Current Attitudes Towards Sustainability and its Potential to Impact upon Property

Portfolio Values Within the UK

SID- Removed – BSc (Hons) Building Surveying

Acknowledgements The author of this research work would like to thank the following for their

assistance and input towards the completion of this work:

John Bennett BSc (Hons), FRICS – Head of Business Planning and Resources with the Valuation Office Agency

Tatiana Bosteels Head of Responsible Property Investment with

Hermes Real Estate Investment Management Ltd. James Clifton-Brown Chief Investment Officer UK with CB Richard Ellis Investors Donna Harris Director of Legal Services (Property) with AVIVA Syed Jamalullail Sustainable Investment Team Analyst with

F&C Investments

Karina Litvack BA (Hons), MBA – Head of Governance and Sustainable Investment with F&C Investments

Esme Lowe Partner: Property Fund Team with

Climate Change Capital

Lord Mandelson and Claire Brialey (Sustainable Buildings Division) Department Communities and Local Government for provision of Government documentation relating to Commercial Property

Paul McNamara BSc (Hons) PhD, ASIP, FRSA, OBE – Director and Head of Research with PRUPIM

Professor Gary Pivo BA, MSc, PhD – Senior Fellow,

University of Arizona Jonathan Tillson Head of Sustainable Development at DEFRA HRH Prince of Wales and Claudia Holloway of Clarence House, for

providing information regarding The Prince’s Charities – Accounting for Sustainability Project

Finally my thanks to Mr. Stephen Fenton, BSc, FRICS, PGCE, FHEA, for his

continued guidance and supervision throughout this dissertation project.

Abstract

Responsible Property Investment is simply one area of sustainability that is

present within the built environment. Sustainability as a whole is fast

becoming one of the main concerns within industry, with those managing

property portfolios equally susceptible to its effects as those on the

construction side. This report focuses on current opinions and attitudes

towards the field, and how these can have a knock-on effect to property

values.

Initially the question was do investors care? - If an asset was capable of

generating favourable returns, then what did it matter if it was highly inefficient

or only useable over a short term? The purpose was then to ascertain

whether a change in overall opinion and the “valuing” of sustainability

amongst the industry would change investment trends.

This paper then looks at the existing considerations given to sustainability

within real estate investment, whilst looking ahead to what is being done to

incentivise further action within the area. In order to do this, current industry

professionals were approached with questionnaires and for formal interview,

in order to provide data giving a qualitative overview of current practice and

opinion.

The findings of the research suggest that, although initially there was little or

no interest, sustainability as a consideration during property investment is

growing. A small number of dedicated funds are emerging specifically

targeting carbon reduction within assets, whilst owners and occupiers are

increasingly looking to reduce costs associated with energy efficiency. This

has resulted in premiums being attached to sustainable property, both as

additions to a portfolio and commanding higher rent values.

Contents

ACKNOWLEDGEMENTS ........................................................................................2

ABSTRACT..................................................................................................................3

CONTENTS..................................................................................................................4

1. INTRODUCTION....................................................................................................6 1.1 AIMS AND OBJECTIVES. ........................................................................................8 1.2 LIMITATIONS TO THE RESEARCH ...........................................................................9

2. CURRENT LITERATURE. .................................................................................10 2.1 OPPORTUNITY AND NEED....................................................................................10 2.2 RESPONSIBLE PROPERTY INVESTMENT (RPI)......................................................10 2.3 VARYING APPROACHES TO RPI...........................................................................11 2.4 INVESTMENT DRIVERS ........................................................................................12 2.5 SUSTAINABILITY DURING ASSET ACQUISITION ...................................................13 2.6 GOVERNMENT STANCE .......................................................................................15

3. METHODOLOGY ................................................................................................16 3.1 AIM .....................................................................................................................16 3.2 PROJECT LAYOUT................................................................................................16 3.3 LITERATURE REVIEW. .........................................................................................16 3.4 PILOT STUDY ......................................................................................................17 3.5 MAIN SURVEY.....................................................................................................18 3.6 FORMAL INTERVIEWS..........................................................................................18

4. ETHICS STATEMENT ........................................................................................19

4.1 PROJECT TITLE:...................................................................................................19 4.2 RESEARCH OVERVIEW: .......................................................................................19 4.3 PARTICIPANTS:....................................................................................................19

4.3.1 - Who will they be and how are they selected?...........................................19 4.3.2 - Participants right to withdraw: ................................................................20 4.3.3 - Participant Consent:.................................................................................20

4.4 INCONVENIENCES AND POSSIBLE NEGATIVE OUTCOMES:.....................................20 4.5 INFORMATION SOURCES AND HELP PROVIDED FOR PARTICIPANTS:....................21 4.6 FEEDBACK: .........................................................................................................21 4.7 INTERVIEW GUIDE: .............................................................................................22 4.8 OVERVIEW OF DATA ANALYSIS: .........................................................................22

5. ANALYSIS OF ACQUIRED DATA....................................................................26

6. FORMAL INTERVIEW RESPONSES...............................................................41

7. CONCLUSIONS ....................................................................................................49

8. FURTHER RESEARCH.......................................................................................53

REFERENCES...........................................................................................................55

BIBLIOGRAPHY......................................................................................................58

APPENDIX A.............................................................................................................63

APPENDIX B .............................................................................................................69

APPENDIX C.............................................................................................................70

APPENDIX D.............................................................................................................71

APPENDIX E .............................................................................................................72

APPENDIX F .............................................................................................................73

1. Introduction

“Only business can build a low-carbon economy. Business is all about seeing ideas

and growing them. Businesses have the resources, the people, the technical skills to

make things happen…”

- Tom Delay, Chief Executive, The Carbon Trust (reported in The Times, 25 March 2008)

Climate change is big business. Around the globe, new legislation has been

introduced, targets set and plans initiated to react to the changes being seen

within the environment.

The built environment accounts for over 8% of the UK’s GDP. This figure is

only the direct relation between construction and wealth produced. All manner

of assets, including property, from a range of international institutions and

corporations’ portfolios create wealth for their respective owners. In fact, only

49 of the top 100 largest global economies are countries; the other 51 are all

multinational corporations.

(Crossley, 2000)

When this is considered alongside the knowledge that 50% of our carbon

emissions come from the construction and operation of the built environment,

it becomes clear as to how much of a relationship there is between business

and efforts to lower and indeed erase our, “Carbon footprint, “ including the

amendments to the Climate Change levy in April of this year.

(Carbon Trust, 2009)

This is where the notion of sustainability being combined with the responsible

management of assets, can be used to generate and improve value of

property portfolios whilst making a difference to the environment.

(Sustainable Development Commission, 2009)

Two of the main driving forces of corporate organisations are to achieve

success through profiting in their business, and encouraging a positive public

perception of that business. The advent of Corporate Social Responsibility

(CSR as it is commonly referred to) means that these can be accomplished

simultaneously. By creating a positive public perception and therefore

encouraging further investment from outside sources, companies can be seen

to be adhering to their socially pressurized responsibilities, whilst generating

revenue and succeeding in their business.

In 2007 a study was undertaken in the United States where executives within

property investment were surveyed to comment on their attitudes towards

Responsible Property Investment (RPI.) Unsurprisingly, their concerns were

that by selecting responsible investments, their overall financial performance

and fiduciary obligation would be affected.

Having shown this reluctance to, in their minds at least, put performance

levels in jeopardy in exchange for dealing with the “bigger issue”, it therefore

needs to be shown that the “risk” is not as is initially perceived. Of those

executives surveyed in the US, 85% agreed that if their risk and return criteria

could be met, then they would increase their level of involvement within the

arena of RPI.

(Pivo, McNamara 2007)

In order to provide a tangible basis for the argument that incorporating

sustainability in asset management can provide profitable results,

assessments of industry wide accepted benchmarks need to be made.

In terms of indicators for sustainability, research has been conducted and an

initial list of such indicators has been produced. However, these have not yet

been accepted into wider use within industry, and as such, companies have

not been able to apply them to their assets in order to determine performance

comparatively to those more or less sustainable than their own.

(Sayce, S, Ellison, L, 2003) (Eichholtz, P, Kok, N, Quigley, J, 2009)

The literature review that follows has been compiled from current research

within the area of sustainability and what impact this is having thus far on

asset values. The common perception of the industry however is that there is

not yet sufficient data available for property stock to enable an accurate

analysis of different elements of sustainability on its value.

(RICS, 2009)

Many of the largest companies and corporations in the world have

Sustainability Reports and Corporate Governance Policies that are freely

available to view and show their stance on climate change and how they are

acting accordingly. The question being addressed therefore is: What are the

actual attitudes of the individuals within these companies and those they act

on behalf of every day, and what impact does this have upon investment

trends, property values and overall business performance?

1.1 Aims and Objectives. The aim is to establish whether the increase in sustainability as an issue

within the built environment has made an impact on investment trends and

corporate behaviour, therefore affecting portfolio values and profit returns.

In order to ascertain this, there are the following objectives: -

1) Determine any current company policies on sustainability.

2) Investigate relationship between clients’ business needs and asset

management strategy.

3) Establish motivation for investing in sustainable assets when adding to

a portfolio.

