Property Investing RPI lies at the nexus of Sustainable Cities - - PowerPoint PPT Presentation

Responsible Property Investing

Sustainable Cities and Buildings Real Estate Investing Corporate Social Responsibility Socially Responsible Investing

Responsible Property Investing

RPI lies at the nexus of …

Definitions

• Real estate investments that benefit investors

and the common good

• Portfolio, asset, or property mgt. practices that

produce social or environmental gains consistent with fiduciary responsibilities.

• Efforts to address ecological integrity,

community development, and human fulfillment in the course of profitable real estate investing

• Going beyond compliance with minimum legal

requirements to better manage the risks and

• pportunities associated with social and

environmental issues

James A. Grasskamp

UW-Madison Professor of Real Estate

“Man really is the only animal that builds his terrarium around him as he goes and real estate is really the business of building that terrarium. So we have a tremendous ethical content, tremendous social purpose”

1996 by the UN Habitat Agenda

“We endorse adequate shelter for all and making human settlements safer, healthier and more livable, equitable, sustainable and productive by socially and environmentally responsible corporate investment”

Property matters

• > 50% of energy-related CO2 is from

building operations and transport

• Perhaps 1 million+ janitors, maids,

bellhops and doormen in the USA earn below a living wage

• US loses 1.5 million acres of farmland

per year to urbanization

• 2 million occupied housing units in

America lack water, toilets or electricity

Property‟s Triple Bottom Line

• Economic Accounts

– income, value, returns, public tax revenues

• Environmental Accounts

– carbon footprint, biodiversity, eco-efficiency, natural hazards, land conservation, etc.

• Social Accounts

– worker wages and benefits, worker safety, respiratory illness, affordable housing, urban revitalization, segregation, unemployment, security, history & culture, aesthetics, childcare, infrastructure

RPI Style Funds

• Urban Funds
• Land Conservation Funds
• Brownfield Funds
• Historic Preservation Funds
• Low Income Housing Funds
• Community Development Funds
• Green Building and Smart Growth Funds
• Responsible Contractor Funds

Two examples

Learning Links Centers, LLC

MuniMae Sustainable Land Fund

Working Groups

• TIAA-CREF
• CalPERS
• BC Investment Mgt Corp.
• AFL-CIO Investment Trust
• Methodist Church Pension

Board

• GE Real Estate
• Kennedy Real Estate Counsel
• BOMA Intl.
• Urban Land Institute
• Real Estate Roundtable
• New Boston USA
• Institution Real Estate, Inc.
• Aviva
• AXA
• BC IMC
• Caisse des Depots
• F&C
• Hermes
• IL&FS
• Innovest
• Mistubishi
• Mn Services
• PruPIM
• Sumitomo
• West LB

Common Environmental Practices

• Setting energy, water, waste, GHG targets
• Building recommissioning
• Obtaining 3rd party endorsements (e.g., DJWSI)
• Using renewable energy
• Preparing habitat conservation plans for projects
• Training occupiers on conservation
• Supporting urban forestry

Common Social Practices

• Providing fair benefits and wages
• Investing in urban revitalization and affordable

housing

• Pursuing local hiring and training
• Seeking design and service awards
• Supporting community organizations
• Maintaining good health and safety

records

www.unepfi.net

UNEP Finance Initiative

Energy Conservation

Better lighting, boilers, AC and office equipment and recommissioning are nearly always cost-effective. Investa saved AUS$30,000 and 363 tonnes of CO2 per year in Parramatta offices at “minimal or no cost”.

www.unepfi.net

UNEP Finance Initiative

Fair Labor Practices

Fair wages and benefits require 2.5% higher

• rents. But they improve service by 25% and

increase rental income by 7% .

General Growth Properties has promised janitors at its 194 regional shopping centers access to affordable health insurance, market-based wage rates, complaint resolution procedures, and green cleaning products.

SRPI REITs

• Brandywine Realty Trust

USGBC member and LEED building owner

• Boston Properties

US EPA energy star partner and NAREIT Leader in the Light

• Simon Properties

Carbon Disclosure Project participant

• Equity Office Properties

General Growth Properties

DJWSI and FTSE4Good constituents

• Others

What are the key criteria?

