A comparative study into the effect of sustainability on corporate property investment drivers in the UK, Australia and New Zealand

Deborah LevyUniversity of Auckland, New Zealand

Anthony DeFrancescoColonial First State Global Asset Management, Australia

Outline

• Background

• Sustainability as perceived by major property investors

• Differences in key drivers of sustainability on the property investment environment in Australia and New Zealand and the UK

Background

• Our previous research discussed the possible impacts of sustainability on commercial property investment in Australia and New Zealand

• To gauge what key investment decision makers in different countries consider relevant factors when it comes to incorporating sustainability into property investment decisions

• Interviews with UK property funds

Defining sustainability in the context of corporate property investors

• A framework for adopting investment principles which give joint consideration to the economic, social and the natural environment, thus effectively utilising resources for current and future generations.

• Need to jointly consider three key elements:

– Economic prosperity

– Social advancement

– Environment protection

Responsible property investment

• UNEP Finance Initiative’s Property Working Group came up into 10 underlying dimensions (Pivo 2008):– Energy conservation– Environmental protection– Voluntary certifications – Public transport-orientated developments– Urban revitalisation and adaptability– Health and safety – Worker well being– Corporate citizenship– Social equity and community development– Local citizenship

What are leaders doing?

• Pivo (2008) highlights a number of initiatives under each of these 10 headings, it is interesting to note which countries are represented in each of the categories and contemplate why?

What are investors doing by country?

• Energy conservation: Europe, Australia, France, UK

• Community development: UK, USA• Green power: UK, Japan• Water conservation: France, UK, Australia• Solid waste management: USA, UK• Fair labour practices: USA• Environmental quality certification: France, UK,

India• Historic preservation: USA, UK

What are investors doing by country?

• Parks, plazas, atriums and natural areas: UK• Safety and risk management: UK, France• Transportation demand management and

transit-oriented development: USA, UK• Tree planting and preservation: Japan, France• Urban regeneration: UK, USA• Design quality: UK

Impact of sustainability- understand interplay between environments

Asset users (tenants)

Asset managers (agents)

Owners of capital (investors)

Asset creators (developers)

Asset owners (landlords)

Managers of capital

(funds managers)Investment

environmentBuilt

environmentSUSTAINABILITY

Regulatory environment

Government and related agencies

Industry groups (eg. PCA, BCA)

External environment

Non-Government Organisations

(NGO’s)

Other global influences

Source: CFS Research.

Methodology• Undertook in-depth interviews (1-2 hours) with key

industry players • In establishing the interview guide and making it

relevant we initially sought guidance from NZ Green Building Council and other industry professionals

• Interviewees:– Coverage: 14 companies, 18 people– country exposure: 4 interviews (AUS), 4

interviews (NZ), 6 interviews (UK)– interviewees: asset managers & fund managers

Results were transcribed and key themes identified

Methodology- topics covered in the interview guide

• Ascertaining perceptions of respondents in the following areas:

– Impact of sustainability on investment strategies

– Tools to gauge the impact of sustainability

– Drivers of sustainability• property development• property investment

• The use of sustainability in new versus existing buildings

What does the property industry understand by sustainability: themes• Overall, Australian, NZ and British respondents

agreed with the literature definition of term sustainability, for example:“alignment of environment and social objectives with commercial objectives” (Australia)

• Australian and NZ Funds generally believe that the term is used too loosely in the market, but they have to imitate this because:“we cannot operate in an island, we have got to relate to our various stakeholders” (Australia)

What does the property industry understand by sustainability: themes• In the UK there seemed to be a deeper

understanding of the wider issues and how they relate to corporate responsibility. More of a history and longer term perspective.

• “it’s a 300 year old company which plans to go on for another 300 years” (UK Fund)

• “Our funds, our clients are looking over decades rather than years o it’s something about longer term maintaining of, I suppose, both return and acceptable economic and living conditions.”(UK Fund)

What does the property industry understand by sustainability: themes• In Australia much more focused on resources and actual

buildings:

• Sustainability to me is the efficient use of resources to make sure that we don’t utilise and ruin the world for the next generation that is really general. (Aus)

What does the property industry understand by sustainability: themes• In the UK there seemed to be a wider

interpretation and more of a relationship to corporate responsibility. More of a history and longer term perspective.

