Monday, June 8, 2009

Green Real Estate: The Next Frontier

Socially Responsible Investing is typically understood in terms of publicly traded equities, but SRI can impact other asset classes such as fixed income or real estate.

An engaging panel at the SIO Conference provided us with lots of thought provoking ideas on the subject of green real estate. This topic has generated considerable interest because many of the asset managers who signed on to the UN Principles for Responsible Investment are not only owners of stocks and bonds, they have significant holdings of real property. Responsible property investment is an approach to property investment that recognizes environmental and social considerations along with more conventional financial objectives. And because green real estate has widely accepted benchmarks like LEED, and the business case is easily quantified, socially responsible real estate may be an easier first step for mainstream investors.

REITs (Real Estate Investment Trusts) are identifying and responding to ESG challenges, such as reporting, using benchmarks like LEED, and staying ahead of the regulatory curve. Ben Spruzen, from Australia’s Sustainable Investment Research Institute, told us about a study of 36 REITs that showed that the management of ESG risks and opportunities contributed positively to performance. However, many challenges to green real estate remain. These include energy efficiency, mandatory disclosure of energy performance, emissions trading, the availability of green building stock and litigation over unhealthy buildings.

David Ogden of ISG Capital Corp offered more evidence of the financial benefits of greening your real estate. In addition to eye popping returns on investment for green upgrades, he also said that companies are changing the way that they procure buildings which will lead to increased demand for green buildings, and that healthier buildings may provide enhanced cash flow because there is less tenant turnover.

While some Canadian companies are working on green real estate, and demand from the retail investor is strong, Bob Mann from Jantzi Research feels the sector has not yet developed enough to create green investment product offerings, although they are on the horizon. Congruent with existing SRI principles of raising the bar, perhaps it is time for a pale green REIT, a portfolio that is biased towards the better, and will demonstrate the performance benefits of green real estate.

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