1.2 Limitations to the Research

This report does not seek to evaluate sustainability benchmarks for property,

neither does it look to show a unique data example of the difference between

a sustainable and non-sustainable property portfolio. Both of these require

separate study, industry involvement backing and a far-extended research

time.

For a real comparison to be made regarding value of sustainable buildings

would require a long-term project such as has been carried out in the US. Two

portfolios would have to be created, consisting of like-for-like investment

properties, with sustainability as the variable. The investments would then

have to be monitored over a period of years in order to ascertain the effect of

this on the return to investors. Such an undertaking is outside the scope of

this report.

It does, however, look at current opinion of sustainability within property

investment, what impact this could have on future investment and current

portfolio values and how incentives can be introduced to increase participation

from institutional and private investors alike.

2. Current Literature.

2.1 Opportunity and Need The word, “need” when referring to sustainability can be taken in two ways:

The first, being that every leading and developing country around the globe is

having to account for its carbon emissions to combat rising temperatures and

sea levels, and the second way in so far as no major business can be seen to

be being left behind in this emerging area. As such, there is a, “need,” to

make things sustainable.

There are also however opportunities to be had in terms of investment. A

research project by the RICS and the Universities of Maastricht and California

in 2009, comprising of “green” office buildings in the United States, showed

that higher returns are to be made from those buildings that have high energy

ratings and are considered sustainable. The results showed a premium of 3%

per square foot for the whole sample stock, 6% higher effective rent returns

adjusted for occupancy levels and a significant 16% premium when selling a

green building.

(Eichholtz, P, Kok, N, Quigley, J, 2009)

2.2 Responsible Property Investment (RPI) The market for Socially Responsible Investments (SRI) has been continually

growing over the last decade, with more institutions and individuals

developing portfolios with social and environmental considerations. Whilst the

UK is currently highly involved in this arena, including working with emerging

economies such as those in China and India, it is the US that has lead the

drive and research in sustainability and investments.

According to the Social Investment Forum (SIF) in 2003, there was 2.16

trillion dollars in SRI’s of all descriptions, including pension funds, mutual

funds and community development financial institutions. These funds were all

in investments that are deemed to follow the, “Triple Bottom Line,” which

takes into consideration their financial, social and ecological impacts.

(SIF, 2003)

Real estate is a major asset for all investors, whether institutional, individual

or occupiers who own their own properties. The advent of RPI means that

investors are able to show significant consideration for their social and

environmental impacts, whilst managing their assets effectively to obtain the

required financial reward.

(CFAUK, 2008)

2.3 Varying Approaches to RPI

Different approaches are being taken towards RPI. For example, Sarasin, the

Swiss Private Bank, has set up a new property fund that uses the strategy of

buying shares in property companies most active in CO2 reduction. The

theory here is that shares are quicker to sell than buildings, therefore allowing

investors to get their money out quicker.

Climate Change Capital (CCC) is a London-based fund that aims to have

raised £120m within six years, on top of the £70m they already have. Part of

their strategy is they purchase poorly performing buildings and refurbish them

to high standards of energy efficiency.

The results for these two different approaches is that Sarasin Sustainable

outperformed Standard & Poor’s property index by 2% in its first six weeks

and CCC are looking for a 10% higher return on their properties.

(Jansen, 2009)

2.4 Investment Drivers Interest regarding sustainability within real estate investors has been growing

since the turn of the millennium. In research by Keeping (2000) it was noted

that investors would sometimes require “Green” features of a building, but not

sustainable properties themselves. This was deemed to be due to an initial

confusion in the terms that are now commonly used, and that they had a lack

of knowledge over any benefits to sustainable real estate.

A review has recently been undertaken of current publications regarding

investments in sustainable buildings (Schleich, 2009,) which identified the

drivers of investment and their classifications. The research found there to be

three levels regarding these drivers:

• Property Level – Affecting individual assets and investments

• Corporate Level – A collective impact for institutions

• External – Legislative, financial and legal implications

(Schleich et al, 2009)

The identification of these drivers had further implications for the methodology

of this research project, due to their perceived implications being integral to

the outcome of the aims and objectives for this study. This is because those

investors that are involved directly in managing their portfolio will need to take

into account these drivers, thus reflecting their current attitudes towards

sustainability and it’s ability to impact on portfolio value, such as those drivers

identified at the property level.

2.5 Sustainability during Asset Acquisition As was found in the section regarding the varying approaches to RPI, retro-

fitting poorly performing buildings is one method of approaching sustainability

within real estate. However, for some it seems that this method is considered

far more costly and creates further challenges.

(Tillson, 2009)

This difficulty in justifying expenses regarding property deemed as obsolete

has created the necessity for sustainability to be a consideration during the

acquisition stages of investments for a portfolio. The British Land Company

PLC (2008) produced a Sustainability Guide for Property Acquisitions

detailing the need for this issue to be addressed prior to the board approving

a new acquisition.

Studies by Pivo and McNamara (2007) highlighted the concern of investors

regarding their fiduciary obligations, which is another element during

acquisition stages relating to due diligence. When undertaking investment

management responsibilities, due diligence must be shown in order to avoid

legal repercussion, such as in the case of REIT’s (Real Estate Investment

Trusts) pension funds etc… This is especially the case when justifying new

and sustainable investments as an “added-value” class asset to a portfolio.

(McMahan, 2006)

This flow chart was taken from the Sustainability Guide for Property

Acquisitions by The British Land Company PLC. It’s significance is in the

detailing of sustainability as a consideration before the acquisition of an asset

is completed, therefore demonstrating due diligence with concern to

sustainable investment and intention to add value through portfolio

diversification.

(British Land PLC, 2008)

2.6 Government Stance The UK Government is taking its commitment to sustainability very seriously

and is attempting to incorporate it as an issue in all of its undertakings.

“Securing the Future” is the name given to the development strategy, which

makes up part of a shared framework including all four nations of the United

Kingdom.

The Sustainable Development Programme crosses all government

departments as well as other public bodies such as the Sustainable

Development Commission. This includes targets set out by the government

including the sustainable management of its estate in order to reduce energy

consumption, waste and water use. It also produced a Sustainable

Procurement Action Plan, which aims to improve standards and market

engagement.

(Crown, 2009)

The recent meeting in Copenhagen on climate change further demonstrates

where the UK government intends to make its commitments further from

2009. In a telephone interview with Jonathan Tillson, Head of Sustainable

Development for the government body DEFRA, he made clear that the

intention is for the UK and its government to lead by example to further

encourage developments in sustainability, and that from this point in 2009/10,

there is more yet to be done in the coming years.

Paul Morrell, former senior partner with Davis Langdon, was made the first

Chief Construction Advisor to the Government in November last year. He

makes a point that the industry’s carbon reduction commitments would be his

“immediate priority” and that, “We’re going to need to start counting carbon as

seriously as we count money, and accepting that a building is not of value if

the pound sign looks ok, but the carbon count does not.”

(Building, 2009)

3. Methodology

3.1 Aim In keeping with the title of this project, the aim is to use suitable methods of

data and information gathering in order to create and present a paper on the

current state and opinion of sustainability within the built environment and its

potential to impact upon property investment values.

This methodology section details how the research was carried out, the

justification for these actions, initial intended structure of the report and the

rationale for the project as a whole.

3.2 Project Layout The information in the report will follow in these chapters: -

• Abstract/Introduction.

• Literature Review

• Research Design and Methodology.

• Analysis and Discussion of Report Material.

• Conclusion and Evaluation.

• Suggested further research.

• References and Bibliography.

3.3 Literature Review. Initial study has shown that work has already been undertaken on the

individual aspects that make up this report, such as investment practice,

sustainability and asset management strategies. However, the foundation of

this work was to analyse the amalgamation of these areas as a whole unit, by

how they relate to each other to form a single purpose within the industry.

The Government Department of the Environment published a work on

indicators of sustainable development in 1996, and Sayce, S and Ellison, L

later developed this work initially in 2003. Research has also been done on

best practice within asset management and how property forms part of

businesses investment considerations. This also forms part of the study, as it

is the basis for how decisions within the investment sector are made.

The literature review has the purpose of outlining initial works within the area

of sustainability and RPI, whilst demonstrating that the requirement of this

report is to asses current opinion in order to establish a motivation for

investors, as described in the aims and objectives.

3.4 Pilot Study

The pilot study consisted of an initial questionnaire, vetted by industry

professionals, in order to ascertain its relevance and validity. The importance

of piloting the study was to ensure that the main questionnaire contained

relevant subject matter to those professionals that would be receiving it in

order to contribute to this research.

The questionnaire remained unchanged, due to positive confirmation and

feedback from those who responded to the pilot. The main element of

feedback regarded the combination of having both multiple choice and open-

ended questions. The reason for this was to allow for both a greater depth of

detail in respondents answers, as well as to gain a wider range of answers to

be analysed, depending on each participant’s individual impression of the

question.

3.5 Main Survey

Each question in the survey has its relevance stated individually in the

analysis section of the study. The questionnaire as a whole was designed to

allow for a wider range of data from a large base of professional opinion. As

this is a qualitative study, it was important to ensure that opinion was sought

from a variety of practitioners in order to get the most relevant data for

pertinent analysis towards the central question of this project.

