Asset Management: Environmental Issues in RE Management
Asset Management: Environmental Issues in RE Management
The 'mainstreaming' of sustainability in commercial RE investment management:
Sustainability has become embedded in corporate reporting
Sustainability considerations have become increasingly entrenched in investment and development processes
Measuring, monitoring, and managing energy consumption/carbon emissions etc. of existing stock has increased and improved considerably
Sustainability is an increasingly important consideration in stock selection and asset and property management
Certification and bench marking organisations are well established e.g. GRESBE
A range of industry associations are promoting and guiding
A high proportion of new commercial stock is environmentally certified (BREEAM)
Regulatory and professional bodies have continued to engage with the issue
Lorenz (2008). The mainstreaming of of sustainability has come about because it's a self perpetuation issue.
"we demand and occupy sustainable buildings because they are cheaper to run, increase our well being and improve our image"
Designers & Constructors:
"we design and construct sustainable buildings and environments because that's what our clients want and what society expects"
"we develop sustainable buildings because they are easier to sell, achieve higher prices and are much more resistant to obsolescence"
"we invest in sustainable buildings because that's what occupiers want and because they give better returns and have higher value growth potential"
The 4 stages of issue maturity:
Business strategy: compliance Period: 2000-2006?
Political and media awareness of issue increases
Emerging body of evidence but evidence still weak
Business experiment with approaches to engage with issue
Business strategy: integration Period: 2006-present?
Emerging body of business practices and specialists professionals
A range of sector-wide voluntary initiatives emerge
Increasing acceptance of need for regulation
Voluntary standards are created and collective action emerges
Business strategy: defensive Period: 1990s?
Activist aware of issue
Weak evidence base
Issue largely ignored by business community
Business strategy: promotion Period: Present -
Legislation and/or business norms become established
Embedded practices become a normal part of business-excellence model
The next stage of issue maturity?
Enhancement? Business strategy: Strengthening
Rationalisation of initiatives, associations etc. ‘Winners’ govern, ‘losers’ wither?
Incremental growth in scope and scale of activities to improve sustainability of portfolios?
Incremental improvements in organisational processes and procedures?
Industry’s capacity deepens and co-ordination improves
Issue decreases as a potential source of competitive advantage?
Contamination and Liability
Has a risk assessment been carried out?
Who is responsible for remediation?
Is the asset contaminated?
Who is liable for third part damages?
Type of Exposure:
Liabilities assumed under warranties and indemnities
Questions that need to be asked:
Whether there is pollution of controlled waters
Who knowingly permitted the pollution?
Whether there was significant harm
Who is the appropriate person for responsibility?
Investment risks of contamination:
stigma and uncertainty
civil claims for damages
clean up costs
potential loss of tenant
additional management costs
RE managers response?
can the tenant absorb potential costs?
Environmental impairment liability insurance
Conduct a risk assessment
Modify how the building is operated
Modify the behaviour of the building's occupiers
Modify the building
Operational Environmental Management
monitoring and reporting
annual plans and targets
policies and processes
Practices and Equipment
Optimal coverage of above
‘Green’ procurement of materials and service providers
Optimal timing of heating, air-conditioning, escalator and lighting provision.
Can produce lower management costs, service charges , irrecoverables, tenant satisfaction
installation of decentralised water heaters
increased awareness of waste issues
insulation of tanks and piping
use recycled materials
regular servicing of heating and air con
information, guidance, etc.
misaligned allocation of costs and benefits
inertia - behavioral issues
imperfect information - awareness
costs -direct or indirect - new or old
Environmental Performance to Financial Performance
Key transmission mechanisms:
lower void costs
increased rental income
reduced risk premium
It's more difficult to quantify the potential effects than it is to identity them
Research questions that are being asked:
Returns to tenants
Reputation/Brand/Image? Cost savings? Productivity?
Operating Costs Determinants?
Environmental performance is just one of many, often interlinked, determinants of a real estate asset’s operating costs. It may be relatively minor compared to other determinants. Whilst there are statistical methods, it is difficult to isolate the unique effect on operating costs of environmental performance due to data and other modelling issues.
The evidence here is thinner and less convincing and is almost exclusively drawn from the US.
Most US studies find a negative relationship between energy and utility costs and environmental certification.
(Especially for Energy Star buildings in the US) There seems to be an “operating expense puzzle”! A number of studies have found that Energy Star buildings have higher levels of operating expenses.
In contrast to a number of previous studies, Devine and Kok (2015) found that Energy Star buildings consumed more energy per square foot than non-certified buildings.
Reichardt (2014) found that operating expenses are 10.4 % to 10.7 % lower in buildings with net leases
Fuerst, Van der Wetering and Wyatt (2013) found no relationship between EPC and service charge for a sample of 417 offices in UK.
Fuerst (2015) looked at the relationship between returns and GRESB score for 442 REITs across the globe.
Found no significant effect of GRESB performance and unadjusted total returns.
Found a significant positive effect of GRESB performance and risk-adjusted returns (Sharpe Ratio).
Found a significant positive effect between Return on Assets and Return on Equity and GRESB performance.
Eichhotltz, Kok and Yonder (2012) calculated the share of LEED and ES assets for US REITs over the 2000–2011 period.
Found that the greenness of REITs is positively related to three measures of operating performance – return on assets, return on equity and the ratio of funds from operations to total revenue.
Found no significant relationship between the greenness of property portfolios and abnormal stock returns, suggesting that stock prices already reflect the higher cash flows deriving from investments in more efficient properties
Costs to developers
What are the additional costs of developing 'green'buildings? What is the cost-benefit trade-off?
Returns to investors
management costs and operating expenses
rental growth and depreciation rates
vacancy rates and void costs
lease incentives, time-on-market and liquidity
income and capital returns
Environmental performance is just one of many, often interlinked, determinants of a real estate asset’s value. It may be relatively minor compared to other determinants. Whilst there are statistical methods, it is difficult to isolate the unique effect on value of environmental performance due to data and other modelling issues.