Putting ESG at the summit of real estate strategy

Impact investing, high street sustainability, retrofitting, renewable energy procurement, the effects of ESG on transactions and much more were all on the packed agenda at EG’s latest ESG Summit at the Ham Yard Hotel, W1. There were some 200 attendees for the full-day event on 5 November, at which industry professionals shared their expertise and experience. The extent to which investors have moved beyond viewing ESG as a nice-to-have was laid bare in a session on impact investing, in which decarbonisation and social value creation were shown to be central to delivering returns. As Impactful Places managing director Vivienne King put it: “This isn’t philanthropy, it isn’t creating value with no return, it’s absolutely creating it with a return, so let me unpack that: there needs to be an intention, and the intention needs to be central to investment strategy, and that sits alongside the intention to create a financial return.” Tough targets Adrian Benedict, head of real estate solutions at Fidelity International, highlighted his fund’s strategy of delivering operational net zero carbon on buildings within two to three years, which was met with initial scepticism. “Fast-forward the clock,” he said, “and we are about two-thirds of the way through the business plan on one asset; we have actually done it on three other assets ahead of time, 20% below budget. So the notion that this is a challenge, I’m not taking any of that away, but the impossible is becoming increasingly possible. All of that with the expectation of generating an outsized return. This is not charity, Fidelity is a financial organisation.” Lydia Merry, who oversees impact and client engagement at Schroders Capital, lifted the lid on a recent deal which saw Homes England invest £50m. “The fund that they have invested in has a real estate impact strategy, so we are trying to address social inequality in the UK through investment in real estate solutions. “That is going to be predominantly housing-led investment, so social and affordable housing and town centre regeneration that is led by homes, and then alongside that social infrastructure. And we really think those strategies create market opportunities to deliver that, but also they create long-term income for investors.” Housing-led regeneration is also a strategy for a fund operated by AEW, whose portfolio manager, Charles Royle, spoke of the returns that exist in projects with high social value, such as delivering homes, town centres, educational facilities and community hubs in areas of deprivation. Royle said: “A lot of these assets which we are investing in provide long-term value from an investor perspective because the sectors lend themselves to longer leases, and they lend themselves to RPI increases because they are operational assets in a lot of cases. So yes, there is good value; it’s a core fund so they are core returns, and it’s unleveraged, so 5-6% distribution yield in this market is probably not bad.” The panel also agreed on the need for more data and internationally recognised standards around ESG if it is to be more successful in attracting global capital. Homelessness challenge Impact loomed large again in a session on the pioneering Build to Rent Pathfinder initiative launched by LandAid to address the pressing issue of youth homelessness in the UK. The initiative seeks to create tenure-blind BTR flats for young people facing homelessness through a unique collaboration between LandAid, the UK BTR sector and specialist frontline youth homelessness charities. LandAid chief executive Paul Morrish said the success of the initiative relied on “progressive BTR landlords who are able to discount a bit of rent roll in order to have social impact”. “This is a tangible way for us as an industry to deliver real social value,” he said, with the “return” calculated at £7 to every £1 spent. Charlotte Hopkinson, head of sustainability and CSR at Grainger, the UK’s largest listed residential landlord, shared her insight into why it made sound business sense to sign up. Grainger has so far committed to the initiative at two sites and has had two residents move in. With LandAid acting as broker, she said the process was very easy and “no more risky than renting to any BTR resident”. Each tenancy is with the charity partner, which then lets the flat to the individual under licence.   “What helped is that this is aligned with our brand,” said Hopkinson. “We do mid-market build-to-rent and we are very focused on affordability for local people, so this seamlessly fits into that. It is also part of our wider community and social impact approach. “It ticked lots of boxes for us, but there is also the question of ‘why wouldn’t you get involved?’ It is not a huge financial impact because it is discounting rent, rather than rent-free, and that is the preference of the charities involved. They want people to get used to being able to pay their rent.” Broadening appeal There was more first-hand experience to be shared on other topics, too, including development.  Dan Higginson, director for development and leasing at Greycoat Real Estate, took us behind the scenes of its 140,000 sq ft project in the heart of London to transform an existing building into an EPC A-rated best-in-class asset. This has included extensive reuse of existing materials, such as acres of high-quality stone. Higginson talked about the role that sustainability and environmental performance has in creating an asset that is highly liquid. By striving to reinvent the 1980s-built Finsbury Dials, EC2, as a best-in-class asset fit for today’s expectations, Greycoat aims to appeal to a broader range of occupiers, which it hopes will enable it to lease the asset more quickly and on better terms. “If you can do that, when you come to sell or refinance it will appeal to the widest pool of investors or lenders,” he said. “In terms of that last group, we are seeing a lot of scrutiny from institutional investors – the likely purchasers of our stabilised assets – funds, lenders and freeholders,” Higginson added. “They are placing hard obligations on us to meet the targets we are setting. The upward pressure from occupiers is coming, but we see a huge disparity across the market in terms of awareness and demand.” Some occupiers are still focused purely on “ticking the box” of EPC and BREEAM ratings, while some don’t know and others don’t care. “Generally, occupiers regard it as a good thing, and they have long understood that the principle of reuse is positive, even before it was quantified,” Higginson said. “Others are pretty sophisticated. The best-informed and most conscientious occupiers are focused on the best-performing buildings and, most importantly, they are understanding how they can use them in the most sustainable way.” In partnership with Photo © Telling Photography