2006 SRPI Delphi Project

RPI Metrics

4.0-5.0, 3.0-4.0, 2.0-3.0

• More Walkable, Less Auto Dependent Places

– Transit Oriented, Centrally Located, Walkable, Carpool Friendly, Bike Trails and Facilities

• Low Carbon

– Energy Efficiency, Daylight and Ventilation, Renewables, Local Sources

• Worker Well Being

– Parks & Open Space, Sense of Community & Place, Childcare, Handicapped Accessible, Amenities for Working Parents

• Urban Revitalization and Reuse

– Urban Revitalization, Adaptable Interiors, Suburban Redevelopment, Brownfield, Not on prime farmland

RPI Indicators Study

0.00 0.20 0.40 0.60 0.80 1.00

Energy Conservation Less Auto- Dependence Worker Well- Being Urban Revitalization Environmental Quality Health & Safety Corporate Citizenship

RPI Index, Sub-Indices Scores

Portfolio 1 Portfolio 2

Leaders‟ views on RPI

2007 Survey of Senior Real Estate Executives

Sponsored by BOMA Intl., ULI, NAREIT, The Real Estate Roundtable

Conducted in cooperation with Institutional Real Estate, Inc.

Not Done Planned or Under Consideration Implemented % % % Value Statement 39% 18% 43% Strategic Planning 36% 22% 42% Learning/Management Systems 55% 29% 16% Conservation 24% 23% 53% Responsible Contractor 50% 16% 34% Women or Minority Owned Businesses 52% 13% 35% Committee for Sustainability or CSR 68% 12% 19% Social or Environmental Accounting 59% 15% 26% Targets and Benchmarks 69% 19% 13% Disclosure 65% 18% 18% Stakeholder Engagement 44% 11% 45%

Are you using…?

Not Invested Planned or Under Consideration Invested % % % Brownfields 52.4% 17.0% 30.6% Green Bldgs 35.1% 32.4% 32.4% TOD 31.8% 16.9% 51.4% Infill or Revitalization 22.3% 15.5% 62.2%

Are You Invested In…?

SRPI Stage % Non Responsiveness 7.1% Compliance 17.0% Efficiency 37.6% Strategic Proactivity 29.1% Sustaining Organization 9.2%

Your RPI Stage?

Mean Cost avoidance 3.8 Concern for risk and return 4.6 Peer activity 2.8 Employee recruitment/retention 3.2 Internal leadership 3.8 Business advantage 4.2 Opportunities to

• utperform

4.3 Moral responsibility 4.1 Voluntary codes of behavior 3.9 Stakeholder pressure 2.7 Investors 3.0 Customers 3.7

Drivers

Prospects

• 82% of executives would increase

their allocation to RPI if it could meet their risk and return criteria

Is RPI neutral or positive for returns?

Desert Riparian Areas along Tucson‟s Tanque Verde Wash, 96-99

Colby and Wishart, The Appraisal Journal, 2002

Open Space in Portland, 1990-92

Bolitzer and Netusil, J. of Env Mgt, 2000

Note: best type was golf courses

Conservation Subdivisions

• utperformed in So.

Kingston, RI

Mohamed, Urban Affairs Review, 2006

Average price per acre of lots sold Average improvement costs per lot Average selling time Conservation Subdivision $125,000 $18,700 9.1 months Conventional Subdivision $107,000 $26,100 17.0 months

Regeneration Outperformed

Total Annualized Returns, „81-‟02

• J. of RE Portfolio Mgt, 2006

Retail Office Industrial All UK Property 11.49% 9.65% 9.09% Regeneration Properties 15.50% 10.59% 12.60%

The “Green Tilt” at Work

Source: Innovest

Land Use Mixing in Single Family Neighborhoods, 1970 Tucson

Use Benefit to Median Home Value from 10% increase in land use Maximum studied Commercial $990 12% Multifamily $940 20% Industrial $440 10% Public $930 21%

Cao and Cory, Annals of Regional Science, 1982

Changes in Valuations near Dallas Light Rail Stations, 1997-2001

Clower, Australasian J. of Regional Studies, 2002

Land Use Control DART Office 11.5% 24.7% MFR 34.8% 42.0% Retail 30.4% 28.3% Industrial 21.5% 13.0%

Investment Returns from Responsible Property Investments:

Energy Efficient, Transit Oriented and Urban Regeneration Office Properties in the US from 1998-2008

Study Question

Can an investor be “responsible” and earn competitive returns?

