Working Paper 2 – V4 1 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate WINNING IN THE LONG RUN ? A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate (Working Paper 2) GRANTS Royal Institution of Chartered Surveyors Education Trust Austrian Chamber of Commerce, Federation of Real Estate Professionals AUTHORS Vis. Prof. Dr. Juerg R. Bernet, MSC MBA MRICS Prof. Sarah Sayce, BSc PhD FRICS IRRV Maarten Vermeulen, MBA MSRE FRICS DI Rupert C. Ledl Billy Clements, BSc KEYWORDS Commercial Real Estate; Sustainability Metrics; Risk; Worth; Methodology Milan,

Working Paper 2 – V4 2 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate AGENDA RATIONALE: background – issues – aims CHALLENGE of a low growth economy BENEFITS of a sustainable performance plan CONCEPT of the driving systainability indicators FRAMEWORK of systainability metrics DATA SET for sustainability reporting MODEL for measuring the Impact of sustainability UNIVERSE of a first study in Europe WAY FORWARD searching market evidence

Working Paper 2 – V4 3 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate Project Rationale: BACKGROUND THEORY Environmental and social footprint – ongoing risk to property portfolios Link through to value line via various conduits

Working Paper 2 – V4 4 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate Project Rationale: BACKGROUND REALITY Paucity of evidence to support value differential (Sayce et al, 2010) Limited evidence emerging in US – CERTIFICATION LEVEL No such evidence for European markets and portfolios KEY QUESTIONS What sustainability factors impact on property returns? What risks do they present? Are these risks priced appropriately?

Working Paper 2 – V4 5 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate Project Rationale: KEY ISSUES DEFINING SUSTAINABILITY No globally accepted definition or criteria set Existing empirical studies tie to CERTIFICATION as a surrogate (e.g. LEED) BUT Not necessarily an indication of ‘full’ or ongoing sustainability Accreditation uptake in Europe is limited Grading and specific CRITERIA not extrapolated (w/exception of Energy Star) Identify aspects of commonality amongst existing rating systems/tools

Working Paper 2 – V4 6 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate Project Rationale: KEY ISSUES MEASURING SUSTAINABILITY Data measurement and collection core to building sustainability CRITERIA into financial modelling and worth forecasts BUT Measurement practices globally remain limited Key metrics (e.g. Energy) only collected by 19% of investors (Kok et al. 2010) Identify those metrics which are most commonly collected and held by portfolio managers

Working Paper 2 – V4 7 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate Project Rationale: AIMS OVERARCHING AIM Develop a deeper understanding of how individual sustainability risks are translating into market responses to inform investment decision making OBJECTIVES [1] To decompose existing rating systems to establish in particular which characteristics are most widely included [2] To establish which sustainability characteristics are most likely to have an impact on risk/return performance moving forward [3] To set up a mathematical model capable of analysing risk and returns on assets against a selected range of sustainability and conventional performance characteristics [4] To trial the model on actual assets to test whether data can in practice be collated

Working Paper 2 – V4 8 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate The Challenge of a Low Growth Economy Income Yield Income Growth RATE OF RETURN Non-Recoverable Cost Capital Expenditure Property Tax PRESERVE ! REDUCE ! (Inflation) ? OUTIN Performance Attribution

Working Paper 2 – V4 9 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate The Benefits of a Sustainable Performance Plan Standing Investment    SHORT POSITION Observations Performance Drivers Income Yield Income Growth Non-Recoverable Cost Capital Expenditure Property Tax Expectations Sustainable Investment   LONG POSITION - PERFORMANCE PLAN

Working Paper 2 – V4 10 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate MANAGEMENT The Concept of Driving Sustainability Indicators ENVIRONMENT economic naturalsocial PROPERTY

Working Paper 2 – V4 11 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate Towards a Framework of Sustainability Metrics REGULATORS EC (EPBD; GBP), ISO, CEN (EN ) ASSESSORS BRE (BREEAM), GBCI (LEED), DGNB (DGNB), BMVBS (BNB), AHQE (HQE) AUDITORS KPMG, PWC, VERITAS, FERI ASSOCIATIONS RICS, ICSC (BREEAM), INREV, EPRA COUNCILS UNEP-FI/SBCI (FSMR), GRI (CRESS), WGBC, SBA (CMF) CONSULTANTS JLL (OSCAR), IPD (ISPI), CBRE INVESTORS ISA (BREEAM), GRA (GR), GBA (GBA-CM) UNIVERSITIES KU (SAP), TUK, UM, HBS, CCRS (ESI), DUK SIRE

Working Paper 2 – V4 12 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate Natural SocialPhysicalEconomicStrategicFinancial The Data Set for Sustainability Reporting PROPERTYENVIRONMENTMANAGEMENT Natural ACCOUNTASSETISSUE UNIT AMOUNT Electricity Fuels Water used Waste disposed to landfill Waste disposed to other Green house gas emissions Emissions saved Water recycled / harvested ENERGY WATER WASTE CARBON kWh m3 t t t CO2e m3 Source: GBA (Ellison & Brown 2010)

Working Paper 2 – V4 13 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate A Model for Measuring the Impact of Sustainability SUSTAINABILITY INDICATORS Explaning Variables PROPERTY ENVIRONMENT  economic  social  natural MANAGEMENT PERFORMANCE DRIVERS Explained Variables (Income Yield) INCOME GROWTH NON-RECOVERABLE COST CAPITAL EXPENDITURE (Property Tax) ANALYTICAL MODEL Mathematical Functions DCF Disconted Cash-Flow MFR Multi-Factor Regression ROA Real Option Analysis

Working Paper 2 – V4 14 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate The Universe of a First Study in Europe RESEARCH PORTFOLIO INVESTMENT FUNDS POLICY, LEADERSHIP Investors Pool-Size F/COUNTRY ≥ 2, F/POOL ≤ 25% ASSETS

Working Paper 2 – V4 15 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate The Way Forward Searching for Market Evidence 5) SPECIFY APPROACH describe methodology for analysis of other markets 4) TEST LIMITATIONS verify gereralisation and restrictions and for further research 3) FIND EVIDENCE evaluate observations of sustainablility worth 2) DESIGN MODEL evaluate the available data with alternative model settings 1) COLLECT DATA structure the data base and set up the data template

Working Paper 2 – V4 16 ERES Conference 2010 Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate ACKNOWLEDMENTS. Royal Institution of Chartered Surveyors RICS Education Trust Austrian Chamber of Commerce, Federation of Real Estate Professionals Milan, Acknowledgements