The survey questionnaire sent to 183 people over a variety of professions

received 42 responses and can be viewed in Appendix A, along with the

original proposal for this dissertation.

3.6 Formal Interviews The inclusion of formal interviews was an important part of this research, with

it being a qualitative study. The professionals selected for interview were

chosen due to their high levels of experience, variation in business/career

areas and overall relevance to the central question and research topic. Three

participants were selected for comparative viewpoints from a global insurance

and investment provider, a British Government body and an Investment Bank

that specialises in carbon offsetting and cutting ventures.

Those contributors to the research from the above institutions are:-

• Paul McNamara. PRUPIM Director: Head of Research,

BSc (Hons) PhD ASIP FRSA OBE

• Jonathan Tillson. Head of Sustainable Development at

DEFRA

• Esme Lowe Partner: Property Fund Team

Climate Change Capital (CCC)

4. Ethics Statement 4.1 Project Title:

“Current attitudes towards sustainability and its potential to impact upon property portfolio values within the UK”

4.2 Research Overview: This research project involves the gathering of data and studying current

practice and opinion on matters regarding sustainability. The methods that will

be used for this will be in the form of accessing both publicly available

information/reports, sending out a piloted questionnaire and conducting face-

to-face interviews.

Sustainability is of growing importance within the built environment, with more

and more companies creating Sustainability Profiles as evidence of their

Corporate Responsibility. This research intends to discover the actual extent

of interest and involvement within the industry and how value and profitability

is affected as a result. It is therefore the intention of the aforementioned data

gathering methods to be implemented in order to ascertain this.

4.3 Participants:

4.3.1 - Who will they be and how are they selected? The participants will be from a mixture of professions and business areas

within the construction/property industry. These include institutional investors,

property agents, occupiers, acquisition managers etc… The nature of these

positions within their respective companies means that the collection of data

will not involve either minors or those considered to be lacking in mental

capacity as outlined in the Mental Capacity Act 2005 and a CRB check is not

required.

4.3.2 - Participants right to withdraw:

Those who are approached for interview will be informed of their right to

withdraw from the research at first communication when being asked to

participate. They will also be presented with a “Participant Information Sheet”

which details their ability to withdraw at any point from the research along with

the option to have any of their information omitted from the report by

contacting the main researcher.

4.3.3 - Participant Consent:

Along with the Participant Information Sheet, a Consent Form will also be

attached and will be required to be read and signed in order to agree to taking

part in the interview and resulting dissertation paper. A withdrawal form is

included with this, which can be filled in at any point and sent to the

researcher requesting removal of their contribution.

Consent will also be sought for use of a dictation/recording device during the

interview. As part of the consent to this, participants will be ensured that the

recording will remain private, securely stored and then destroyed upon

research completion in keeping with Data Protection Act 1998. It will be made

clear that any and all contributions made can be made anonymous for the

individual concerned and their respective company if required.

4.4 Inconveniences and possible negative outcomes: The sharing of private/sensitive material is purely at the participant’s

discretion. All material is provided under the understanding that it will not be

published or circulated further by the researcher forming the report and is only

for initial informative purposes. No hard copies are made or kept and received

files will be destroyed.

The questionnaires are only completed voluntarily. There is no obligation to

complete or answer at all, and particular questions can be ignored at the

receiver’s judgement. The questionnaire states at the outset that all replies

will be dealt with confidentially and anonymously.

The inclusion of the fields, “Job Title” and “Area of Business” within the

questionnaire are purely to enable the researcher to group respondents

during the analysis stage of the work. The individuals’ names and that of their

company/institution will not be divulged at any point unless requested or

permitted directly.

The time, date, venue and duration for the interviews will be determined by

the consenting interviewee in order to minimise any disruption or

inconveniences. Any perceived negative outcomes from the participant will be

dealt with at their request, such as remaining as an anonymous contributor, or

by their insisting to withdraw completely from the research.

4.5 Information Sources and Help Provided for Participants: The researchers contact details will be provided to all participants in the

project. This will allow for ease of contact should they have any further

questions or requests relating to their withdrawal from the research. Details of

the researchers’ University will also be provided to participants so that contact

can be made with senior faculty members supervising the dissertation project

if they deem this necessary.

4.6 Feedback: All participants will have their contributions acknowledged to confirm the

intended researcher has received it. They can be provided with further

information if requested, but only relating to their own contribution or the

report as a whole, not of other respondents or interviewees.

4.7 Interview Guide: A semi-structured interview process will be undertaken, based on previous

literature in the area and specific experience of the individual interviewee.

Initially open-ended questions will be used intending to facilitate rapport and

create a relaxed atmosphere. This will be followed by more specific closed

questions to directly deal with the aims and objectives of the research.

4.8 Overview of Data Analysis: Information and opinions collected as part of this qualitative research project

will be analysed in order to meet the aims and objectives outlined at the start

of this dissertation paper.

Comparisons will look to be drawn between the different business areas of

those professionals responding to the questionnaire. Conclusions will then be

made from an interpretation of the responses for each individual question

included, intending to suggest an indication of current opinion and practice

regarding sustainability.

Any discrepancies between conflicting answers to questions will be

highlighted and comment provided based on further analysis and reference to

the literature review. In line with guidance set out by Patton (2002), all raw

data themes will be validated and agreed upon throughout the analysis

process, in order to produce a valid and accurate representation of emerging

themes.

Analysis of interview material will include obtaining consent and confirmation

at the time of interview as to whether the information discussed is

representative of their individual views or company policy. It will then be

subjected to analytical methodology including coding of open-ended questions

such as is outlined in Naoum (2007)

ANGLIA RUSKIN UNIVERSITY

ETHICS REVIEW CHECKLIST FOR RESEARCH WITH HUMAN PARTICIPANTS

Date 10.3.09 V1.0 Name:

SID:

Title of Research Project:

Current Attitudes Towards Sustainability and its Potential to Impact upon Property Portfolio Values.

Faculty:

Science and Technology

Supervisor(s):

Steve Fenton

Type of research: Tick all that apply

Undergraduate Taught postgraduate Research degree

Member of staff Other

If you require this checklist or any of the documentation in an alternative format (e.g. Braille, large print, audio or electronically) please contact Julie.Scott@anglia.ac.uk

You need to consider ethics for all research studies. Research is defined in the UREC (Research Ethics Sub Committee) Policy and Code of Practice for the Conduct of Research with Human Participants on Page 5. Please refer to: http://www.anglia.ac.uk/ruskin/en/home/central/rds/services/research_office/research_degrees/ethics.html Please complete this mandatory Ethics Review Checklist for all research applications. This is to ensure that you are complying with Anglia Ruskin University Policy and Code of Practice for the Conduct of Research with Human Participants. All research applications are dealt with in the same way. There is no distinction between undergraduate, taught Masters, research degree students and staff research. For research involving animals, please complete the Animal Ethics Review Checklist to determine your course of action. This checklist should be completed by the Principal Investigator or the student in consultation with his/her supervisor.

YES NO 1. Does your research involve human participants? (including observation only) 2. Does your research involve accessing personal, sensitive or confidential data? 3. Does your research involve ‘relevant material’ as defined by the Human Tissue Act (2004)? 4. Does your research involve participants who are 16 years and over who lack capacity to consent and therefore fall under the Mental Capacity Act (2005)? 5. Will the study involve NHS patients, staff or premises or Social Services users, staff or premises? If you have answered NO to all the above questions, you do not need formal ethics approval. You do, however, need to submit this checklist signed and dated to the relevant Faculty Research Ethics Panel (FREP) Administrator prior to starting your research. If you have answered YES to either or both Questions 1 and 2, you need to submit an application, including this checklist, to your FREP. If you have answered YES to Question 3, you need either to submit your application to your FREP or an NHS Research Ethics Committee (REC), even if the study does not involve the NHS. Please seek further advice if you are unsure about which committee it needs to be submitted to. If you have answered YES to Question 4, you need to seek approval from an NHS REC, even if your study does not involve the NHS. If you have answered YES to Question 5, you need to obtain approval from: a. Both an NHS REC and the NHS Trust(s) where you are carrying the research out (R&D Management Approval) or b. The Local Research Governance Group (Social Services). Please note that you must send a copy of the final approval letter(s) to: Beverley Pascoe, RESC Secretary, Research, Development and Commercial Services. Additional information: Applicant’s signature:

Date:

Supervisor’s signature:

Date:

(Axa-IM, 2009)

5. Analysis of Acquired Data

Each question included that was sent out to obtain data for this research will

initially be dealt with separately, followed by an analysis with reference to how

it relates to others within the questionnaire and the opinions expressed during

the formal interviews.

The sample of data comes from 42 respondents of 183 initially contacted via

e-mail or telephone. The response rate reflects that no obligation was placed

on those contacted to reply, conforming to the ethical requirements of this

work.

The demographic and number of those respondents is as follows. They

consist of both public and private sector individuals:

• Fund Manager 5

• Investment Analyst 14

• Property Agent 7

• Surveyor 4

• Company Director 7

• Acquisitions Manager 5

Q1. How relevant is sustainability to your companies core business? a) Essential b) Highly c) Moderately d) Partially e) Not at All. This question was included in order to establish a benchmark for the

remaining answers supplied by that individual, closely linked to the following

question relating to client interest. It allows for an initial indication of a

discrepancy between their own perceived level of relevance to sustainability,

compared to that of their clients.

