Responsible Real Estate Investment

Transcription

1 March 2015 Schroders Responsible Real Estate Investment For professional investors and advisers only. Responsible investment is at the heart of our investment philosophy

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3 Responsible Real Estate Investment 3 Our approach 4 Responsible investment is good investment 6 Responsible real estate investment is about developing resilience 8 Governance, assurance and industry engagement 18 Case studies Towards zero in Zurich 9 Staying ahead 11 Sustainable technologies 13 See the light! 14 Occupier appeal 15 Regenerating a town centre 16 An innovative concept 17

4 4 Responsible Real Estate Investment Our approach A knowledge advantage With an imperfect real estate market where risks are often not fully incorporated into prices, we seek a knowledge advantage through detailed research and analysis. Developing resilience The global financial crisis has accentuated the importance of understanding economic risk that may affect our investments. The emergence of environmental and social issues in recent years is no different. Understanding and managing all risks is critical to developing resilience within our portfolios.

5 Responsible Real Estate Investment 5 Benefiting stakeholders A successful responsible investment programme should deliver enhanced returns to investors, improved business performance to tenants and tangible benefits to local communities and wider society. Duncan Owen, Head of Real Estate, Schroders

6 6 Responsible Real Estate Investment Responsible investment is good investment Schroders has been managing real estate for over 40 years. Over this time we have witnessed the emergence of a variety of different risks to real estate and adapted our business to ensure the assets we manage continue to offer an attractive return on investment.

7 Responsible Real Estate Investment 7 The changes in markets as a consequence of environmental and social issues are simply investment risks which Schroders must understand to protect our clients assets from depreciation. Offering occupiers resource-efficient and flexible space is critical to ensure our investments are fit for purpose and sustain their value over the long term. As a landlord, we have the opportunity to help reduce running costs for our occupiers, increase employee productivity and wellbeing, and contribute to the prosperity of a location through building design and management. If we ignored such issues when considering asset management and investments, we would risk the erosion of income and value as well as missing opportunities to enhance investment returns. Through its construction, use and demolition, the built environment accounts for more than one-third of global energy use and is the single largest source of greenhouse gas emissions in many countries. The industry s potential to cost-effectively reduce emissions and the consumption of depleting resources, combined with the political imperative to tackle issues such as climate change, means the real estate sector will remain a prime target for policy action. This presents new challenges and opportunities for the real estate industry with profound implications for both owners and occupiers. A good investment strategy must incorporate environmental and social issues alongside traditional economic considerations. At Schroders we believe a complete approach should be rewarded by improved investment decisions and performance. To maximise returns for our clients we must anticipate and understand the impact of all issues and trends to reduce exposure to long term risks. Neil Turner, Head of Real Estate Investment Risk, Indirect Investment & Research, Schroders

8 8 Responsible Real Estate Investment Responsible real estate investment is about developing resilience Resilience to change Attitudes and behaviours are changing as the world accepts the impact of climate change, the economic crisis and changing demography. These impacts are stimulating a myriad of issues that directly impact real estate investment creating different perspectives on risks old and new. We need to respond and design approaches to develop investment resilience to these changes. Responsible investment requires anticipating and managing all risks to maximise returns to investors. Risks may appear absolute such as legislation, however all require in-depth analysis founded on local knowledge and dedicated research. This helps to develop investment resilience to changing economic, social and environmental conditions. Our pan-european investment portfolios enable Schroders to draw upon best practice from across our regional teams to develop asset strategies that incorporate cost-effective and appropriate solutions. Legislation It is clear that European legislation is not only increasing, but has the potential to significantly change the real estate market, particularly in relation to energy usage and management and the protection of the natural environment. While there is some consistency provided by the EU, national governments continue to implement a variety of legislative, regulatory and fiscal controls which have varying impacts on occupiers and landlords. Schroders monitors emerging legislation and seeks to participate with industry bodies to help shape the agenda.

