Increasingly, real estate fund managers are having to think like environmentalists.
Institutional investors, particularly those that are government-owned and new to the investment class, are demanding fund managers have a clear strategy towards improving the energy efficiency of buildings, lowering the carbon footprint and being more socially responsible.
On a visit to the EXPO REAL property show in Munich last month, Dutch global powerhouse ING Real Estate Investment Management (REIM) told PERE how its Paris office in particular was aware of that stance among French institutional investors.
Jean-Michel Bongiorno, director of institutional clients for France, Spain, Portugal and Luxembourg at ING REIM, said investors fell into two separate camps. Those that already had a sizeable real estate portfolio were looking for “sustainable” assets, but even more so for the second type of investor, which is newly into the asset class and has a semi-government owned structure. “Because these are close to the public sector, they need to have a socially responsible policy and criteria in place,” he explained. “Therefore, prospective real estate fund managers need to have an environmentally friendly strategy.”
ING declined to identify specific institutions, but several have published documents outlining their responsible investment strategy.
One is Fonds de Réserve Pour les Retraites (FRR), which was established by the French government in 2003 to help finance several public retirement plans. In March 2008, it published its strategy, making clear its intention to expand its approach to all asset classes in its portfolio. That would include real estate, currently at 3 percent of assets. The strategy, according to FRR, will take environmental, social and governance criteria into account when making decisions related to investments and the selection of managers and/or funds.
In 2006, FRR also signed up to the United Nations’ six principles for responsible investment, which require it to seek “appropriate disclosure on environmental, social and governance issues” by the entities in which it invests.
Moreover, it is not just FRR. Agrica, a pension, insurance and savings group for French farmers, and Etablissement de Retraite Aditionnelle de la Fonction Publique (ERAFP), the Paris-based retirement fund for French civil servants, are also hot on the issue. Making the issue even timelier, by law, ERAFP hopes to be able to begin investing in real estate for the first time next year.
Olivier Bonnet, socially responsible investing strategist at ERAFP, said its criteria will be wide, encompassing even social and governance policies to its real estate investing. This could extend to working conditions for cleaners in buildings, for example, or aspects of contractual agreements for building contractors on a real estate project. “The asset manager might have the skills to create a green building, but they might not be skilled or experiences in these other areas,” he said. “They will probably have to hire people.” Failure to meet its criteria would be a deal-breaker for the retirement plan. “We won’t compromise on that,” he added.
In September last year, ERAFP said it was allocating hundreds of millions of euros to sustainable property investments. According to some sources, it was reluctant to invest in out-of-town retail parks in France because they encouraged greater car use, so it opted for a city centre retail strategy instead.
Chuck Leitner, former global head of RREEF and now chief executive of the Greenprint Foundation, a not-for-profit global alliance of real estate owners, said: “The dialogue between investors and fund managers about green investing is not just taking place in France, but in all of Europe and on a global basis. Investors are really starting to make it a much higher priority and, as a result, the industry is paying much more attention.”
Leitner was at the EXPO REAL property show in Munich last month promoting a measurement index as part of the group’s mission to reduce carbon emissions from property. Its members include several well-known property managers, including Beacon Capital Partners, JPMorgan, LaSalle Investment Management and RREEF.
Leitner said many investors have yet to put into place a “practical or quantifiable wrapper” around the issue. “What is required is a common language for how energy performance is measured, how it is talked about and how one compares one building to another building or one manager to another.”