The importance of social criteria for responsible property investment: A Swiss view on the market success of sustainable real estate fundsScholz, R.W., Bügl, R., Hüni, G.R. and Leimgruber, C.

ERES Conference 2009, Stockholm, June 24-28, 2009

Workshop Session 6-C Investment and Finance

Outline

1. Introduction2. Results

2.1. Sample description

2.2. Sustainability criteria

2.3. Market acceptance

3. Sustainability - What can we learn?4. Conclusions and outlook

2

1. Introduction (1/4) – Swiss real estate market

3Sources: Cf. Graf (2008); Wüest & Partner (2006).

Bio. US$

Total real estate value in Switzerland is about 1436 bio. US$

This equals factor 4 of the Swiss GDP and factor 2 of the stock market capitalization in Switzerland

About 50% property ownership and 30% property to rent

1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

3. Sustainability -

What can we

learn?

4. Conclusions

and outlook

1. Introduction (2/4) – Sustainable property investment

ETH-UNS case studies: Gothenburg (Lundby), Zürich Nord, Sulzer-Escher Wyss, Basel and other cities and regions

Certification according to Minergie standards is rapidly upcoming, but this certification just equals about 0.5 - 0.75% of the total building stock in Switzerland (Minergie, 2008; SFSO, 2006)

Shares of energy for room heating, warm water supply and CO2 emissions generated by energy at home are almost about 40% (Ankirchner, 2006; Weber and Perrels, 2000)

Improving waste management: Amount of building waste is enormous, and recycling often means material downgrading (cf. Spörri et al., 2009ab)

Strong ecological commitment (Minergie, SIA 112/1, Life cycle

analysis, ...), but social criteria are missing

4

1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

3. Sustainability -

What can we

learn?

4. Conclusions

and outlook

1. Introduction (3/4) - Research questions

Which sustainability criteria do key financial stakeholders view as important for the market success of S-REFS?

What is the role of sustainable social infrastructure? How is the market acceptance of S-REFs by financial stakeholders,

and what role do cognitive drivers and institutional context play ?

5

1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

3. Sustainability -

What can we

learn?

4. Conclusions

and outlook

1. Introduction (4/4) - Methods

Procedure of the study - basic modules: Focus groups (N = 15) Generation of sustainability components Questionnaire study (N = 68) Anticipated importance, market

acceptance

Sample of the questionnaire study: 58 institutional real estate investors (from 44 employing institutions) 10 real estate funds suppliers (from 4 major REF supplying companies)

Market acceptance indicators: Decision to invest Investment volume Willingness to accept return shortfalls

6

1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

3. Sustainability -

What can we

learn?

4. Conclusions

and outlook

2.1. Sample description (1/1)

Capital investment categories:

7

1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

3. Sustainability -

What can we

learn?

4. Conclusions

and outlook

2.2. Sustainability criteria (1/3) - Focus groups

Attractivity of location Energy for usage Well-being Return on investment Building materials

= most important criteria

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cost o

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8

1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

3. Sustainability -

What can we

learn?

Mean

4. Conclusions

and outlook

9

Low pollutant-loading of building materials

Long life cycle of structural components

Little sealing of soils Quality of landscape and few natural hazards

Low-energy demand for warm water

Low costs for construction and conservation

Support for endemic plants on green areas

Conservation and creation of pristine areas

High proportion of renewable energy

Low-maintenance constructions

Greening of roofs and facades

Low electricity demand during operation

Low expenses for value conservation

Indoor air quality Easy substitutability of technical components

Eco-friendly raw building materials

Slim building technique

High proportion of recycl. building materials

Above-average return on tenancy

Blue: above-average import. for market success

Little demand for realty areas

Red: below-average import. for market success

Building materials

and energy

Expenses, return

and flexibility

Green space

design

Landscape &

natural ecology

Su

sta

ina

bil

ity

cri

teri

a f

or

RE

Fs

economic sustainability criteria

are dominant for market success

ecological sustainability criteria

are of minor importance for market success

Explained

variance

=

83.1%

2.2. Sustainability criteria (2/3) – Questionnaire study

2.2. Sustainability criteria (3/3) – Social infrastructure

Social sustainability is no independent factor

Substantial correlation of “Sustainable social infrastructure“ and orthogonal sustainability factors

