The property industry must embrace sustainability - that debate is over. But how should its stakeholders proceed? A recent panel of key figures shed light on regulatory issues and the occupier and investor standpoints
One of the highlights of Invesco Real Estate's recent Trends and Opportunities client conference in Amsterdam, held in association with IPE Real Estate, was a panel looking at sustainable property investing. The panel featured some of the field's big hitters, including Hans Op't Veld from PGGM and Sander Paul van Tongeren from APG. The panel was chaired by Simon Redman, head of business development at Invesco Real Estate.
Ron Weidner, global CIO at Allianz real estate, set the scene with the results of a recent survey. What he referred to as a "surprising recent poll" by the World Business Council for Sustainable Development shows that a vast majority of real estate professionals believe real estate only contributes 19% of emissions and the cost of green buildings represents 17% of the asset value, when the reality is 40% for emissions and 1-5% of the asset value.
Weidner has been central to the Greenprint initiative, which was born of what he described as the "proliferation of information from organisations focused on sustainable building, combined with a lack of practical case studies".
Weidner also pointed out that there is no global standard. But rather than creating a new standard, Greenprint's mission is to "create and implement a common energy measurement tool to establish our base line and monitor energy efficiency". He added: "We recognise that significant energy savings can be achieved in a relatively short space of time, with little or no investment, if we focus on reconditioning our buildings and adapting our operating best practices."
While the case for sustainable real estate is in part straightforward, it is also clear that the regulation of real estate's environmental footprint will figure large in investment decisions. Jared Eigerman, senior counsel at Boston-based law firm Goulston and Storrs, outlined the global regulatory regime and named three key categories to consider - energy performance, information and carbon pricing.
Regarding energy performance, Eigerman noted that regulators pay much more attention to reducing the use of thermal energy and electricity consumption on a building level rather than on transitory growth. "It is the easier area for regulators to focus on and an increase in regulatory activity in this area is what we will be seeing in both the EU and the US," he said.
Given recent trends it is not surprising that transparency is also high on the agenda. "The trend is irreversible for disclosure of information regarding how buildings perform," Eigerman said. He was referring, among other things, to impact reviews in which developers have to make public the environmental impact of their development projects, and registration - where large polluters have to place details of their environmental footprint in the public domain. "The reason that I, as a lawyer, think this will go forward is that it is very hard in the US and also in the EU to deny the public access to information," he added.
Ron Herbst, global head of energy management and sustainability in global sourcing and corporate real estate at Deutsche Bank, presented the occupier view of the City of London's largest employer. In November last year the company set itself the goal of becoming climate neutral by 2012. He said: "We are on track this year as a result of accelerating investment in energy efficiency, expanding our renewable power purchasing agreements, moving our business into higher performance carbon efficiency assets - buildings in the top quartile of performance in terms of carbon efficiency. This is the most exciting point, as it connects directly with the investor community."
There is also a clear focus on the full lifetime of the asset. "When we dispose of assets we want to hold to our lease commitments by proving the long-term energy efficiency of the property realised and by minimising waste streams of property disposition," Herbst said.
He also added to earlier remarks about information, saying: "We also want to ensure continuous flow of information on energy, water and waste management at the properties into the landlord site management practice. We're looking for buildings that are well run and that have a high operating efficiency. We're also pushing for the external rating of buildings."
Hans Op't Veld, head of listed real estate at PGGM investments, is another key player for whom sustainable real estate is "already part of the investment philosophy". He said: "We have a set of investment beliefs and one of those is that sustainability adds to performance. Occupiers are willing to pay a bit more in order to access buildings that are sustainable because it lowers their cost of occupancy as well as the cost to the owner."
Since PGGM first took sustainability on board the thinking of the pension fund-turned-third-party manager has moved on. "If buildings make up 40% of emissions, at some stage the regulators will come knocking on your door - you are faced with the risk of obsolescence in your portfolio."
In the course of attempting to formulate a strategy, it became clear to PGGM that further homework was necessary, and on a grand scale: "What we concluded was that we didn't know much about the issue," Op't Veld said. "So together with APG, USS and Maastricht University we have embarked on a mission to generate at least some data and start measuring the impact of our sustainable investing. We are trying to get information from the listed and non-listed property funds where we are invested."
The benefits, he said, are clear. "This allows us to go back to the companies and the funds and talk about the issues. First of all, you can think about better ways to engage with managers. Secondly, it allows us to map out not only return possibilities but also the risks that we face, given that some of the funds and companies we invest in could do better in terms of sustainability."
Within the sustainability debate a great deal of attention is focused on new build, but in the developed world this accounts for only around 2% of stock. "Another fascinating subject is what do you do about existing portfolios," Op't Veld said. "We add plus/minus 2-5% to our portfolio each year on the listed side and more on the non-listed side. Regarding the rest of the portfolio, we must engage with fund managers about retro-fitting these buildings and doing something to raise the bar because this is the really low hanging fruit for regulators."
APG, the investment management company of Dutch civil servants pension fund ABP integrates environmental and governance issues in each investment. "For new investments it is relatively easy," said Sander Paul Van Tongeren, senior sustainability specialist for global real estate at APG. "The challenge is how to deal with the existing stock. For APG's €16bn real estate portfolio the challenge is the lack of comparable data on sustainable real estate, which is an issue, especially if you are a global player."
APG carried out a global survey for the entire listed and non-listed industry. "Based on those insights we will draw up our own policy," Van Tongeren said. More than 50% of the EPRA members responded to the survey, which measured the energy consumption, water consumption and waste levels of the real estate portfolios of companies constituting 80% of the total market cap of Europe's listed real estate companies. "We are providing each company with their own relative performance in terms of sustainability, along with a list of recommendations as to how they can improve the environmental performance of their real estate portfolio," Van Tongeren said. "APG is having this dialogue with most of its strategic investments. If the improvements are not made we will reconsider our stake as sustainability forms an important part of our investment decision process."