9 Responsible Real Estate Investment 9 Energy and emissions Developing energy efficiency and reducing emissions is a key EU focus. The EU climate change and energy package brought in energy and climate change targets for These are a 20% reduction in greenhouse gas emissions, a 20% reduction in energy consumption through efficiency improvements and for 20% of energy to be provided by renewables. Member states have set strategies for these goals. In the UK it was announced in 2012 that buildings with poor Energy Performance Certificates ( EPCs ) may not be lettable from The regulations were granted Parliamentary approval in March This should act as a catalyst for improvements to building stock and occupational efficiency, many landlords had been waiting for the law to come into effect before taking action. We are assessing exposure to lower rated properties and developing appropriate asset strategies. In France, the Grenelle law is aiming to reduce energy consumption in buildings by at least 38% by 2020 and could accelerate the emergence of a two-tier market. From 2013, an environmental appendix is mandatory in every commercial lease or renewal signed. The appendix sets some obligations from tenant and landlord to meet and discuss how to improve the building s environmental efficiency. It can also include obligation from tenants in order to reduce their energy consumption in the building. In contrast, the Swiss government has taken a different approach and is encouraging the improvement of the existing stock by providing subsidies for sustainable refurbishments. For investors, this offers an opportunity to add value without incurring additional cost. At Schroders we aim to improve the energy efficiency and consumption within buildings in our portfolios where appropriate. Case study Towards zero in Zurich In Schroder ImmoPLUS, we are undertaking an extensive refurbishment of the ZRH+ office building to create a more desirable and efficient space for Zurich-based occupiers. By improving the Building Management System, replacing the heating and cooling system and converting from gas to geothermal, we should achieve a two thirds reduction in the heating demand and reduce associated CO 2 emissions. We considered a range of options and worked hard to balance the economic and environmental considerations for this refurbishment. The result will be a vastly more efficient building and a very comfortable working environment. Roger Hennig, Head of Real Estate Investment, Switzerland, Schroders

10 10 Responsible Real Estate Investment Renewable energy Governments are trying to reduce carbon emissions associated with national energy production which has led to the proliferation of onsite and offsite renewable energy generation across Europe. Many governments have provided support, albeit often short term, in the form of guaranteed prices for onsite generation. The challenge with these initiatives is, therefore determining cost effective technologies which offer benefits to landlords and tenants over the longer term. At Schroders we explore renewable technologies where appropriate. Corporate responsibility Reputation is core to any business and measures which require disclosure and encourage transparency, whether by legislation or by investors and consumers, should stimulate corporates to act more responsibly across all aspects of their operations. In 2014 EU member countries began to implement Article 8 of the Energy Efficiency Directive which requires large companies to undertake energy audits. The first audit is required by 5 December 2015 and then at four yearly intervals. We are establishing the requirements of the UK s Energy Savings Opportunity Scheme and other member country schemes to ensure compliance. The UK scheme does not require public disclosure however companies may opt to disclose compliance to confirm their commitment to acting responsibly. The value of research and analysis This diverse regulatory landscape requires Schroders to have detailed local knowledge of our markets which extends beyond compliance. We must understand and anticipate the unintended consequences of such legislation as the market reacts. We must be prepared to take the investment decisions necessary to ensure our assets are not only compliant, but prepared for tighter and stricter regulation in the future. We are continually assessing changing legislative requirements, occupier attitudes and evolving investor demands. Each asset requires a customised approach. Nick Montgomery, Head of UK Real Estate Investment, Schroders

11 Responsible Real Estate Investment Case study Staying ahead We are testing a new approach with the Schroder UK Real Estate Fund to develop improved sustainability risk profiles for assets and the Fund. Our focus is to identify portfolio resilience to emerging regulation, legislation and occupier preferences. The analysis considered the implications of climate change and socio-economic impacts addressing building fabric, flood, energy performance, legislative compliance and tenant retention. Opportunities to improve resilience have been identified across the portfolio ranging from low and no cost options through to higher cost capital expenditure measures.

12 12 Responsible Real Estate Investment Adapting to a changing climate The rising frequency of extreme weather events across Europe confirms the natural risks presented by climate change to both property owners and occupiers. Prolonged higher temperatures may reveal the inadequacy of existing cooling equipment to maintain internal temperatures, and changing rainfall patterns require analysis of potential disruption to business operations and investment value from flooding. We recognise the implications of climate change and the need for our buildings to adapt to meet the needs of our occupiers now and in the future. Flooding The increased incidence of flooding as seen in the UK, France, Germany and Italy is impacting the physical viability of some locations. The ability to obtain insurance adds to the challenge. The overall effect could be to accelerate the obsolescence of certain locations. Schroders is taking steps to analyse the flood exposure of our portfolios and reflecting the results in asset business plans. Technology The physical effects of climate change coupled with the desire for efficiency and reduced emissions, necessitate scrutiny of building technologies. For many buildings this involves optimising existing systems and plant and machinery, which requires analysis of patterns of actual consumption and occupier demands. This means ensuring metering is in place and fine tuning Building Management Systems. One of the most cost effective ways to improve energy usage is to make changes to the type of lighting source and usage. EU emissions targets also affect emissions from gases involved in plant, for example air conditioning systems, measured in carbon dioxide equivalents. Technologies deployed for refurbishments and developments, therefore, require analysis and specialist advice to determine specifications appropriate to balance the needs and finances of occupiers and investors and to meet legislative requirements and building standards. Schroders seeks to ensure our buildings technological configuration and management delivers appropriate, effective, efficient and compliant solutions for occupiers. Water The global demand for water and potential for scarcity requires changes to the way buildings are managed and maintained. Technologies need to minimise the volume of water used whilst protecting users health. Short flush toilets and regulated taps for hand washing are common. However, rainwater harvesting for toilets and watering grass and planting provides health risk challenges which need to be balanced with the desire to achieve a responsible approach. Schroders aims to ensure that water is used responsibly and safely in all areas of a property under our control and encourage tenants to adopt similar practices. We aim to install water saving devices where appropriate.

