Sustainable Investment in Real Estate (s-i-r-e) is conducting an empirical study on the financial performance of sustainable European office and retail assets owned by more than 40 fund managers and investment firms. Juerg Bernet, Sarah Sayce, Rupert Ledl and Maarten Vermeulen report on its first findings

Fund managers and investment companies across Europe are pooling financial and sustainability data on the independent research platform Sustainable Investment in Real Estate. The mission of s-i-r-e is to advance credible knowledge through pan-European networking with professional leaders both business and science.

This is the first attempt to analyse the financial performance of commercial property assets in relation to the Global Reporting Initiative's (GRI) new Construction and Real Estate Sector Supplement (CRESS) reporting criteria. A preview on the first s-i-r-e sustainability report reveals some provisional facts and figures.

Since the initiative began, 43 major fund management houses and investment companies have signed up to participate. Collectively, they manage approximately €419bn worth of direct real estate assets. This year they have reported on 1038 buildings.

These standing investments represent a total market value of €124bn, comprising about one-third of their property portfolios. The value of the s-i-r-e research portfolio compares to about 60% of the market capitalisation of the FTSE EPRA/NAREIT Europe Index, representing a significant share of the institutional capital invested in European real estate.

The sectoral allocation of this year's s-i-r-e study concentrates on commercial real estate. It includes all types of existing office and retail assets, but excludes development projects for new buildings.

The geographical universe covers 187 towns and cities in 23 countries throughout Europe, stretching from Sweden to Portugal and from the UK to Turkey. With a total of 17,830 tenancies; the net lettable area of this sample is approximately 15,346,000 square metres.

The energy consumption of all the building owners was 891 gigawatts per hour, bringing the carbon footprint to a total emission of approximately 463,000 metric tonnes of carbon dioxide equivalents per year. This demonstrates the enormous economic, social and environmental impact that lies in the responsibility of the asset managers, who are contributing to s-i-r-e.

Two out of three companies participating in s-i-r-e publish an annual sustainability report. More than half of these reports are established in accordance with the guidelines of GRI. Only a small sample of four companies refers to another standard. Therefore, s-i-r-e has adopted a top-down approach; following GRI's common metrics, which are widely used in corporate reporting, and applying them to measure the sustainability performance of single assets in exactly the same way.

Confidential asset data
This is why contributors to s-i-r-e can efficiently share the raw data they have already collected for their own sustainability reporting. Confidential asset data are made anonymous and aggregated with the s-i-r-e research portfolio, and it is only disclosed on a consolidated group level in the s-i-r-e sustainability report.

By following GRI's global reporting framework, s-i-r-e enables investors, managers and analysts to compare economic, environmental and social performance consistently with their peers. Sustainability reporting should not require vast resources. Therefore, s-i-r-e has adopted the GRI guidelines on a minimal level, adopting the 10 most material indicators for beginners and 20 more comprehensive indicators for advanced reporters. Property-specific performance indicators are taken from GRI's new CRESS supplement, which is enhancing the transparency of focused performance reporting.

As the saying goes, the proof of the pudding is in the eating. Testing the CRESS final draft in the context of the s-i-r-e research portfolio has confirmed that CRESS is a strategically and operationally useful tool; especially within companies and countries where there is advanced sustainability awareness such as the UK, Germany, France, Switzerland and the Netherlands.

However, throughout the property sector, available sustainability data at the asset level is still far from complete and balanced. Only a few real estate investment companies in Europe are monitoring any long time series. At most, these date back to 2002, but changes in information systems limit the feasibility to 2006. Besides the mandatory financials, the most complete coverage of data relates to energy consumption.

Only companies with a relatively long track record in sustainability appear to be managing other aspects of environmental and social performance too. While the quantity of data is therefore restricted, the quality is generally robust with the majority of reported information having received external assurance.

1% more rent for 1% less carbon?
The provisional analysis of the s-i-r-e research portfolio shows a steady income stream of the aggregated standing real estate investments throughout Europe. The average rental growth rate of approximately 2.5% per year is clearly above inflation, which provides a reason for the sharp rise in capital values during this period. Simultaneously, asset managers have reduced the building carbon footprint of the s-i-r-e portfolio step-by-step by more than 3% per year.

Only in 2010 did this annual reduction fail to materialise. The resulting trends in the s-i-r-e property portfolio indicate a strong correlation of -0.8 between gross rental growth and carbon intensity reduction. Based on this obvious hard evidence, analysts could easily be tempted to argue for a "green premium" of almost 1% more rent for 1% of carbon reductions.

But investment success is rarely down to a single reason. Financial value is created and destroyed by a dynamic bundle of several drivers, including the basic economic and social fundamentals. Already a quick look at GDP growth might question the earlier argument for a green premium.

In the countries of the s-i-r-e portfolio, GDP growth is perfectly correlated at a coefficient of 1.0 with rental growth from 2006 until 2008 and with carbon intensity from 2008 until 2010. This begs the question: is carbon reduction really a new driver of rental growth? Or is it just a new proxy, which in itself is driven, or even overruled, by the good old investment fundamentals such as currency, gross domestic product, interest rates and inflation?

Having the first data set of a triple bottom line at hand from a significant real world property portfolio across Europe, the s-i-r-e research team is now challenged to identify the real drivers of sustainable financial performance on real estate. The understanding of a potential link between sustainability and financial performance is gaining momentum along the economic, environmental and social aspects of GRI's comprehensive CRESS framework.

This project - Winning in the Long Run? - has been awarded grants by the Royal Institution of Chartered Surveyors Education Trust and the Austrian Chamber of Commerce, Federation of Real Estate Professionals. The results are expected in the coming months and shall inform investors on what really is material in a sustainability report from an investor's point of view.

Juerg Bernet (top left) is visiting professor at Danube University Krems, and managing director of the EURO Institute of Real Estate Management in Zug and Cologne. Professor Sarah Sayce is head of the School of Surveying and Planning at Kingston University London. Rupert Ledl (bottom left) is head of the Center of Real Estate Economics, Department of Building and Environment, at Danube University Krems. Maarten Vermeulen is director, Europe at Composition Capital Partners