On an individual basis there were occasions where respondents indicated

sustainability had a low level of relevance to them or their business ( i.e

“partially” or “moderately”) yet stated in the very next question that between

75-100% of their clients expressed interests in the area. These anomalies

were few however, and the majority of those confirmed sustainability as an

issue affecting their business to some significant degree.

11

23

7

1

0

0 5 10 15 20 25

Respondents

Essential

Highly

Moderately

Partially

Not at All

How Relevant is Sustainability to your Core Business?

Q2. What % of your clients express an interest in sustainability? a) 0-10% b) 10-25% c) 25-50% d) 50-75% e) 75-100%

As mentioned on the previous page, this question allowed for both an

individual impression from the respondents, as well as a rudimentary way of

gauging a wider opinion base; that of the respective clients of each business

of those who replied. The graph shows the anticipated reflection of the

previous question; that is, respondents who previously indicated sustainability

being of high significance to their business, demonstrated a consistency

through the interests of their wider client base.

A point of interest includes the four participants who answered a 0-10% range

of their clients showing interest in sustainability. The level of comment on the

area in professional journals and publications suggests that there is, or at

least is expected to be, enough interest from client bases for business to be

active and able to respond to sustainable demands.

4

0

14

17

7

0 2 4 6 8 10 12 14 16 18

Respondents

0-10%

10-25%

25-50%

50-75%

75-100%

What % of your Clients Express an Interest in Sustainability?

Q3. What areas are of most concern to your clients? Please could you place a number next to the answers to indicate the top three, 1 being the most important. a) Energy efficiency / Performance Rating b) Waste / Water Consumption c) Building Functionality / Flexibility d) Location / Transport Ease e) Rent Value / Void Period

This question demonstrated which areas were of greatest importance to each

of the respondents. Participants were asked to number from 1 to 3, in order

of priority, those areas that are of greatest concern to their clients. The

significance of this is that, due to the nature of sustainability regarding energy

efficiency, one would expect a higher number of “votes” for this aspect, but

this was not to be the case.

Whilst building functionality and location/transport ease are factors in

sustainability and RPI, (as highlighted in Prof. Pivo’s and Jeffery Fisher’s

study, “Effects of Walkability on Property Values and Investment Returns”,

2009) energy efficiency is still the most widely understood aspect of

sustainability. Therefore, it was expected for those contributing to this study to

have placed more emphasis on this area.

The fields highlighted in bold below, show the most consistently voted areas.

83% (35 of 42) placed rent value and void period as the most important, 76%

put location/ transport at second highest (32 of 42) and building functionality

of third most concern to their clients, with 90% (38 of 42) positioning it there.

Energy efficiency / Performance rating and Waste Water Consumption were

the least concern of respondents clients, with only 9.4% of the total vote.

Attributes Respondents' Voted Importance Level (1 High, 3 Low)

1 2 3 Energy Efficiency / Performance Rating 7.1% 0 0 Waste / Water Consumption 0 2.3% 0 Building Functionality / Flexibility 4.7% 4.7% 90.4% Location / Transport Ease 16.6% 76.1% 7.1% Rent Value / Void Period 83.3% 4.7% 2.3%

Q4. Are your clients prepared to pay a premium for sustainable assets, either to purchase, invest or occupy, or do higher prices make this inhibitive. a) Yes, they are prepared to pay more. b) No, higher prices are preventative. c) Other (Please Comment)

The next element to the questionnaire was intended to assess current

demand from investors and occupiers regarding sustainable real estate.

Interestingly, the previous questions responses would indicate that profit takes

precedence over other sustainable considerations, yet the findings for this

question suggest that many are willing to accept a greater initial expense in

order to acquire a sustainable asset.

The significance of the 45% positive response to paying a premium indicates

that those involved with the acquisition, investment and management of real

estate assets, see a positive economic impact from climate change adaptive

property sufficient to their respective portfolios to warrant higher purchase

price.

19

15

8

0 5 10 15 20

Respondents

Yes

No

Other

Are Your Clients Prepared to Pay a Premium for Sustainable Assets?

Of those who chose “Other” in response to this question, there were two

themes in the comments provided. The first was that it related to the risk of

the asset. It is common understanding that once money is invested, it is then

at risk, whereas if it is not invested then it remains safe. The elements of risk

within sustainable real estate forms a dichotomy in the view that it is either of

less risk, as it is adaptive regarding climate change and future legislation, or

that it is of higher risk due to little empirical evidence to suggest a greater

investment yield after initial premium purchase cost.

With this in mind, some respondents indicated that it was their practice to

require a discount on an, “at-risk” asset, rather than paying a premium for

those that are already deemed and being marketed to be sustainable.

The second theme amongst the comments concerned the individual SRI

(Sustainable and Responsible Investment) Policy of each respondent’s client

base. As highlighted in the literature review of this study, different

organisations within the area of RPI have differing approaches towards it and

the management of their portfolios.

Q5. Are you involved with "Green Leases" and if so, how? This open ended question was included at this point in order to determine an

idea at the level of use and understanding regarding this recent undertaking.

7 people commented on this question relating to a non-direct involvement, i.e.

that (depending on their core business) they did not have requirements

themselves for green leases, yet client companies did have involvement from

their investors or occupying clients.

Hermes, Aviva and Land Securities are a few of the companies directly

involved in specifying sustainable commitments and requirements as part of

the lease contract to the tenants.

Q6. Are shareholders consulted or directly informed of matters regarding sustainability? a) Yes b) No c) Don't know

Sustainability as a general issue, particularly in terms of real estate portfolio

investments, is very much the domain of the larger international companies in

the current climate. As such, the majority of these produce CSR (Corporate

Social Responsibility) Reports and publish continually on Governance issues.

If sustainability is to get into the wider knowledge from those outside these

companies, and seen as an ever-increasingly important consideration, it has

been noted that shareholders need to be informed of a companies efforts in

this arena (BRE, 2000.)

The results show that a large portion of those questioned are following this

and do indeed consult and inform their shareholders regarding sustainability.

The two, “No” responses came from public sector individuals, therefore not

having shareholders.

28

2

12

0 5 10 15 20 25 30

Respondents

Yes

No

Don't Know

Are Shareholders Consulted or Informed of Matters Regarding Sustainability?

Q7. Is your company eligible or a member of the FTSE4Good or DJGSI Indexes? a) Yes b) No c) Don't know

The Financial Times Stock Exchanges FTSE4GOOD and Dow Jones

Sustainability Index (DJSI) indexes are specific only to those companies that

are eligible through sufficient performance in sustainability matters.

The importance of this question was to ascertain the awareness of these

indexes and their level of involvement within the relevant real estate

companies. A high positive response would indicate commitment within

property related sectors, with the option of then analysing the performance of

those within the index against those who don’t qualify to highlight any

improvement.

2

4

36

0 5 10 15 20 25 30 35 40

Respondents

Yes

No

Don't Know

Is Your Company Eligible or a Member of the FTSE4GOOD or DJSI Indexes?

Part of the reason for the creation of the FTSE4GOOD index was in order to

incentivise larger companies to become more involved with sustainability

issues in order to qualify for the index.

The results show that there is a sizeable lack in knowledge regarding these

two particular indexes. The six companies that are aware of their position (2

are members/eligible, 4 are not) are almost negligible when compared to the

fact that 85% of those that responded were unaware if they were suitable for

inclusion, or indeed a member of the index.

8. How would you consider an investors attitude to be affected by a portfolio of sustainable assets? a) Considerably Positive b) Marginally Positive c) No difference d) Marginally negative e) Considerably Negative

From the thirteen questions sent out for this report, this is the most directly

related to opinion towards sustainability having an affect on property portfolio

values.

All the participants answered this question, with 100% positive results towards

sustainable assets, with 60% of those (25 respondents) indicating investors’

attitudes to be “Considerably Positive” with regards to sustainable real estate

investments.

Although this may appear to be the natural reaction, some investors, echoing

the opinion of Valuers, subscribe to the notion that sustainable real estate is a

liability that does not necessarily reflect the money put into it. (RICS, 2008)

25

17

0

0

0

0 5 10 15 20 25

Respondents

Considerably Positive

Marginally Positive

No Difference

Marginally Negative

Considerably Negative

Respondents Perceived Attitudes of Investors Towards Sustainable Assets

Q9. Would you be in favour of a government tax incentive regarding sustainability? a) Yes b) No c) No Preference.

Although not all participants completed this question (31 answered out of 42)

it produced an unexpected result nonetheless.

With sustainability being a major issue within the built environment at present,

and it generally being viewed as a positive aspect, it was expected that the

stand-out answer would be in favour of a Government-led incentive towards

sustainability. However, only a quarter were found to be in favour of such a

move and 48% were against.

This finding would suggest that although many of the respondents were

actively involved with sustainability relating to their assets and property

investments, both directly and through their clients, they would prefer to retain

individual control over their involvement and requirements imposed.

