Investing: The future of sustainable property

Globally Environmental Social and Governance factors are having a growing impact on how we invest, as asset managers, we now must go beyond just considering the short-term bottom line.

Tuesday, October 30th 2018, 8:00AM

by Pathfinder Asset Management

The Real Estate sector has also made a shift in how their operations making a strong push to a sustainable future. “Environmental Social and Governance” (ESG) is now catching up with “Location, Location, Location”. Our developed environment is crucial to everyday life and has resulted for the most part in well-governed real estate businesses, however, environmental and social factors have not always been considered. Professional services firm PWC thinks that needs to change, saying “sophisticated approach to ESG practices can be critical”, in their annual Emerging Trends in Real Estate report.

As a part of our everyday life, the developed environment (including shopping centres, hospitals, housing and offices) has a significant impact on the people that use them. A push towards a greener and more sustainable buildings is critical, property developers and managers now understand that this can make tenants happier and more productive – increasing occupancy and rental rates. The idea isn’t new it just hasn’t traditionally been applied to mainstream buildings yet. Singapore's Marina One is one example of the new wave of buildings. It has enough plants to change the climate of the building, filter the air and store enough carbon to make the building a carbon negative emitter. The multi-use building hosts Facebook as an office tenant and combines residential, shopping, fitness and entertainment facilities with open green shared spaces. The development has set out the blueprint for modern sustainable building design.

Real estate investment trusts (REITs) own and operate a broad range of properties, management teams must now think like the developers of Marina One, creating buildings that go beyond just providing a place to live, shop or work but a space that allows human interaction and social benefit. Happier tenants can mean higher rents.

Buildings are a major part of the built environment, consuming large amounts of energy and emitting large amounts of carbon. The UN Environment Programme estimates that the construction and operation of buildings account for 40% of global energy use. Architecture can have a positive impact on a social level. However, the real benefit to the triple bottom line (plant, people & profits) are the environmental improvements buildings can make. Cities including San Francisco and Toronto are now required by law to install solar power infrastructure in all new buildings. What may increase construction cost now will have benefits in the long term – making property owners think long-term, like responsible investors. It’s not just new building like Singapore's Marina One, the thinking can also be applied to retrofits. New York’s iconic Empire State building has been refreshed after decades of neglect. The retrofit included replacing over 6,500 single pane windows and installing reflective insulation. Power savings of 38% per year alone will pay off the redevelopment cost in just three years.

What does this all mean for investing? As disclosure and data improve investors will know which buildings are improving energy consumption, reducing water use and even their carbon footprint. This information will all flow to the triple bottom line and reward investors who seek out only the most sustainable properties in the market. Along with a host of other market data provides, S&P a global leader in financial data has made a comitment to producing green property data. Data examples include down to the building water monitoring, energy use and waste management. A well-run building like Marina One attracts better tenants that experience increased staff retention, optimised productivity and reduced environmental impacts from operations – all having a significant impact on the triple bottom line.

Karl Geal-Otter is an investment analyst at Pathfinder Asset Management, a boutique responsible investment fund manager. This commentary is not personalised investment advice - seek investment advice from an Authorised Financial Adviser before making investment decisions.

Pathfinder is an independent boutique fund manager based in Auckland. We value transparency, social responsibility and aligning interests with our investors. We are also advocates of reducing the complexity of investment products for NZ investors. www.pfam.co.nz

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