Socially responsible investment (SRI) was once dismissed as the preserve of the tree hugger or the ethical activist. Yet today it accounts for £9bn in assets globally and £5.9bn in Europe.
Property, with its current return performance, is a key asset class in the SRI sphere. But for some investors, there are still sustainability hurdles to overcome before property becomes the SRI asset class of choice.
In investment performance, property is currently having its moment in the sun.
It is now outperforming other asset classes with nearly 15% returns compared with 6.6% for equities and -5% for bonds. It’s a similar picture for yields, with equities just under 4% and property edging towards 7%.
“Property is now the natural place to go,” says James Thornton, chief investment officer at Mayfair Capital, speaking at its annual investment seminar in London. “What was happening in equities last year is now coming through to property and economic conditions continue to be favourable to property.” Thornton, who is also fund director of the Property Income Trust for Charities Fund, says that with the property market continuing to perform well, asset selection is crucial for SRI investors, not only for attaining maximum returns, but also for meeting sustainability principles.
He says Mayfair’s current investment strategy is to push out into the regions, particularly Manchester and Bristol, although offices and sheds in the South East are still key. It is also looking at the restaurant sector to take advantage of the growth of the “fast, casual diner” in locations near large leisure and retail areas. It has a strict environmental policy for all its funds and will invest only in property with high EPC sustainability ratings and those that fit with its ethical policy.
For property, it is the sustainability of buildings that can be an obstacle for SRI investors. It is estimated that 35% of the EU’s carbon emissions, 30% of its water consumption and 30% of its waste generation comes from property. Its record of tackling these stats isn’t sterling either, with about 200,000 commercial properties falling below the green EPC ratings E standard (26 April, p43), the legal minimum due to be in force by April 2018.
Not only are these buildings unattractive to the SRI market, but there is growing evidence that a poor rating can also chip away at value from traditional investors, with a central London office block recently selling for 5% less after a EPC rating of F.
“If the property industry doesn’t face up to this and take action, there’s going to be a real impact on asset value,” said Alastair Mant, head of sustainability at GVA, speaking at the seminar. Mant says the industry still hasn’t woken up to the benefits of sustainability. He says research has shown that BREEAM-certified buildings can see rental increases of 28% and tenants an 18% increase in employee productivity, while sale values can increase by 25%.
“I can’t say what a sustainable building is,” he says. “The industry is always moving on but it is about making better buildings, reducing costs and increasing productivity.” Mant warns that up to 70% of investors now look at energy efficiency and 66% at the sustainability rating of buildings when they are making investments. “Badges like GRESB and BREEAM are becoming increasingly important,” he says.
Mant says there is work under way to compile an EPC risk register to determine the scale of the problem come April 2018, when the legislation comes in. But while property is performing so well against other asset classes it seems obvious to invest now, he says, and increase appeal across the investment spectrum.
But increasing property assets’ sustainability and SRI compliance isn’t entirely the responsibility of the industry. Investors as well as fund managers have a role in pushing sustainability issues. Lucy Tusa of Mercer UK, who advises charities on SRI, says property is a natural asset class for charities but she tells clients to review the ethical performance of a fund manager, how they vote and how often, and look carefully at the sustainability of any property assets before they invest.
Peter Michaelis, head of sustainable and responsible investment at Alliance Trust Investment, concurs with Tusa. He told the Mayfair seminar that he advises clients to invest only in companies promoting a “better future”, such as carbon reduction or health improvement. Other companies he encourages to change from within, to use their investment muscle as an active shareholder. “A US corporate manager once told me that only teenage girls were interested in ethical investment,” says Michaelis. “But it can be hugely influential. It was investor activism that got global retail companies to pledge to make Bangladesh safer after the Plaza factory collapse.”
SRI case study: The Crown Estate
From 2010, The Crown Estate stopped treating sustainability as a separate corporate issue and integrated it into its investment activity. Vivienne King, the Crown’s director of business operations, says that the estate aspires for its assets to have EPC ratings of C and above, and that all its urban properties have sustainability improvement plans. She says the estate is carbon net positive with its sustainability drive, which includes using certified timbers and avoiding soil erosion, and as a result has avoided about 4m tonnes of carbon emissions since 2011-12.
SRI case study: Bridge Ventures
Bridges Ventures, a social impact investor, has recently launched an alternative property fund. The company, which aims to raise £200m of equity to create the fund, says it will be targeting only projects it deems to have a beneficial impact on society. It expects Bridge Property Alternatives to have a value of £500m.