Fundamental dilemma of sustainable real estate investment: Key finance stakeholders aspire maximum return on

investment and avoid social investments of public use

Critical social factors are underestimated with regard to the added value of sustainability

They view sustainability as a mean of risk reduction

10

Sustainable

Social infrastructure

Conventient transportation network

Considering future development

Daylight penetration in the building

Well-being and feeling secure

Obstruction-free and equipped construction

Flexibility and modifiability of building and structures

Playgrounds, sports facilities, seating accomod.

Social mixture of dwellers

Social sustainability criteria

large spread of importance

Su

sta

ina

bil

ity

cri

teri

a f

or

RE

Fs

2.3. Market acceptance (1/2) – Willingness to invest

3 out of 4 institutional real estate investors are potential S-REF investors

9.3 Mio. Swiss Francs (7.04 mio. US$) mean willingness to invest of potential S-REF investors

60 percent of the real estate funds suppliers are potential S-REF suppliers if the supply of sustainable real estate is enough

Acceptance of return shortfalls: 38% of responding investors are willing to accept return

shortfall Average absolute rate return shortfall of 0.85% under benchmark= Mean relative interest rate decrease of 21%

(SWX Immobilienfonds Index, average return of 4.0% 2004-2005)

11

1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

3. Sustainability -

What can we

learn?

4. Conclusions

and outlook

12

2.3. Market acceptance (2/2) - Drivers

12

Positive impacts

Negative impacts

Mixed impacts

13

3. Sustainability (1/2) - What can we learn?

What can the finance sector learn? Develop S-REFs from a social and ecological perspective Show the sustainability management effect of S-REFs Sustainability assessment of S-REFs has to inform classical finance evaluation

What is missing for sustainable development? Real estate stock of sustainable buildings with gentrification potential is critical but also at top-level locations (eco-friendly, lifestyles, ...) Sustainable buildings exist in the residential sector (single-family houses), but sustainable buildings for multi-storey superstructures, offices, trade/commerce

and industry are very rare (diversification) Sound differentiation of sustainable vs. conventional REFs:

Under which conditions can a REF be called “sustainable”?

14

3. Sustainability (2/2) - What can we learn?

Where are the boundaries for investors? Ecological and social market arguments are perceived as hampering return (anticipated costs > yield) Critical social criteria and proper implementation in finance instruments are some kind of a blind spot

Where is the potential for transdisciplinary action? Transdisciplinary action is a process of mutual learning of practice and science on equal footing Development of diversified development funds, object funds, ... Develop a S-REF from scratch or redevelop a conventional REF

1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

4. Conclusions

and outlook

3. Sustainability -

What can we

learn?

4. Conclusions and outlook (1/1)

S-REFs are a business case in countries with sustainability commitment

Results help to introduce S-REFs in the finance market and to understand the investment behavior of institutional real estate investors

Some critical criteria of social sustainability are missing (cf. Kriese and Scholz, submitted), and views on economic sustainability criteria are dominant for market success than views on ecological criteria

Stock of sustainable real estate in Switzerland, volume of S-REFs and sustainability engagement is critical

Besides technological systems, lifestyles are a key component for the ecological and social efficiency of urban and regional systems

Strong need for sustainability learning and transdisciplinary action for the development of S-REFs in order to ensure quality standards

15

1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

4. Conclusions

and outlook

3. Sustainability -

What can we

learn?

Thank you!

16

APPENDIX

17

Swiss real estate market

1.0% of the total real estate value are stock-traded and 1.5% are invested in indirect real estate investment products (Credit Suisse, 2006)

About 0.8% of the total real estate stock value in Switzerland is traded in open-ended real estate fund (REF) products

Swiss real estate investment funds, which are authorized by the Swiss Federal Banking Commission, had a total asset volume of US$11.1 billion as of midyear 2005 (Swiss National Bank, 2007)

Sustainable real estate funds (S-REFs) are now in the stage of market introduction and product settlement

18

1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

4. Conclusions &

outlook

3. Sustainability -

What can we

learn?

