1. 1 Sustainability and real estate investment performance Dr Paul McNamara OBE Head of Research, PRUPIM Co-Chair, UNEP FI Property Working Group SPR RESEARCH BRIEFING - London, October 1 st 2009

2. 2 Agenda  Property – a key part of the problem and the solution  Can investing responsibly in real estate enhance performance?  Approaches to responsible real estate investment

3. 3 Property and Climate Change Source: UJNEP SBCI (2006), pg 5 Being a significant part of the problem…. …makes property a significant part of the solution Share of the built environment in resource use Share of the built environment in pollution emission 020406080100 Water effluents Solid waste generation CO2 emissions 020406080100 Land Water use Raw materials use Energy use

4. 4 Property – a key contributor to climate change mitigation Source: IPCC, 2007

5. 5 So – it is hardly a surprise that property is a key focus of attention European & UK Government bodies Activists/Opinion Formers/NGOs Tenants Community Business Partners/ Suppliers Property Investors Investors/ Shareholders Customers/ Policyholders Employees

6. 6 The twin paradoxes “98% of the debate has focussed on 2% of the problem” “Those with the power don’t have the knowledge….and those with the knowledge don’t have the power.” The need is to see this as an investment issue relating to existing stock

7. 7 Can investing responsibly in real estate enhance performance?

8. 8 Behaving Responsibly Enhances Fund Performance Behaving Responsibly Has No Effect on Fund Performance Behaving Responsibly Harms Fund Performance Fiduciary Duty to act this way “Moral” Duty to act this way Dilemma Consider three possibilities…. Can we find a logic for this? Can we invert this logic and find things to do that don’t affect fund performance? Sadly, many start here…

9. 9 RPI can have a positive effect on property values and returns FactorInvestment ImplicationsUnderlying effects Tenants prefer green buildings  Rental differentials emerge between green and non-green buildings  Green assets quicker to re-let  Rental growth higher, depreciation lower  Shorter interruptions to cash-flow, lower risk premium Green buildings are cheaper to runMore money available for rentRental growth higher Impending government regulation and legislation Greener assets de-risked through better tenant retention/attraction Reduced risk premium Other investors prefer ‘green’ buildings Green properties quicker to transactGreater liquidity, lower opportunity cost and risk premium Green assets likely to have lower yields, higher values over time As differences in value emerge, green assets should outperform The more it matters, the more values and performance will be affected

10. 10 Early evidence of possible benefits Results for buildings with Energy Star ratings Variable Impact of being ‘green’ Rent per square foot+3% Effective rental income (adjusted for prevailing occupancy levels) +6% Sale prices+16% Source: Eichholz P, Kok N and Quigley J (2009) Doing Well by Doing Good? Analysis of the Financial Performance of Green Office Buildings in the USA, RICS Research Report, London, March 2009, pp 9 and 28 Total sample of 9,998 office buildings throughout the USA – 893 “green” 1,816 offices sold between 2004 and 2007 – 199 “green” Rental information on 8,182 – 694 “green”

11. 11 But is knowing about the effects the same as being responsible?  Sustainability is changing the entire context for property investment  Successful investors need to at least understand how sustainability will affect asset pricing and prospective performance  Responsible investors will go further and look for economic ways to work with assets and tenants to improve the environmental and social credentials of assets and, thereby, protect or enhance future returns Responsible property investment is quintessentially active

12. 12 Approaches to responsible real estate investment “investment where social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments, and the responsible use of rights…......…attaching to investment”(Mansley M., 2000, pg 3)

13. 13 Responsible Investment ‘Engagement’Screening‘Best in Class’Enhanced Analysis Positive Negative Direct Action Indirect Pressure Forms of Socially Responsible Investment

14. 14  Relationship between Investor and Invested Asset  Property as a ‘Binary’ (Tertiary?) Asset  Property as a Concatenation of Time-limited Investments  Differential Liquidity and Transaction Costs  Property as a ‘Legacy Asset’ Five differences between property and equities

15. 15 Three forms of ‘Engagement’ in Property Engagement with the Tenant (occupiers) Engagement with the ‘Legal Structure’ (leases) Engagement with the Built Structure (buildings)

16. 16  On Site  New building  Refurbishment  Property management  “Situation”  Benefits of landlord expenditures can accrue to the tenant.  Timing, scale and nature affected by the lease Engagement with buildings

17. 17  Leases are socio-cultural in nature  commonly grants occupation rights  more restrictions can reduce attractiveness (rent and value)  Green leases/Memoranda of Understanding  obligations on both tenant and landlord, agreed at the outset and enforced through the term of the lease. Engagement with leases

18. 18  Occupiers are crucial to the environmental and social impact of a property.  The lease greatly determines what can be achieved  ‘Informal engagement’ with tenants  No ‘voting’ rights, as in equities  Dialogue to persuade or educate tenants how to utilise their premises in a more environmentally responsible way. Engagement with occupiers

19. 19  Can be done (both positively and negatively) with respect to a variety of asset characteristics.  E.g. relative location of properties, physical attributes of buildings, and/or tenants  However, the nature of property as an asset class causes problems Screening in Property

20. 20  Limited and uniform investable stock  creates risk for investors  Tenant screening  What to do about mixed occupied assets  Rights to occupy and assign  Capital already invested  Limited availability of data – on buildings or tenants Difficulties with Screening in Property

21. 21 Conclusions  Property is a major element of both the problem of, and the solution to, increasing CO2 emissions  A very major user of resources generally and conduit for CO2 emissions  The lowest cost per unit impact on the problem  Setting aside increasingly stringent government regulations – ‘green’ property investments should perform better  Higher net income growth at lower risk  Savvy investors will profit from this knowledge; responsible investors will strive to ‘do well by doing good’ – especially through improving existing stock