Why is the property industry so reluctant to lobby when governments are so eager to regulate? Shayla Walmsley investigates

Most regulation is a hostage to the law of unintended consequences and the risk of those consequences is all the greater if the industry does not participate while the regulation is being drafted. The property industry needs to get closer to policy makers if it is to avoid having inappropriate sustainability policies foisted on it. If it does not, it will get legislation that suits the government of the moment but not necessarily the industry.

That is pretty much the argument made by Paul McNamara, director and head of research at PRUPIM, and it is gaining traction with other investors.

"It's clear that the government needs our view to get regulation right, to come up with something that enables a sustainable market rather than damages it," says Tatiana Bosteels, head of responsible property investment at Hermes Real Estate.

Regulation is back in fashion after the light-touch 1990s, and property is a prime target. For one thing, it has a disproportionate impact on global emissions. According to the United Nations Sustainable Construction and Buildings Initiative, real estate accounts for 40% of global energy use and carbon dioxide emissions, and uses 30% of raw materials and 20% of water.

It beats heavy industry, and it is a prime target for any policymaker wanting to have an impact - all the more so because, according to the Intergovernmental Panel on Climate Change, the real estate business can do most at lowest cost about mitigating its carbon emissions.

In the UK, the emphasis has been on a combination of disclosure - or name-and-shame - and fiscal incentives. Energy performance certificates (EPCs) are already mandatory for real estate assets. Voluntary display energy certificates (DECs), which are likely to become mandatory before long, disclose how much energy public buildings use. There is more where those came from. In June, amid rumours that the majority party in the coalition government planned to shelve some new regulations on sustainability as ‘red tape', UK energy Secretary Chris Huhne confirmed: "We are taking issue with this ideology that less regulation is inherently better. Regulation can be incredibly important…. we are certainly not going to be letting regulations go."

"The government is keen to be seen to be driving the agenda forward," says Michael Pillow, director at the building consultancy at Savills. "There will be additional legislation creeping in over the next few years. In the UK it should go at the pace of other EU countries - at the front but not way out in front."

The new UK government's focus on carbon performance will include new twists on old energy efficiency schemes, combined with fiscal incentives and penalties. There's a move, for example, towards tax incremental financing that will allow local authorities to borrow against future tax income from new developments. Scotland has already tried it with an £84m (€99m) leg-up for Edinburgh's Leith docks.

For the industry, these financial arrangements could be a good sign - because it suggests that the government does not want to commit public money to its public commission on carbon in emissions.

Aled Jones, ESG investment manager at the £3.84bn (€4.34bn) London Pension Funds Authority (LPFA), points out that, given that the government is unlikely to want to use public money to reduce carbon emissions, it is in its own interests to get the investment community onside. 

Bosteels attributes the raft of real estate legislation over the past five years to the fact that the industry had never been heavily regulated before. Despite being the primary contributor to environmental damage, she says, the industry was doing little about it. But the result could be that regulation emerges as a stronger stimulant of the sustainable real estate sector than market demand.

At the same time, there is an acknowledgement from the property industry itself that it needs to act. The UN agreement on responsible investment - which has 900 companies as signatories, including a third of the global financial sector - is "a clear signal", according to Bosteels. She views positively the fact that the UN is "putting more teeth" into the programme, notably with the stipulation, intuitive but nonetheless recent, that companies need to comply with it to belong to it.

If that is the global picture, it breaks down in more ways than one at national level. Among the industry's leaders, there is a strong suspicion that the government just does not get it.

In May the UK government announced a consultation on whether to introduce mandatory reporting on greenhouse gas emissions by April next year. No-one seriously argues with the evidence that real estate's contribution to carbon emissions is staggering: 50% of carbon emissions come from residential and if the UK government is serious about achieving a target 40% reduction in carbon emissions, it has to take on real estate. The problem, says Paul McNamara, is that the government has only a partial understanding of what property is.

"They see it as development," he says. "They don't know much about relationships between landlords and tenants from a policy perspective, and they have an exaggerated view of the role of developers." Despite the near-exclusive focus on development, new stock only makes up 2% of the real estate added every year.

"The industry fears it will be asked to dance by a very large, keen dancing partner who doesn't know the steps," he says.

You could say the same thing about sustainability. Piet Eichholtz, professor of real estate finance at Maastricht University, sees as a problem the fact that "sustainability is still associated with the likes of Greenpeace, which is not a natural friend of the property industry. If your friends tell you something, you listen. But if Greenpeace is telling you something, you don't associate it with doing any good for your business."

Teaching government the steps is where Bosteels sees a role for the financial services sector, including pension fund managers. "There's an important role bringing knowledge and expertise to the debate," she says. "We need a clear framework so we know the roles and responsibilities."