Definitions

Sustainable real estate funds (S-REFs): A definition of S-REFs should meet both the performance demands of

financial institutions as well as the impacts of the real estate investment.

Sustainable social infrastructure: Sustainable social infrastructure consists of goods, services and spatial

structures that enable human systems to realize their capabilities without social inequality.

19

20

Description of hypotheses

Methods

21

Design of a S-REF

22

Conclusions and outlook

S-REFs create supply of sustainable building stock which can may attract and foster the expression of sustainable lifestyles.

The application of human-environment systems allows for a more thorough interdisciplinary understanding of lifestyles

Managing the incentive-barrier structures, which are linked to sustainable lifestyle settings, is crucial for enabling sustainable urban living.

The urban design of lifestyle settings may aid in structuring improvements on the material and cultural spheres that may eliminate system disparities.

The proposed conceptualization of lifestyles can be utilized for structuring sustainable transitions of urban and regional systems

S-REFs can enhance the functionality of urban planning (enhanced district planning, integ. participation, future-oriented dialogue processes)

23

1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

4. Conclusions &

outlook

3. Sustainability -

What can we

learn?

E.g.,

- Energy & mobility

- Residential living

- Health care

- Working sphere

- Consumption

patterns

- Leisure-time activities

- Social networking

Human-environment matrix

components

Human matrixH

Cognitive-behavioral submatrix:

Socio-demographic submatrix:E.g.,

- Age - Life cycle status

- Family status

- Nationality

- Gender - Social status

- Income - Wealth

Lifestyle consequences

Human outcomes

Environmentaloutcomes

E.g.,

- Acidification

- Depletion of (a)biotic raw materials

- Eutrophication

- Ecotoxicity

- Greenhouse effect

- Ozone layer depletion

- Physical ecosystem degradation

- Smog, noise, odor

Environmental matrixE

Situational submatrix:

Socio-cultural submatrix:

E.g.,

- Health status, human toxicity

- Income distribution, property equity

- Life expectancy, direct victims

- Population, community structure

- Quality of life, well-being

- Migration, social exclusion

- Social equity, access to resources

- Social exclusion, cultural landscape

E.g.,

- Built

environ.- Formation

- Climate - Legislation

- Density - Media coverage

- Ecology - Urbanization

E.g.,

- Acculturation

- Reference

groups

- Cultural env.

- Social capital

- Integration - Social norms

- Hist. context

- Segregation

E.g.,

- Attitudes - Risk perception

- Awareness - Salience

- Dissonance - Skills

- Interests - Values

Identification

Affiliation

Distinction

Symbolic motives

E.g,

MotivesIncentive-

barrier structur

es

E.g.,

Affective motives

Instrumental motives

Habits

Lifestyle components

Lifestyles

Lifestyles - Fields of transition

25

Energy & mobility

Residentialliving

Workingsphere

Consumptionpatterns

Healthcare

Consumer behavior

Urban housing

Public health

Traditional lines oflifestyle research

Fields of transition

Leisure-timeactivities

Socialnetworking

Lifestyles inurban systems

Further readings

Sustainable real estate funds (S-REFs): Sustainable property funds: financial stakeholders’ views on sustainability criteria and market acceptance.

By Bügl, R., Leimgruber, C., Hüni, G.R., & Scholz, R.W. (2009). Building Research & Information.

Sustainability criteria for finance products: Principles for sustainability rating of investment funds.

by Koellner, T., Fenchel, M., Weber, O., & Scholz, R.W. (2005). Business Strategy and the Environment. Incorporating sustainability criteria into credit risk management.

By Weber, O., Scholz, R.W., & Michalik, G. (2008). Business Strategy and the Environment.

Embedded case study methods - book: Embedded case study methods: Integrating quantitative and qualitative knowledge.

By Scholz, R.W., & Tietje, O. (2002)

Environmental literacy - book: Environmental literacy in science and society: From knowledge to decisions.

By Scholz, R.W. (in prep.)

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1. Introduction 2.1. Sample

description

2.2. Sustainability

criteria

2.3. Market

acceptance

4. Conclusions &

outlook

3. Sustainability -

What can we

learn?