8

15

8

0 2 4 6 8 10 12 14 16

Respondents

Yes

No

No Preference

Would you be in Favour of a Government Tax Incentive Regarding Sustainability? (From sample of 31 who answered)

Q10. What strategies do you have in place to attract sustainable investment? As stated in the aims and objectives section and when outlining the purpose

of this work, it was stated the intention to establish motivation and any

incentives for investment in sustainable funds and property assets, as well as

investigate the current practice by firms involved in the area.

This question was therefore included in order to obtain a variety of responses

from those participating in the study, and as such was deliberately left open.

However, only 7 of the 42 respondents completed this question. The reason

for this could be attributed to the general aversion to open questions due to

their perceived requirement of additional time to complete, or other factors

including the respondent not being in a position to be aware of their company

strategy, it being a confidential matter, or simply that there was no specific

strategy attached to obtaining further sustainable investment.

Among those who did complete this question, the responses covered the

same areas. There was not a sufficient volume to warrant coding in order to

demonstrate significance. The strategies highlighted in the responses were:

1. Direct contact and advisory reports on Governance.

2. Client-led and 3rd party funds.

3. Separate Sustainable-Specific Funds.

4. Presentations on Corporate Level Drivers.

Despite the response to this individual question being a small section of those

who participated overall, it provided for a critical addition to the analyses for

this report. The lack of responses demonstrates, as could also be deduced

from the obtained replies, that there appears to be a lack of a strongly defined

strategic approach to attract potential clients towards sustainable investments.

The first area, direct contact of clients and provision of reports pertaining to

Governance, could be considered a mandatory undertaking for the

transparency of the client and as such is not a direct strategy for attracting

investment. It may encourage clients to invest in sustainable assets, but only

through insinuation that it’s necessary rather than beneficial in its own right.

Client-led funds can attract investment in so far as the investors have greater

control over the equity placed into the fund. However, the initial investment

still has to be the decision of the client rather than the organization actively

drawing in the investors. It is clearly the case that investment managers would

look to encourage investors to use such a fund, but this was not

communicated through the response to the questionnaire and so could be put

down to one of the reasons mentioned above.

A similar case can be applied to the third area, that of separate and dedicated

sustainable-specific funds. The availability of such a fund to invest in does not

however necessarily constitute a strategy for investing. Whilst it is clear that

you cannot gain sustainable investment without a relevant fund, the lack of

empirical evidence relating to higher yields on sustainable property means

that greater work needs to be done to acquire further investment. As such,

simply having provision of such a fund cannot guarantee investment in it.

The fourth point relates to the drivers for sustainable investment on a

corporate level. As previously demonstrated earlier in this report, it was

identified (Schleich, 2009) that “Image” was the sole driver at corporate level.

Whilst personal presentations, going out and meeting potential investors, can

be considered a strategy for attracting sustainable investment, it is basic and

not descriptive as to the methods used. In fact, as an illustration, a response

to this question consisted of:

“We convince our clients that on the long run, it is a good idea to invest in

sustainable buildings.”

Following a letter sent to Lord Mandelson for this dissertation in connection

with his involvement with sustainability and setting up the Low Carbon

Construction Innovation and Growth Team, the reply from the Department for

Communities and Local Government also could not indicate clear and

effective incentives (See Appendix B)

In response to the enquiry about incentives for commercial property owners

and large corporations, among the measures that were quoted to, “encourage

companies and investors to be sustainable” included: -

• Building Regulations

• Planning Policy

• EPC’s (Energy Performance Certificates)

• DEC’s (Display Energy Certificates)

• The Code for Sustainable Homes

The inclusion of building regulations and planning policy cannot be considered

incentives, as these are mandatory and therefore are upheld regardless of the

intention of those involved. The Code for Sustainable Homes is also not

relevant to the type of real estate and portfolio asset considered in this work.

As for energy certification, many within industry only find DEC’s to be a valid

element. This view is echoed by an interviewee for this project, Mr Esme

Lowe of Climate Change Capital who says, “many in the industry consider

EPC’s to be de-merited tool, because it’s based on theoretical consumption of

energy as opposed to focusing on absolute operational consumption over a

period of time. As a result, given a choice over an EPC and a Display Energy

Certificate, the DEC should win every day and that’s the one that should be

made mandatory in the UK market. “

Q11. In the last financial year, what percentage of your transactions involved sustainable properties? Not all of the respondents were able to provide comment on this and so the

sample for this question consists of 24 participants.

The question was included in order to provide an idea of the current market

for climate change adaptive real estate and to give an indication of the

amount of sustainable properties moving within portfolios.

All of the replies to this question quoted figures of either 5% or 10% exactly.

The question was deliberately open and non-specific in order to encourage

this type of response. The reason for this was that many of the respondents

may not have exact numbers available to them, or if they did may not be

inclined to find the details for provision in this questionnaire. As such, the

broad and basic answers better reflected the percentage proportions of these

transactions.

The low number of 5-10% was expected, but for different reasons. The first of

these is that this sort of fund and asset portfolio is still relatively new, indeed

some of the respondents cited in their answers that they were unable to

provide details as their portfolio or fund specific to sustainability was not set

up in the previous year.

The second potential reason for this reflects the reluctance in investors to

commit to property assets that may initially command a higher price yet do not

have sufficient evidence to suggest a greater return will be gained yet. This in

turn links in with the possibility that many of the companies that claim to be

involved with sustainability are only doing so on a small scale in order to fulfill

any perceived social pressure to be showing environmental awareness.

6. Formal Interview Responses The interviews for this paper were undertaken to supplement to the

questionnaire above, with the participants being chosen for their in-depth

knowledge of the subject matter, being members of varying organizations with

different approaches to sustainability and working at the top of their respective

professions.

The interviews were semi-structured, that is, there were certain subject areas

that were intended to be explored and were common to all interviewees,

whilst allowing for open discussion and opinion to be expressed based on

each individual area of expertise and knowledge within their own fields.

6.1 Paul McNamara: BSc (Hons) PhD ASIP FRSA OBE

PRUPIM – Prudential Property Investment Managers. Director: Head of Research. Mr McNamara chairs the Institutional Investors Group on Climate Change

(property) and co-chairs the United Nations Environment Programme Finance

Initiative (UNEP FI.)

PRUPIM’s involvement in sustainability came about as a result of Prudential

Portfolio Managers Worldwide (a predecessor to M&G investments) launching

green equity funds, as well as development surveyors and fund managers

within PRUPIM reacting to activity from property companies involving

corporate responsibility reports.

As lead author of the first sustainability report, gathering data and researching

developments in the area of sustainability, it was found that there were

implications relating to investment. Mr McNamara commented, “…if this new

phenomenon was going to impact value, and asset performance, we needed

to understand it…by understanding it you should be able to exploit that

knowledge.”

The awareness of sustainability as an impact on investment returns is not

simply a method to ensure profitable yields. As highlighted in a report to

church investors, he goes on to say that, “understanding that does not make

you a responsible investor, it makes you an intelligent investor, because you

know that accelerated depreciation, increased risk premium leads you to a

higher capitalization rate and to a lower value.” (See Appendix C)

PRUPIM have introduced compulsory initiatives in order to embed the

practice and understanding of sustainability within their company and

outwards to their clients. They currently have around £14bn in assets, of

which those stakeholders and clients involved are required to respond to a set

of questions in order for PRUPIM to, “… assess the extent to which the assets

are “future-proofed” against a changing environmental context, with the

understanding that a property may suffer increased risk or accelerated

depreciation.”

When questioned about the change in attitudes towards sustainability,

particularly from a business perspective, Mr McNamara is confident that it is

becoming an increasing consideration. He says, “My observation of how the

industry has responded to this issue over the [past] 10 years is that they have

as a generality gone from not believing that there is an issue at all to…

realising the regulatory structure policies are coming in, a risk of raising

minimum standards and some investors and tenants prefer greener

buildings.”

Another important role is that of the client seeking sustainable options from

providers such as PRUPIM. This brought up the impact of the FTSE4GOOD /

GJSI Indices, as well as client organisations and watchdogs surveying those

established in the industry. Initially when results were being published, large

organisations were finding themselves left out completely or low down in the

tables. This effect on corporate level drivers (i.e. Image) for these companies

produced an important reaction.

Mr McNamara commented, “Nothing exercises the board of a major

responsible company [more than] to find yourself in the bottom quartile of

anything… If you can start getting potential sources of capital saying, ‘Where

did you come in the survey?’… then that really starts to have an impact.”

The area of sustainability has been developing in understanding in varying

professions within the industry. Fund managers did not initially see the

relevance of it to themselves, considering it to be an area specific to the

construction side. However, as Mr McNamara points out, only 2% is new-

build, the other 98% is existing stock, which is why the implications of climate

change adaptive property affects current portfolio values.

A pertinent point raised during the interview related to incentives to act and

invest in a sustainable manner. Known as the “Split incentives issue, “ it

presents a practical barrier to both investor and occupier. The example given

was a shopping centre, where some parts are common, others individually

occupied:-

“If PRUPIM goes in and does some work to the common parts, that’s cost us

money; where do we get the return back? It might be electricity usage is

reduced, so the service charge is lower, can we convert that reduction in

service charge to an increase in rent if the occupiers have a certain amount

available for occupation costs?”