13 17 Case study Sustainable Technologies Through the Bracknell Regeneration Partnership, Schroders worked with Waitrose, a major UK supermarket operator, to develop a new 25,000 sq ft store in Bracknell, Berkshire. The building incorporates numerous responsible technologies including an on-site energy centre, air quality controls, presence controlled lighting, sun tubes, smart water systems and a green roof. The building is rated BREEAM Outstanding and in December 2012 won a British Council for Shopping Centres Gold Award Commendation for Sustainability.

14 14 Responsible Real Estate Investment Delivering on occupiers needs As landlords it is our business to provide desirable and efficient space to occupiers. Lowering operational costs for us and our occupiers through efficiencies in energy, water and waste, is one of the most immediate ways we pursue a responsible investment approach and realise financial benefits. Schroders considers this an integral part of good asset management. We expect our property managers to monitor these issues with the same rigour they apply to rent collection. It makes good economic and environmental sense to add value to our properties by making them more cost-efficient. We also need to ensure buildings support the activities of the occupier, current and future. This may involve rethinking building configurations to increase occupancy due to cost control and changing working patterns or improving accessibility in view of the environmental and lifestyle cost of car bourne commuting. To meet occupiers needs we ensure all aspects of a building work together to provide an efficient and comfortable environment for the operation they host. Case study See the light! The refurbishment of a warehouse in Born, Netherlands, in the Schroder European Logistics Fund, included the installation of LED lighting and motion sensors, and marks an evolution in occupier engagement. As part of the lease negotiation and in return for the additional capital outlay for energy efficient technology, the occupier agreed to extend the lease and pay a rental premium, which was more than offset by a reduction in their annual energy spend. Tenants are becoming more aware of the energy saving potential and are placing more importance on reducing costs and carbon emissions. If we proactively help these tenants, we will position ourselves as a landlord of choice. Tony Smedley, Head of Continental European Investment for Real Estate, Schroders

15 Case study Occupier appeal The refurbishment of 82 Dean St in central London, owned by the Schroder UK Real Estate Fund, should extend its operational life by 15 years. The works included new mechanical and electrical systems, water saving devices, cycle racks and zone controlled lighting. We achieved a BREEAM Very Good rating and upgraded the EPC from F to C. We expect to see a 25% uplift in the rental value as a result of the refurbishment, enhancing value by more than double the initial capital outlay. The building specification was designed to appeal to media companies, the dominant occupiers in the locality. Engagement Deploying technological and management innovations enables Schroders to deliver more advanced and cost effective property solutions to our occupiers. These range from replacing inefficient lighting and fitting smart meters, to comprehensive retrofits, renewable energy programmes and centralised waste management. We assess where such measures are appropriate and cost effective, but given our responsibility in many instances extends only to common parts, we recognise that the greatest opportunities are found by engaging with occupiers. Whether this is formalised through green leases or not, the key to reducing operational costs and associated environmental impacts of the built environment is through active collaboration between owner and occupier. In some regions this is easier than others due to lease structures and transparency. Schroders has achieved some success through open dialogue with informed occupiers and seeks to apply this approach to all our portfolios where possible. Waste It is important to consider not only the management of waste and how practices may reduce the amount transported and the cost to landfill, but also how we can make better use of waste. The property industry embraces recycling and using recycled materials for refurbishments and developments. The combustion of waste to produce energy also presents an opportunity to contribute to renewable energy targets. Schroders aims to arrange for our tenants waste to be recycled for all sites which we control and use recycled materials where appropriate within refurbishment and development projects.