• “it’s a 300 year old company which plans to go on for another 300 years” (UK Fund)

• “Our funds, our clients are looking over decades rather than years it’s something about longer term maintaining of, I suppose, both return and acceptable economic and living conditions.”(UK Fund)

Points of difference• The UK has the widest and most holistic

interpretation of the term sustainability and the implications for all three elements o the generally agreed definition.

• In Australia, sustainability is viewed more narrowly but does embrace an understanding of more responsible investment

• In New Zealand, sustainability is viewed in asset-specific context – it focuses on ‘green building’ initiatives

• This tends to reflect the variations in market maturity and immediate concerns on the topic

Drivers • An advocate within the organisation:– A recurring theme over the 3 countries– In Australia and the UK roles such as the “Head of

sustainability” more prevalent– In UK much wider responsibilities than in Australia.“My role in the business is head of sustainability. So

the easy way to put that is that I look after anything to do with social and environmental aspects of our business, from community engagement, job training skills, through to energy, water, waste..” (UK)

Drivers

• To be active the drive needs to come form the top of the company:– “Our MD couldn’t be more committed” (UK)

– “X has been instrumental in getting it under way (NZ)

– The CEO’s vision is there and he drives it pretty hard and he is very vocal on this…” (Aus)

Drivers

• In all three countries a prevalent theme is the importance of the commitment of someone senior with influence with a vision to drive the company’s investment strategy.

• This in turn has lead to people being employed to take responsibility for sustainable issues ranging from environmental (more prevalent in Australia) to environmental, social and economic.

Key Drivers – Tenant demand• Instrumental to getting the green initiatives

up and running in Australia and New Zealand.

• Government tenants in Australia and NZ require at least a 4 star building rating

• Large corporate tenants wanting to be perceived as good global citizens are competing to occupy higher and higher green star rated buildings

Key Drivers – Tenant demand• In the UK more discussion around the variety

and education of tenants and other stakeholders:

• “Our retail tenants vary from M&S and our office tenants like HSBC through to a retail tenant who has no idea about what we’re talking about and why it is important to them” (UK)

Key drivers – Government, regulation and rating systems

In Australia and New Zealand the major impact has been the Green Star rating tool initiated by industry.

• General feeling that government incentives could create stronger initiatives for green development.

• December 18th 2008 Disclosure office energy performance now mandatory in Australia.

Key drivers – Government, regulation and rating systems• In UK tools although important (BREEAM) the

government has had more of an impact, starting from such legislation as health and safety.

• “I mean here the Government is miles ahead, the legislation is miles ahead but the private sector has been a bit slower on the uptake” (UK)

• Energy Performance Certificates will have a big impact in UK when stakeholders will be able to rank buildings

Economic drivers

– Respondents from all countries concerned with “future proofing” their assets and believe by building “green” or refurbishing, this is a way of doing it.

– In Australia want to reduce possibility of a “stranded asset”

Economic drivers

– Respondents do not believe that there is a clear evidence yet that there is higher returns from green buildings but most believe that non green buildings will lose value.

– General feeling across countries is that valuers and real estate agents could play a more important role

– Cost of utilities – reduction of OPEX

Social drivers

• Much more wide ranging in the UK that in Australia and New Zealand

• “Important for a couple of reasons:• One we believe in it… and two they have a corporate

responsibility to do it, and three …it’s an opportunity, it helps us get planning..we’ve got fantastic schemes that deliver jobs.”

• “It’s probably because in Australia, you do a building..you don’t do a town centre”

• “Here it is a lot more (Community engagement, because generally you’re going into a brown fields site..they’re different issues” (UK)

Overall findings

• There are differences in the main drivers leading to sustainable development across different countries

• In Australia and New Zealand the push has come from new buildings and te consequences of climate change.

• In UK more of a government push, initially in he area of health and safety and more recently EPCs

• All countries landlords looking for more evidence of benefits from returns.

Green leases

• Green leases being commonplace in Australia and being considered more recently in New Zealand.

• In Australia a number of funds see green leases as a way of creating closer relationships with their tenants.

• In the UK landlords considering more Memoranda of agreements pressure from valuers real estate agents, lawyers and tenants who perceive green leases more onerous on the tenant.

Discussion

• It seems clear that the drivers to sustainable investment for large property owning organisations vary distinctly between countries.

• This may be for a number of reasons:– Pressing climatic conditions (Australia vs UK)– Government initiatives– Tenant demand– History and differences in company culture

• Different phase of embracing these issues