“The tenant has exactly the same problem; [if they spend money on the

improvements] then at the end of the lease that benefit reverts to the landlord,

so what’s their incentive? There’s some really creative thinking that needs to

go on somehow about how to holistically manage buildings in a way that

brings those interests together.”

6.2 Jonathan Tillson: DEFRA – Department for the Environment, Food and Rural Affairs. Head of Sustainable Development. As head of the Sustainable Development Unit at DEFRA, Mr Tillson is

responsible for the UK’s Sustainable Development Strategy and overseeing of

its domestic implementation. This includes helping to achieve sustainable

communities, building and construction.

With DEFRA being part of Government, Mr Tillson was keen to demonstrate

both innovation and agreement with the private sector. In terms of how they

incentivise sustainable behaviour, he replied, “Leading by example… It’s no

good for Government to preach at people about becoming sustainable if we

don’t try to do it ourselves.”

In contrast to the average questionnaire results which indicated rent value /

void period and building location as the most important aspects, Mr Tillson

was adamant that energy efficiency, waste and water were of top priority. This

was because he saw these as the areas of, “…Most opportunity, but also

most need.”

He went further, adding, “There are good business reasons for it. We’ve

saved quite a bit of money through installing efficient ways of regulating

electricity. There are strong business reasons, [it’s] not just to show strong

leadership.” This view is echoed by those in the private sector, including those

of the other interviewee’s for this report, indicating that despite an overall lack

of availability of empirical evidence, there is money to be saved, and made,

from acting sustainably.

In terms of sustainable construction, DEFRA hold to their intention to lead by

example: Nobel House is their flagship office and was redeveloped with a

purposefully sustainable focus.

The aim was to achieve a BREEAM

excellent rating. It went on to gain the

highest ever BREEAM rating for a

project of its type, was named

Sustainable Building of the Year by

the RICS in 2006 and achieved a

70% recycling waste level and 40%

higher water efficiency level than

normal. It was also a learning curv

for the department in terms of

realising the work needed to prod

such a bu

e

uce

ilding.

The undertaking of the refurbishment of this building allowed for a first-hand

understanding of the practices being done and issues regarding sustainable

construction. Mr Tillson added, “You can raise standards of new buildings

relatively easily, but when it comes to refurbishing or retro-fitting, it’s that

much more challenging.”

When questioned about the ability that government has to change opinion and

drive sustainability, Mr Tillson explained, “There are ways the Government

can help; by raising awareness, encouragement, exemplifying and sharing

practical experience and enabling others to make change. Possibly using

environmental controls or taxes.”

“There are a spectrum of controls but it’s important to try and understand the

motivations of those it’s trying to influence, and respond accordingly rather

than trying to adapt a, ‘One size fits all’ approach.”

This sentiment aptly demonstrates the recurring challenge that has emerged

in this area. That is, the scope of the issue is so vast, and affects such a

demographic, that it seems that at present there cannot be, or is not, a

consolidated action to the benefit of all those involved.

6.3 Esme Lowe: Climate Change Capital (CCC) Property Fund Partner. Mr Lowe is a founding partner (along with Tim Mockett) of Climate Change

Capital’s Property Fund, which raises and invests equity into sustainable real

estate. Prior to approaching CCC to start their property fund, Mr Lowe was

Head of European Real Estate with Capital Trust Ltd where he managed £300

million of funds and 1 million square feet of property assets.

The fund started by Mr Lowe is one of a handful of ventures (including others

by Sarasin and Credit Suisse) in “Green Equity” funds, with CCC’s being

launched in 2008. Climate Change Capital, the property fund included, were

responding to the movements in opinion within the markets, seeing an

opportunity in the low carbon economy.

Mr Lowe said, “It recognized the change from high energy - low carbon, to low

carbon high energy costs, i.e. the transition to low carbon will necessitate the

private sector to make it happen, therefore there is a unique opportunity and

role to build a business as part of that process.”

In accordance with typical portfolio management practice, CCC have a spread

risk over different asset classes, with 50% retro-fit, 25% pre-let development

and 25% “standing investments”, that is, existing energy compliant buildings.

The advantage and theory behind this method, as opposed to low carbon

company share buying, is that a discount can be sought on the initial property

acquisition before refurbishing for a higher additional value to the portfolio.

As Mr Lowe explained, “Putting it simply from our point of view, we might be

able to buy a very good refurbishment opportunity at 10% net initial yield, and

once we’ve done the work, made it a high C or B energy rating and it’s fully let

and mature, that might be worth 7% or 6.5%, so its an attractive area for

generating above average risk returns.”

When questioned about social pressure to act sustainably, and motivations for

a variety of organisations to behave the way they do within the arena of

sustainability, Mr Lowe acknowledged that there is no single, clearly defined

mindset between institutions. He commented; -

“There’s no black and white answer… Some market leading companies that

are focused on corporate social responsibility just think it’s the right thing to

do. At the other end of the spectrum there might be global financial

companies who will only do it if they believe that it’s the right thing to do

financially, because they have a lower operating cost and make more profits.”

He went on to add, “The regulatory framework is there… there are existing

European laws that require compliance to certain standards specifically within

the built environment, you’ve got shareholder and stakeholder demand, a HR

component and actually you can save operating costs and make money, so

when you put all those bits of the jigsaw together, ‘why wouldn’t you?’ would

be the question.”

Despite it being early days in terms of the property fund managed by Mr Lowe

at CCC, he is confident that there are already signs of a financial advantage

to the new portfolio… “…I don’t think we have any doubt about that at all. Both

our assets are in top quartile energy performance, we think that will make

them more attractive to potential occupiers and they should trade at a better

price. Our investment thesis is around collecting a number of assets that have

those features so we think we should get a portfolio premium in addition.”

What about the reaction from the occupiers? Do they think it’s worth it and

how have they responded to the sustainable property? “Very supportive, very

focused and willing. We’ve achieved significant improvements in the

building… They’ve been extremely focused on that we’ve been doing. We

managed to secure a £400,000 sterling rebate… and that’s put us in a very

good position with them to achieve objectives.” (Appendix D)

How do see property values being affected within the next 5 –10 years and

how do you feel the fund will perform?

“We will always aim to out-perform the market. In the medium to long term,

real estate will do reasonably well as an asset class… We think our

investment philosophy is the right one, because it’s based on working with

occupiers to produce a product that is future-proofed and will therefore, on a

balance of probability, outperform the market over a period of time.”

“…I think now most people understand that actually it would make sense that

you try and look after your resources better. The argument is not now about

the science, it’s about the mitigation and the adaptation. I think in the medium

to long-term I’m pretty encouraged by the focus and adoption of these issues.”

Shortly after the completion of this interview, Climate Change Capital Property

Fund made its close on the 8th February 2010 with £69 million in equity.

In a press release, Mr Lowe’s co-founding Partner, Mr Tim Mockett said,

“Investors are becoming increasingly aware of how the future regulatory

landscape will look and are acting accordingly. The trend to more energy

efficient buildings, driven by legislation and the wishes of occupiers and

investors, is irreversible."

(CCC ltd, 2010)

7. Conclusions

The process of this dissertation was aimed at establishing whether the

increase in sustainability as an issue within the built environment has made

an impact on investment trends and corporate behaviour, therefore affecting

portfolio values and profit returns.

In order to ascertain this, there were the following objectives: -

• Determine any current company policies on sustainability. • Investigate relationship between clients’ business needs and asset

management strategy. • Establish motivation for investing in sustainable assets when adding

to a portfolio.

This investigation found that there are an increasing number of companies

and organisations that include sustainability within their policies, particularly in

the last two years. Corporate Social Responsibility is currently an important

area within larger companies, with sustainability gaining an increasing focus

and dedicated reports being produced on the subject.

Following a letter to HRH the Prince of Wales regarding his early and

continued involvement in the area of sustainability for this report, the

“Accounting for Sustainability” document and case study examples provided

by the Prince’s Charities show how policies and practices are being

implemented, which was the intention of the first objective. (Appendix E)

The “Connected Reporting Framework” (CRF) was developed to allow

companies to provide consistent and comparable information that is

strategically important to businesses. Aviva, Carillion, Generation Investment

Management LLP, HSBC, Marks and Spencer Plc and many other leading

names have been involved in the project and in producing reports using actual

data. The aim of the framework is to encourage further involvement in the

area, using existing participants to lead by example, and shows how

sustainability policies are becoming more commonplace.

Confidential information provided by other contributors to this paper also

demonstrates how company policies regarding sustainability are being

adhered to and impacting upon client organisations. This ranged from private

investors withdrawing from individual UK assets, to companies requesting

actions from high-awareness clients in global markets such as China and the

Far East. Relating to the second objective, the practice of asset management has

begun to incorporate sustainability as part of its necessity to provide the best

service to and from the client through their assets. This would appear to be in

direct correlation with the current attitudes found in the questionnaire

responses to this report.

With sustainable assets being more desirable in a market where carbon costs,

portfolios are being adjusted accordingly. Across all fields, private and public

sector, sustainable assets are being acquired, and those less so are being

released, in order to lower operating costs, provide better transport options,

drive up overall portfolio values and improve corporate image.

