Non-financial ESG metrics may be the future, but which ones?
Real estate industry moving towards greater use of environmental and social metrics to measure returns, finds PwC/ULI.
January 22, 2019Real Estate
Are non-financial metrics increasingly important in measuring returns? ‘Yes’, say the majority of market participants Europe’s real estate industry, according to research in Emerging Trends in Real Estate - Europe 2019. Published by PwC and the Urban Land Institute (ULI) in November 2018, the report takes into account 885 survey responses from a wide range of industry experts across 22 European countries. Amongst other trends, it found that 59% of respondents either agreed or strongly agreed with the statement that the industry is moving towards using a wider range of non-financial measures to assess the value of assets and real estate businesses.
A watershed moment in the industry’s move towards using non-financial metrics, as depicted in the report, was a January 2018 letter from BlackRock CEO Larry Fink to senior executives at companies in which the firm was invested. Fink wrote that, to prosper in the long term, “every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”
However, it is still early days in the development of common and meaningful environmental, social and governance (ESG) metrics within the real estate industry, as Lisette van Doorn, CEO of ULI, is keenly aware. To date, greatest progress has been achieved in the measurement of energy performance and reduction, helped by the development of thorough due diligence, reporting and benchmarking, and supported now by the latest data-focused, proptech innovations.
Climate change challenge
When it comes to the greater, global environmental challenge of climate change, explains van Doorn, investors are only just starting to deal with it: “Climate change has an impact on value and liquidity - on keeping your asset liquid in order to achieve the right financial returns. It is still mainly dealt with by the real estate industry as an insurance issue, and yet insurers themselves are struggling. They are used to basing their premiums on historic data, but climate change is something yet to come. You could describe this situation, with insurance covering real estate, as a catch-22.”
Challenging as it may be, indicates van Doorn, “a lot is happening, in terms of how investors and fund managers are trying to deal with climate change, starting with data collection and analysis on exposure.”
‘Good density’ and social performance
Within the ESG formula, social impact has been proving harder than environmental performance to measure. “Like climate change, social impact and outcomes are forward looking and long-term, and pretty hard to measure,” says van Doorn.
The ULI recently tried to assess social value and impact, working around the concept of ‘good density’. Their findings were published in 2018 in ‘Supporting Smart Urban Development: Successful Investing in Density’. In that ULI report, van Doorn points to the example of Aspern Seestadt, a new urban district built on an old airfield outside Vienna, as an example of a sustainable and successful urban development. “They started out with an integrated masterplan, including transport and social infrastructure alongside real estate, setting the density such as to afford for the necessary infrastructure to achieve the goal that less than 30 percent of journeys should be made by motorised vehicles. When construction started, they put the infrastructure in first, before the real estate. If you just do one thing after another, without that kind of planning, you miss out,” says van Doorn.
In terms of achieving ‘good density’, in order to underpin social performance, van Doorn points to London as leading the way in terms of finding funding for infrastructure on the back of future, higher density, in particularly around transport points such as those of the TFL and its new transport links: “It is well possible to densify at these points and mix uses. By densifying, you can create a bigger target group who will use the infrastructure.” Van Doorn also points to Frankfurt as an interesting city. “They have changed their approach to more high rise, densification and mixed use developments,” says van Doorn.
Still, admits van Doorn, it is difficult to isolate investment returns based on social performance, because of the wider market. “It could come down to comparing land values over the longer term. That might be possible to measure, because there is an impact on the community and social cohesion - it’s about where people want to live and work. The longevity of the assets will also be longer, with less capital needed to restore and refurbish them.”
Financial versus ESG performance
Going into 2019, the development of ESG metrics looks set to remain a longer term project. “This year, the real estate industry’s focus is on the day-to-day management of real estate, given the uncertain outlook, with trade tension, rising populism, and the fact that real estate prices are pretty high,” says van Doorn. “Investors are focused on where to find value and position themselves to weather the storm.”
Real estate investment and returns will be discussed further at Deutsche GRI 2019 on 8-9 May in Frankfurt, and at British & Irish GRI 2019 on 15-16 May in London.
A watershed moment in the industry’s move towards using non-financial metrics, as depicted in the report, was a January 2018 letter from BlackRock CEO Larry Fink to senior executives at companies in which the firm was invested. Fink wrote that, to prosper in the long term, “every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”
However, it is still early days in the development of common and meaningful environmental, social and governance (ESG) metrics within the real estate industry, as Lisette van Doorn, CEO of ULI, is keenly aware. To date, greatest progress has been achieved in the measurement of energy performance and reduction, helped by the development of thorough due diligence, reporting and benchmarking, and supported now by the latest data-focused, proptech innovations.
Climate change challenge
When it comes to the greater, global environmental challenge of climate change, explains van Doorn, investors are only just starting to deal with it: “Climate change has an impact on value and liquidity - on keeping your asset liquid in order to achieve the right financial returns. It is still mainly dealt with by the real estate industry as an insurance issue, and yet insurers themselves are struggling. They are used to basing their premiums on historic data, but climate change is something yet to come. You could describe this situation, with insurance covering real estate, as a catch-22.”
Challenging as it may be, indicates van Doorn, “a lot is happening, in terms of how investors and fund managers are trying to deal with climate change, starting with data collection and analysis on exposure.”
‘Good density’ and social performance
Within the ESG formula, social impact has been proving harder than environmental performance to measure. “Like climate change, social impact and outcomes are forward looking and long-term, and pretty hard to measure,” says van Doorn.
The ULI recently tried to assess social value and impact, working around the concept of ‘good density’. Their findings were published in 2018 in ‘Supporting Smart Urban Development: Successful Investing in Density’. In that ULI report, van Doorn points to the example of Aspern Seestadt, a new urban district built on an old airfield outside Vienna, as an example of a sustainable and successful urban development. “They started out with an integrated masterplan, including transport and social infrastructure alongside real estate, setting the density such as to afford for the necessary infrastructure to achieve the goal that less than 30 percent of journeys should be made by motorised vehicles. When construction started, they put the infrastructure in first, before the real estate. If you just do one thing after another, without that kind of planning, you miss out,” says van Doorn.
In terms of achieving ‘good density’, in order to underpin social performance, van Doorn points to London as leading the way in terms of finding funding for infrastructure on the back of future, higher density, in particularly around transport points such as those of the TFL and its new transport links: “It is well possible to densify at these points and mix uses. By densifying, you can create a bigger target group who will use the infrastructure.” Van Doorn also points to Frankfurt as an interesting city. “They have changed their approach to more high rise, densification and mixed use developments,” says van Doorn.
Still, admits van Doorn, it is difficult to isolate investment returns based on social performance, because of the wider market. “It could come down to comparing land values over the longer term. That might be possible to measure, because there is an impact on the community and social cohesion - it’s about where people want to live and work. The longevity of the assets will also be longer, with less capital needed to restore and refurbish them.”
Financial versus ESG performance
Going into 2019, the development of ESG metrics looks set to remain a longer term project. “This year, the real estate industry’s focus is on the day-to-day management of real estate, given the uncertain outlook, with trade tension, rising populism, and the fact that real estate prices are pretty high,” says van Doorn. “Investors are focused on where to find value and position themselves to weather the storm.”
Real estate investment and returns will be discussed further at Deutsche GRI 2019 on 8-9 May in Frankfurt, and at British & Irish GRI 2019 on 15-16 May in London.
