Neil Birrell
Chief Investment Officer
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
How can you make sustainable investments in real estate?
For the Diversified fund range, our investment universe for real estate is REITs and property companies in the UK and Europe. Kirsty Riddle manages the funds’ portfolios in the sector and works with fund manager, Alex Ross, on the management of the Premier Miton Pan European Property Share Fund. In the In Favour / Out of Favour insight note we wrote recently, Kirsty outlined, what we believe, to be a great long-term opportunity for investing in the sector that has emerged.
As the Premier Miton Diversified Sustainable Growth Fund invests in the sector, which is a huge contributor to global carbon emissions, we thought it would be worth discussing just how investing in the sector can meet sustainable criteria. As Kirsty selects the investments, these are her analysis and words.
The built environment contributes 39% to global carbon emissions – a widely cited estimate by the World Green Buildings Council – to highlight the crucial role that property owners and developers play in helping mitigate climate change.
Sustainability considerations are subsequently of huge importance as a real estate investor – not only to identify significant threats posed, but also to identify good investment opportunities. It is likely that owners of unsustainable properties will face higher tax and regulatory burdens, increasing vacancy, falling rents and declining property values, as well as tighter access to financing and higher interest rates.
In contrast, sustainable “green” buildings will command greater occupier and investor interest, rental and valuation premiums, and greater access to financing at more favourable rates. Indeed, we are now seeing solid evidence of this within property markets, and we believe value creation opportunities lie with those skilled management teams that can deliver quality buildings with high sustainability and wellbeing credentials that are highly sought after by occupiers. This could either be achieved through development, improving existing portfolio assets, or converting cheaply acquired unloved “brown” buildings.
The latter is a strategy adopted by many of our office holdings, such as Derwent London and Gecina. With around 70% of real estate carbon emissions from the operation of buildings (heating and electricity largely), office occupiers are increasingly looking for the highest quality space to help meet their own sustainability targets, as well as encouraging teams back into the office. Despite much negativity reported around office space usage since COVID and widely adopted working from home patterns, there has been a huge bifurcation between the “best and the rest” within the office space and the demand and supply imbalance for the former is stark.
Vacancy for new prime Grade A space in the West End of London stands at just 0.6% vs overall vacancy in the same area at nearly 8x this level, whilst CBRE recently reported that in the first quarter of this year Central London saw the highest number of leasing transactions on record at £100psf or higher. Tenants have even been pre-leasing office space up to four years in advance, for fear they will not be able to find suitable space meeting their size requirements when needed.
Not just office space
The industrial and logistics property companies are also benefitting from similar patterns, with occupier demand increasingly shifting towards the most sustainable space, not only to reduce carbon footprints, but also for the purpose of energy security, particularly following the recent energy crisis. Roofs can be built to support swathes of solar panels, and along with the installation of geothermal heat pumps, this can result in buildings with almost entirely self-sufficient energy systems. In addition, landlords such as Montea and Catena can generate a return on their solar investments, reporting double digit stabilised income yields in many cases.
The socioeconomic benefits from improving the sustainability of real estate are clearly evident, and pleasingly we have seen a good response from the listed space to address this. Whilst sustainability benchmarks and ratings can be useful, we focus on and see more value from carrying out our own qualitative analysis. As an example, companies that can acquire brown assets and convert into carbon efficient green assets may have a greater environmental impact and may generate higher shareholder returns than acquirers and passive holders of green assets, despite the latter likely receiving a higher sustainability score from their “cleaner” portfolio.
In addition, we appreciate that material differences in sustainability potential exist across different sectors and assets, and we like to engage with companies to ensure they are setting appropriate and stretching sustainability targets (preferably incorporated into their variable remuneration targets). We favour those companies with credible and timely net carbon zero targets, with clearly defined pathways, which ideally cover scope 1,2 and 3 emissions, so not just their own operational carbon emissions but also those generated by tenants and development activity.
Back to Me
Given the exciting long-term opportunity that we believe has presented itself for investing in property companies and the positive sustainable features we can find, we are of the view that the asset class is key to the sustainable and financial goals we set for the Fund.