As described in the interview with Paul McNamara, clients are now

approaching their providers, often with sustainability being the first question.

Companies providing funds like that of Esme Lowe’s at Climate Change

Capital exist because there is a market with investors aiming to be

responsible and see returns from that.

The link then between asset management and client requirements involving

sustainability, although a small part of a much larger field, is clear and

seemingly continuing to grow.

The final objective of establishing motivations for investing in sustainable

assets has proved the most complex. The apparent, “worth” of sustainability is

open to interpretation and varies tremendously depending on to whom you

are talking and their own individual outlook and involvement in the industry.

In relation to new builds, for those in a position to do so, the opinion very

much appears to be, “Why wouldn’t you make it sustainable?” As found by Mr

Tillson at DEFRA and Mr McNamara at PRUPIM, new constructions are much

easier than retro-fitting, and with 98% of the UK stock already in existence,

new builds are only a small part of a bigger problem in terms of sustainability.

There is the motivation in some cases, often by individuals but now appearing

in larger organizations, that it’s just, “the right thing to do.” This may well be

the case, and indeed is also enough of a motivation for people of this outlook

to get involved and commit to an investment. However, the difficulty lays in

how to incentivise the sceptics as opposed to the already converted.

For many, this is where the valuer plays a large role. Understandably, valuers

are not keen to put a higher price on a sustainable asset with the current lack

of empirical evidence and benchmarks to make comparisons. Although

studies such as those by Eichholtz et.al (2009) go some way to showing the

difference in values of sustainable real estate, some criticisms have been

made, suggesting that there were any number of variables that could have

improved individual asset values.

Because of this lack in definitive “evidence” as of yet, valuers generally

remain firm in predicting or making higher valuations. The problem is that as it

is still an emerging market, there exists the dichotomy between the valuers

who look retrospectively and the fund managers and investors who are

already looking forwards in hopeful anticipation of being proven correct.

Despite this need for a definitive answer on a macro scale, there are already

signs of clear incentives and motivation in sustainable assets. These include

the savings on occupying costs such as energy bills, as well as the overall

perception of sustainability and its positive impact on corporate image.

As indicated in question four of the survey for this paper, sustainable

properties already generally involve a premium over those that are not, a

premium which almost divides equally between those who are willing to pay it

and those who will not.

The issue is not whether they cost more, but if they are worth more, which

brings up further implications, or can be simply put down to the adage that

something is worth whatever someone is willing to pay for it. The markets will

dictate this fact at any given time, but for now at least, it seems that

sustainability commands a premium and demand is still on the up.

8. Further Research As stated during the limitations to this work, there is more that needs to be

done in this field that was not within the scope of this report and its time

constraints.

The paper, “Doing Well by Doing Good,” (Eichholtz et.al, 2009) was

instrumental in providing relevant data from a meaningful sample on the

difference in values of sustainable assets, despite the criticisms of it. A further

study of this kind on UK stock would provide for a useful benchmark for the

UK market.

Another area with relevance to the valuation of sustainable property would be

the agreement of an industry-wide set of indicators in order to form

meaningful comparisons between properties. With an agreed list of areas and

elements, complete with a form of pointing system, occupiers and investors

would be able to actively compare and consider each individual asset.

Further research in these areas would allow for a more comprehensive and

quantitative study to be completed. The Investment Property Databank (IPD)

already compiles and publishes performance analysis information for use by

professionals and stakeholders in real estate. As such, developments in the

suggested areas would be of great value to both a variety of industry areas

and academics alike.

Another area that would benefit from further research is creation of a method

for a holistic benefit to stakeholders of sustainable property. Any work done to

a property in order to make it more sustainable and efficient usually results in

a cost from one party, with the benefit shared by another, or undertaken

purely for self benefit with potential for conflict between landlords and tenants.

For example, the benefit of lower operational costs would initially benefit the

tenant, but should the landlord benefit from the changes, especially if they

paid for the alterations? Some may view it that by owning a building with lower

occupancy cost, they are already benefiting through potentially being able to

rent the property more easily. Landlords, however, may only view fiscal

reward as suitable benefit for improving the asset. This may not work though if

the tenants pay for the work in order to lower their occupancy costs.

As such, research undertaken to find common requirements from both the

landlord and tenant side would provide for a mutual beneficiary method. In

turn, the possibility is that more individuals, from both sides, would potentially

be more open to providing for or funding sustainable improvements to their

properties, which would not be unique or restricted to any one market or asset

class.

As highlighted by this work, there is also a need for clear, defined incentives

towards sustainable investment. The identification of mutual benefits (as

outlined above) would be an aspect of this, but there is also work required on

how to incentivise groups such as institutional investors across whole

portfolios, not just single assets. Research of this type would require a large

amount of co-operation from industry, with potential for a substantial test

period of any method agreed upon by contributors.

Future research of a quantitative nature would be highly beneficial. Although

this will require some time, particularly for figures to be comparable outside of

a recession period, the ability to source meaningful data for use in valuation,

acquisition, marketing and investing, would in itself be a valuable addition to

the current information pool available to those in the industry.

References

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The Business Case for Sustainability in the UK Property Sector, Watford, UK,

Building Research Establishment.

Eichholtz, P, Kok, K, Quigley, J, 2009, Maastricht University and University of

California, Berkeley, RICS Research, Doing Well by Doing Good; An Analysis

of the Financial Performance of Green Office Buildings in the USA

Sustainable Development Commission, 2009, Built Environment, Available at

http://www.sd-commission.org.uk/pages/built-environment.html [Accessed 17 October 2009]

Pivo, G, 2007, Corporate Social Responsibility and Environmental

Management, Exploring Responsible Property Investing: a Survey of

American Executives, John Wiley and Sons Ltd and ERP Environment.

Available at http://www.u.arizona.edu/~gpivo/Pivo%20CSREM.pdf [Accessed 18 October 2009]

Sayce, S, Ellison, L, 2003, Towards Sustainability Indicators for Commercial

Property Occupiers and Investors, Kingston University Press, UK.

The Carbon Trust, 2009, Insights: The Climate Change Levy, The Carbon

Trust, Available at

http://www.carbontrust.co.uk/climatechange/policy/ccl.htm

[Accessed 18 October 2009]

Symes-Thompson, J, RICS, 2009, Two Sides to Every Story: Valuers’ and

Investors’ Attitudes, CB Richard Ellis Ltd, RICS Commercial Property Journal,

November-December 09, Pages 18-19

Social Investment Forum, 2003, Report on Socially Responsible Investment

Trends in the United States, Washington D.C, Social Investment Forum.

CFAUK, McNamara, P, 2008, Will Greener Buildings Bring Bigger Profits?,

Professional Investor Real Estate Feature, pp.41-43.

Jansen, M, 2009, Building Sustainable Design: Do Green Funds Stack Up?,

November 2009, [Online] Available at

http://www.bsdlive.co.uk/story.asp?storycode=3151293 [Accessed 17

December 2009]

Crown, 2009, Sustainable Development, Sustainable Operations on the

Government Estate, [Online] Available at

http://www.defra.gov.uk/sustainable/government/gov/estates/index.htm#whatmakes [Accessed 17 December 2009]

Keeping, M, 2000, What about the demand? Do Investors want Sustainable

Buildings’? RICS Research Foundation, The Cutting Edge 2000. ISBN [Online

Available at ]http://www.rics.org/NR/rdonlyres/B10EB127

AB3A�41B9�BA35�2416B057AC63/0/what_about_the_demand_20000101.

[Accessed 15 January 2010]

Schleich, H, Lindholm, A-L, Falkenbach, H, 2009, Environmental

Sustainability – Drivers for the Real Estate Investor, Helsinki University of

Technology and University of Regensburg, [Online] Available at

http://www.eres2009.com/papers/1A_Schleich.pdf [Accessed 15 January

2010]

Axa Investment Managers, 2009, The Real Estate Market: Down the Red

Brick Road, [Online] Available at http://www.axa-im.com/index.cfm?pagepath=research&CFNoCache=TRUE&servedoc=7251820D-1708-7D7E-1B860E7892B77A50 [Accessed 15 January 2010]

McMahan, J, 2006, The Handbook of Commercial Real Estate Investing,

McGraw-Hill Publishing, New York.

Patton, M.Q, 2002. Qualitative research and evaluation methods, 3rd Edition, Beverly Hills, CA: Sage Naoum, S, G, 2007, Dissertation Research and Writing For Construction

Students, 2nd Edition, Butterworth-Heinemann, Elsevier, Oxford.

Pivo, G, Fisher, D. J, 2009, Working Paper: Effects of Walkability on Property

Values and Investment Returns, [online] Available at

http://www.u.arizona.edu/~gpivo/Walkability%20Paper%208_4%20draft.pdf [Accessed 4 February 2010]

Centre for Sustainable Construction, 2000, Sustainable Construction – The

Data, Watford, UK, Building Research Establishment (BRE)

RICS, 2008, Sustainable Property Investment and Management: Key Issues

and Major Challenges, [Online] Available at

http://www.rics.org/site/scripts/download_info.aspx?fileID=5227&categoryID=450 [Accessed 4 February 2010]

RICS, 2009, “two Sides to Every Story” RICS Commercial Property Journal,

November-December ’09, pages 18 and 19

Building, 2009, Morrell Takes the Stage with a Warning to the Government,

Building Magazine, Pg 10-11, Friday, 27/11/2009

Climate Change Capital, 2010, Press Releases, Climate Change Capital

Property Fund Raises £69m, [Online] Available at

http://www.climatechangecapital.com/news-and-events/press-

releases/climate-change-capital's-property-fund-raises-£69m.aspx [Accessed

3 March 2010]

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California, Berkeley, RICS Research, Doing Well by Doing Good; An Analysis

of the Financial Performance of Green Office Buildings in the USA

IIGCC, 2008, A Changing Climate for Property Investment; A Trustee’s Guide,

Institutional Investors Group on Climate Change.

