a thorough best-practice policy – but it also makes good business sense.
The way we demonstrate ESG in our properties may not always be obvious. Environmental factors tend to be more easily recognised, such as improving energy efficiency and water usage. But it is less easy for clients to see the link between social and governance factors. Buildings are part of the community, people use them and they have a social value. Our role is to ensure that buildings work well within their community and that they add value. For example, at the Roaring Meg shopping centre in Stevenage we have worked on opportunities to engage with the local community and occupiers. This included installing beehives, seeding wildflowers, planting native trees, restoring sections of ancient hedgerows, and running a creative writing competition for local school children. Not only do these actions have a positive impact on society, but they also ensure a positive perception of the asset, which can help with retail footfall.
In terms of governance, direct properties have a long supply chain so stewardship at all points of the chain are vital. We ensure best practice policies from the property management teams, the engineers, and even down to the cleaners avoiding harmful chemicals in their cleaning products. We also need to understand what activities the occupiers are undertaking to ensure that no illegal activities are taking place. In some cases, we also need to ensure that the activities meet investors’ expectations too, such as avoiding tobacco manufacturers. With indirect property investments, we are not managing the property, but we still set clear governance expectations for those who are managing the assets.
Buildings have a direct impact on the environment. They are very energy intensive from the carbon that is used in the bricks, concrete and steel, to the running costs of the building. Indeed, real estate accounts for 40% of total carbon emissions1. ESG policies can help to reduce energy consumption but they can also help to improve the environment, such as in areas that require flood control or in dealing with contaminated land.
But ESG policies can also have an indirect impact on improving properties. This would cover things like public transport and how people travel to work, charging points for electric cars and offering cycling facilities for staff.
Part of a good ESG policy is knowing how to manage risks and enhance returns. Inefficient or badly managed properties provide opportunities for improvement, which could enhance the overall value of the property. As long as you understand the risks and you know what you’re doing, there is an opportunity to turn it around.
It is impossible to entirely quantify the difference good ESG policies can have on returns. But by improving a building, you enhance its long-term value and you attract quality tenants. In Australia, where building regulations are particularly strict, they have used the National Australian Built Environment Rating System (NABERS) to demonstrate improved rental returns for more efficient buildings. We see the same in Europe in more general terms, where Investors in Non-Listed Real Estate Vehicles (INREV) has demonstrated that there is a 2.75% difference in return spread between the top 10% and the bottom 10% of the non-listed GRESB entities2.
Happily, it is not one or the other. Good ESG policies don’t mean that investors have to accept higher fees or lower returns. Embedding best practice into every aspect of real estate management makes our properties more valuable, efficient and attractive. It’s a win-win situation for everyone.
1Source: Environmentally Sustainable Buildings Challenges and Policies, OECD Publications, Paris, 2003
2Source: Transparency and Performance of the European Non-Listed Real Estate Fund Market , INREV 2014
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