16 16 Responsible Real Estate Investment Connecting with communities At Schroders we believe in the importance of understanding a building s relationship with the community and its contribution to the well-being of society. All buildings serve a social need and managing this dynamic helps maximise investment value. The degree of integration varies considerably from a mixed use scheme of shopping, offices and housing, which may provide a complete community including parks and new transport solutions, to a single office building meeting the needs of a business and its employees. Understanding social change and the needs of the locality is important in developing the sustainability of an asset. Changing business practices, such as flexible and home working, technology developments and changing corporate responsibilities, combined with a more transient yet connected society, means that occupier demands will continue to evolve. Creating aspirational communities within vibrant and sustainable centres is one of the challenges facing many towns and cities as they seek to reinvent themselves and bring people back into town centres. At Schroders we look to understand and develop the community relationship to ensure our investments provide sustainable social solutions for the long term. Case study Regenerating a town centre Bracknell in Berkshire (UK) has struggled to provide for its residents and compete with neighbouring town centres for many years. Through the Bracknell Regeneration Partnership, Schroders has developed a master plan comprising new shopping, housing, social amenity, green spaces and transport routes, all helping reinvigorate and reposition the town. The project s success heavily depends on the community s support and trust. The Partnership has developed initiatives with a multitude of local groups. Success is evident with Bracknell winning a Britain in Bloom Gold Award for a third year and a Green Apple Award for waste management. We are proud to be delivering on our vision for Bracknell. The town is a changed place and is now beginning to serve its residents needs with a sense of vitality that has been absent for a long time. Neil Meredith, Head of UK Business Space, Schroder Real Estate

17 Responsible Real Estate Investment 17 Case study An innovative concept In the late 1990s we began the development of Chiswick Park in West London. The concept was to provide high quality office space with good transport links connected with the local community, to create vibrant and successful commercial enterprises, pioneering environmental management, and an engaged and satisfied community. The brief has been fulfilled, the Park is a great success, has won awards and continues to attract occupiers ranging from small enterprises to large multinationals. Chiswick Park is living proof that responsible investment is good investment. James Lass, Fund Manager Schroder UK Real Estate Fund, Schroders

18 18 Responsible Real Estate Investment Governance, assurance and industry engagement Schroders is committed to responsible investment across our investment activities. Through governance and industry engagement, we continue to improve our understanding of emerging risks, learn from and adopt best practice from our regional teams and the wider industry, and deliver innovative solutions to our clients. Schroder Real Estate Schroder Real Estate is involved with numerous industry bodies with interests in responsible investment. We are a founding member of the UK Green Building Council. Initiatives such as these help ensure we are well placed to learn from, and contribute to, industry best practice. We have submitted three of our UK funds to the Global Real Estate Sustainability Benchmark, and will consider the benefits of expanding our contribution to this initiative in future years. We understand the importance of providing our clients and the wider investment community with greater transparency about our management of environmental and social issues. We continue to monitor voluntary initiatives and will participate in those which offer valuable insight, useful metrics or improve best practice. However, it is important to recognise the limitations of these initiatives if they do not confirm an understanding of risks and building resilience and how these need to be built into investment decisions.

19 Responsible Real Estate Investment 19 Schroders Plc Schroders Plc is a signatory of the UN Principles for Responsible Investment and we believe that our approach to responsible investment is in compliance with the principles. We were a founding member of the Institutional Investors Group on Climate Change. We are a signatory and special advisor to the Carbon Disclosure Project and we commit to greater transparency of our investment activities, and as members of UKSIF and EUROSIF we actively promote socially responsible investing. Corporate responsibility is important to Schroders and we have policies and schemes in place to ensure that the Group acts in a socially responsible way in its day-to-day operations. For more information about Schroders Plc corporate responsibility and responsible investment activities please visit and

20 R e s p o n s i b l e R e a l e s t a t e I n v e s t m e n t Trusted heritage Advanced thinking Contact us: Schroder Real Estate Investment Management Limited 31 Gresham Street London EC2V 7QA Tel: +44 (0) Fax: +44 (0) realestate@schroders.com Authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. About Schroders: Schroders is a global asset management company with ( 441.6/US$474.3) billion under management. Our clients include corporations, insurance companies, local and public authorities, charities, pension funds, high net worth individuals and retail investors. Source: Schroders, at 31 March Important Information: For professional investors and advisers only. This document is not suitable for retail clients. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Real Estate Investment Management Limited does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. The Schroder ImmoPLUS and the Schroder European Logistics funds are not registered and not available for distribution in the United Kingdom. The Schroder UK Real Estate Fund (the Fund ) is authorised by the Financial Conduct Authority (the FCA ) as a Qualified Investor Scheme ( QIS ). A QIS may not be promoted to a member of the general public. Property-based pooled vehicles, such as the Fund, invest in real property, the value of which is generally a matter of a valuer s opinion. It may be difficult to deal in the shares of the Fund or to sell them at a reasonable price because the underlying property may not be readily saleable, thus creating liquidity risk. Any investment in the Fund must be based solely on the prospectus, or any other document issued from time to time by the Manager of the Fund in accordance with applicable laws. This document is intended for the use of the addressee or recipient only and may not be reproduced, redistributed, passed on or published, in whole or in part, for any purpose, without the prior written consent of Schroder Real Estate Investment Management Limited. Issued in March 2015 by Schroder Real Estate Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No England. Authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. w46874