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2010]

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Trends in the United States, Washington D.C, Social Investment Forum.

Sustainable Construction Task Group, 2000, Reputation, Risk and Reward:

The Business Case for Sustainability in the UK Property Sector, Watford, UK,

Building Research Establishment.

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November-December 09, Pages 18-19

Appendix A Questionnaire sent to Research Participants and

Original Dissertation Proposal Your Job Title: Area of Business: 1. How relevant is sustainability to your companies core business? a) Essential b) Highly c) Moderately d) Partially e) Not at All. 2. What % of your clients express an interest in sustainability? a) 0-10% b) 10-25% c) 25-50% d) 50-75% e) 75-100% 3. What areas are of most concern to your clients? Please could you place a number next to the answers to indicate the top three, 1 being the most important. a) Energy efficiency / Performance Rating b) Waste / Water Consumption c) Building Functionality / Flexibility d) Location / Transport Ease e) Rent Value / Void Period 4. Are your clients prepared to pay a premium for sustainable assets, either to purchase, invest or occupy, or do higher prices make this inhibitive. a) Yes, they are prepared to pay more. b) No, higher prices are preventative. c) Other (Please Comment) 5. Are you involved with "Green Leases" and if so, how?

6. Are shareholders consulted or directly informed of matters regarding sustainability? a) Yes b) No c) Don't know 7. Is your company eligible or a member of the FTSE4Good or DJGSI Indexes? a) Yes b) No c) Don't know 8. How would you consider an investors attitude to be affected by a portfolio of sustainable assets? a) Considerably Positive b) Marginally Positive c) No difference d) Marginally negative e) Considerably Negative 9. Would you be in favour of a government tax incentive regarding sustainability? a) Yes b) No c) No Preference. Please comment further: 10. What strategies do you have in place to attract sustainable investment? 11. In the last financial year, what percentage of your transactions involved sustainable properties? 12. In your opinion, what aspect/s of sustainability are most important? 13. On a scale of 1 - 10, ten being the most positive, how satisfied are you with your own office building / workplace?

Original Proposal Mode of Study: Full Time. Day of Attendance: Monday & Thursday. Course: BSc(Hons) Building Surveying.

Rationale.

Sustainability within the construction industry is not a new concept. The drive

and focus behind this subject however, is ever increasing alongside

government policies relating to climate change and reducing our carbon

footprint.

Commercial property within the UK accounts for around 50% of emissions,

which counts as a substantial portion of the reductions that are currently being

targeted. Despite these high levels of emissions, the “demand” side of this

stock, i.e. the investors and occupiers, have not changed their requirements

for the available space.

Asset management is also an established concept. Research carried out by

DTZ retail estate advisors, estimates that between 5% and 8% of institutional

assets are held as commercial property, which has created a market in which

to have these assets strategically managed in order to create profit and

support each institutions core business. The rationale therefore is to show

how creating a unified model between sustainability and responsible, strategic

asset management, can change investment behaviour and ultimately affect

the value of property portfolios.

Two of the main driving forces within corporate organisations are public

perception and success through profit in business. It is therefore theoretically

achievable to alter investment behaviour by appealing to both these aspects,

through suggesting that by taking a proactive approach to creating a

sustainable portfolio, more outside investors will be encouraged by the desire

to be associated with “green credentials,” thus increasing the value.

Central Research Question.

“How does Sustainability within Strategic Asset Management impact upon

corporate behaviour and property portfolio value within the UK.”

Aims and Objectives.

The aim is to establish whether the increase in sustainability as an issue

within the built environment has made an impact on investment trends and

corporate behaviour.

In order to ascertain this, there are the following objectives: -

1) Determine any current company policies on sustainability.

2) Investigate relationship between clients’ business needs and asset

management strategy.

3) Establish motivation for investing in sustainable assets when adding to

a portfolio.

Methodology. Stage One: Literature Review. – Initial study has shown that work has already

been undertaken on the individual aspects that make up this report. However,

the foundation of this work is to analyse the amalgamation of these areas as a

whole unit, by how they relate to each other to form a single purpose within

the industry.

The Government Department of the Environment published a work on

indicators of sustainable development in 1996, and Sayce, S and Ellison, L

later developed this work in 2003. Research has also been done on best

practice within asset management and how property forms part of businesses

investment considerations. This will be an integral part of the study, as it

forms the basis for how decisions within the investment sector are made.

With this in mind, once the underlying aspects of sustainability and asset

management have been established, the literature review will then go on to

focus on the effect and notion of responsible investment within property and

its associated returns.

Stage Two: Pilot Study. – This will be in the form of an initial questionnaire,

vetted by industry professionals, in order to ascertain its relevance and

validity.

Stage Three: Main Survey/ Formal Interviews and analysis. – The survey will

consist of the updated questionnaire following feedback from the pilot study. It

is intended to be undertaken during interviews with various investors, both

corporate organisations and individual private investors. The combination of

questionnaire and interview will allow for a mix of open and closed

questioning, thus giving more scope for analysis.

Stage Four: Write Up. The information in the report will follow in these

chapters: -

• One: Abstract/Introduction.

• Two: Principles of Sustainability and Asset Management and

requirement of indicators.

• Three: Corporate Social Responsibility and Investment Behaviour.

• Four: Research Design and Methodology.

• Five: Analysis and discussion of report material.

• Six: Conclusion and Evaluation.

• Seven: Suggested further research.

• Eight: References and Bibliography.

Ethics Statement.

The undertaking of this research will involve participation from a range of

professional individuals, along with the accessing of material that in some

cases may be deemed sensitive, private or confidential. In order to comply

with ethical policy required, all participants, including their company will be

given the option to remain nameless in the report. It will also be made clear

that questions undertaken can be refused to be answered, and any sensitive

material omitted from the work.

References/Text Material. Naoum, Dr S, G, 2007, Dissertation Research & Writing for Construction

Students, Second Edition. Butterworth-Heinemann, Elsevier, Oxford.

Lutchman, R, 2008, Sustainable Asset Management: Linking assets, people

and processes for results. DEStech Publications Inc

Blowfield, M, Murray, A, 2008, Corporate Responsibility: A Critical

Introduction. OUP Publications, Oxford.

Barrett, P, Baldry, D, 2003, Facilities Management: Towards Best Practice,

Second Edition. Blackwell Publishing, Oxford.

Ellison, L, Sayce, S, Smith, J, 2007, Socially Responsible Property

Investment: Quantifying the Relationship between Sustainability and

Investment Property Worth, Journal of Property Research, Volume 24,

Number 3.

Pivo, G, Fisher, DJ, 2008, Investment Returns from Responsible Property

Investments: Energy Efficient, Transit-orientated and Urban Regeneration

Office Properties in the US from 1998-2007, Responsible Property Investing

Centre, Boston College and University of Arizona.

Pivo, G, 2008, Building Responsible Property Portfolios: A Review of Current

Practice by UNEP FI and PRI Signatories. UNEPFI and UNPRI

Sayce, S, Ellison, L, 2003, Towards Sustainability Indicators for Commercial

Property Occupiers and Investors, Kingston University Press.

Appendix B Response to letter sent to Lord Mandelson

from the Dept. Communities and Local Government.

Appendix C Explanatory Investment Model with Sustainability Impacts

(Paul McNamara –PRUPIM)

Alternative Baseline Investment – Risk Free Government Bond (Rf)

The higher the risk, the higher the Risk Premium (Rp), the lower the price.

Change to investment income: -

Greater rate of increase of over time, the higher the price, i.e Growth (G)

Market changes, rates fall i.e Depreciate (D)

This translated in basic terms as desired yield from investment as:

Rf + Rp – G + D

The simplistic Yield = Income / Capital Value, means that anything affecting

Rp, G or D will impact yields and through to the capital value.

“Unsustainable” assets are becoming less desirable…

To Tenants, therefore:

Reduced attractiveness means rent levels reduced relatively (G down, D up)

Increased time to re-let (Rp up)

Increased need to re-position asset (D up)

To Investors, therefore:

Increased time to re-sale (Rp up)

Increased costs, especially energy, (G down)

Increased minimum standards relating to carbon reduction. (G down)

Rp up, D up, G down = Yield up, Capital Values down.

Appendix D

Climate Change Capital Property Fund Value Creation

and Case Study Asset Example.

Appendix E -Response to letter sent to

HRH Prince of Wales

and selected extract from provided information on

The Prince’s Accounting for Sustainability Project

Appendix F - CV, Exit Plan and Tutorial Sheets.

Removed.