One problem is that the government is unwilling to take into account the owner-occupier relationship. Whatever investors do, there is no incentive for occupiers to change their behaviour.

"You can't engage with occupiers properly because it isn't their problem," says Bosteels. "When you measure the annual performance of an asset, occupiers should be responsible. "We've been trying to engage with them over a long time. We've held events to get occupiers along but they haven't been successful. If there's no pressure from government, it won't happen."

It was an issue raised at Davos earlier this year by Jones Lang Lasalle CEO Colin Dyer, who pointed to the split in financial incentives available to owners and occupiers to invest in energy efficiency-improving capital upgrades. Investors, he said, were funding improvements to reduce the costs of the tenants; tenants, in turn, were helping to fund long-term enhancements to the capital value of the asset.

Other investors could well dispute his picture of tenants and investors in some kind of opposition. As Jean-Francois Le Teno, global head of operational architecture and sustainable development at AXA REIM, points out elsewhere in these pages, helping tenants reduce their costs is likely to make them stay and pay.

In any case, whatever comes from the regulators, the impetus to drive this forward will come from tenants and investors, agrees McNamara. He says that is why it is as important to mobilise them as it is to represent their position to the government. "Even before you consider what the government might do, if tenants and investors think it's important - because they want to halt emissions or because they have to - they will start to make decisions," he says. 

Industry figures speak wistfully of long-gone days when civil servants invited property managers to brief them on the state of the industry. It has been a while. Since then, a culture has built up within the property industry of, to put it bluntly, non-engagement.
"Traditionally, the industry has tended to be reactive rather than proactive. But we need to work alongside to get the government into our industry. It needs to understand the standing investments with tenants in them," says McNamara.

But a dilemma for the industry is who does the lobbying. Some pension schemes, such as Hermes, lobby both on their own behalf and with sectoral organisations. Others - especially smaller pension schemes - see lobbying via industry organisations as significantly more productive.

"We're a small investment team of four people. We can't do everything we'd like to and we don't have to do everything ourselves," says Aled Jones, ESG investment manager at the London Pension Fund Authority (LPFA).

Yet by their very nature, industry organisations may contend, compete and conflict with each other. "The issue is finding common ground," says Bosteels. She points to the Green Building Council as an example of "a broad-church, consensual" campaign. "It's a much stronger way of lobbying because it presents a strong voice to government," she says.

As Christine Senior pointed out recently (From the same hymn sheet, IPRE March/April 2011), getting industry bodies to work together has been a hard slog. But it can be done. The UK REITs campaign, for example, brought together the British Property Federation, the Investment Property Federation and the Royal Institution of Chartered Surveyors (RICS) to lobby with a single voice.

Likewise, the 70 members of the Institutional Investors Group on Climate Change (IIGCC), representing around €6trn in assets under management. That is a lot of clout to bring to dialogue with policymakers in a bid, in the group's own words, "to accelerate the shift to a low carbon economy" in line with long-term investment objectives. The IIGCC's members include 70 institutions, including pension fund APG, ATP, the £8.23bn (€9.34bn) BBC Pension Trust, Swedish supplementary funds, PGGM and the LPFA.

That leaves the big question. What precisely should the industry be lobbying about? First, clarity. That it will encourage the government to clarify what legislation can, should, cannot and should not do is a strong argument for the industry to be involved. The upshot of all this lobbying - what investors want from it - is clarity, according to Jones. "The UK government has good intentions but the extent to which these clear policy intentions are clear enough to investors is less certain," he says. "Investors want to understand the risks. They're seeking certainty. The result of certainty will be to encourage private investment in carbon-reducing projects." 

Second, cost-effectiveness. Just as it is important for investors to be realistic in terms of what they consider to be sufficiently sustainable, regulators need to focus on what can realistically be done, rather than on a fantasy wish list. In the UK, estimates Bosteels, 10% of sustainability measures are "extremely costly and probably not necessary. We need to focus on cost-effective measures. So you need energy regulation that covers the main points, rather than how many fridges a building uses."

The combination of mandatory disclosure and fiscal incentives will likely be the pattern of regulation, at least for the UK government. Whether the industry will be able to substantially alter the course is doubtful. But it might well be able to mitigate the worst slips of the drafter's pen - Bosteel's 10% - if it can prove that the likely impact will be to damage the market.

It is hardly surprising that the short-term focus for most institutional investors is on mitigating the immediate negative impact of rising energy prices, complying with regulations, and getting the certificates to prove it. But if the industry does not push for clarification, if not mitigation, of planned regulations, it will have to comply with the consequences.