Methods

• Data

– Financial from NCREIF – Energy Star from EPA – Regeneration from HUD RC/EZ/EC locator – Transit data from BTS

• 4,460 office properties, 1999-2008
• Portfolio analysis & OLS regression

Methods

• Dependent financial variables

– End of quarter market value per square foot (log) – Annual income return (log of 1 + return) – Annual appreciation return (log of 1 + return) – Annual total return (log of 1 + return)

Methods

• Control variables

– Regional supply (completions) – Regional demand (job growth) – National market (NCREIF office index) – Property (age, size, floors) – Region – Subtype (CBD, suburban) – Congestion (density)

Independent variables

• Energy Star dummy
• Transit dummies – within ½ mile of fixed rail

– transitcb, near transit in a CBD or not near in a CBD – transitsu, near transit in a suburb or not near in a suburb

• Regeneration dummies – in or near RC/EZ/EC

– regencb, in or near zone in a CBD or not in one in a CBD – regensu, in or near zone in a suburb v. not in one in a suburb

Total Return

• Std. Dev.

RPI (since 2006) 12.05% (11.63%) 2.46% Non-RPI (since 2006) 10.18% (6.61%) 2.50%

Portfolio analysis

estar

.254* (5.9%)

regensu

.317* (9.4%)

regencb

• .144*

(-2.4%)

transitsu

.553* (12.7%)

transitcb

.193* (4.5%)

Net operating income

Controls were significant with expected sign, .25 R-squared, 31,000 observations RPI properties had from 5% to13% higher net incomes except in CBD Regeneration areas, consistent w/ their designation Caused by various combinations of +rents, +occupancy and -expenses Energy Star had +5% rent, +1%

• ccupancy and -10% utilities (the rent is

similar but occupancy is less than what

• thers have found)

NOI per SF

1 2 3 4 5 6 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year NOI per SF

Estar Not Estar

estar

.127* (13.5%)

regensu

.023 (2.3%)

regencb

.011 (1.1%)

transitsu

.150* (16.2%)

transitcb

.099* (10.4%)

Market values

Generally found higher values, consistent with higher incomes Energy Star had +13.5% value (similar to what’s been found by others) Exception was RegenCB which had higher value contrary to lower NOI

estar

.002 (0.2%)

regensu

• .014*

(-1.4%)

regencb

.004 (0.4%)

transitsu

.011* (1.1%)

transitcb

.005 (0.5%)

Capital appreciation returns

In theory, these do not automatically follow from higher income or value With one exception, appreciation returns for RPI properties were greater

• r the same as other properties;

therefore RPI did not dilute appreciation The exception was suburban regeneration properties ; their higher incomes were unable to sustain their higher values; this is an example of how higher income or value doesn’t necessarily mean higher return

estar

• .005*

(-0.5%)

regensu

• .001

(-0.1%)

regencb

• .005*

(-0.5%)

transitsu

• .003*

(-0.3%)

transitcb

• .002*

(-0.2%)

Income returns

All RPI types had lower income returns, analogous to lower cap rates Suggests they were appraised at higher value per dollar of income due to expectations of lower risk or faster future growth Lowest was Energy Star, consistent with concerns about future gas and energy issues Other lower cap rates suggest

• ptimism about future redevelopment

and Transit Oriented Development

estar

• .005

(-0.05%)

regensu

• .021*

(-2.1%)

regencb

.002 (0.2%)

transitsu

.009* (0.9%)

transitcb

.002 (0.2%)

Total returns

Total returns are the sum of income and appreciation returns With one exception was total returns for RPI were positive or neutral The exception was property in suburban regeneration areas where stimulus policies may not be effective The best opportunities appear to be Suburban Transit Oriented Development – 13% higher NOI, 16% higher Value, 1% higher Total Return per year

Total Return Index for Estar and not Estar

0.5 1 1.5 2 2.5 3 3.5 4 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Year Capital Index Estar Not Estar

Higher NOI and Value does not mean Higher Returns But returns do not determine feasibility for developers. If excess costs do not exhaust value premiums, then projects can be very profitable. Except for suburban regeneration, value premiums are holding. That bodes well for the profitability of RPI development.

NOI per SF

1 2 3 4 5 6 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year NOI per SF

Estar Not Estar

Study Conclusions

• Executives can invest in RPI with more

confidence it will not dilute returns

• Special RPI portfolios could be created

without added risk or less return

• RPI returns may be insufficient to shift

investors toward RPI; however higher values could mean higher profits for developers who could tend toward RPI

WALKABILITY, PROPERTY VALUES AND INVESTMENT RETURNS

Study Question

• What are the effects of walkability on

property values and investment returns?

Methods

• Financial data from NCREIF, Walkability

data from Front Seat

• 10,981 office, retail, industrial,

apartments, 1998-2008

• OLS regression models
• Dependent financial variables

– End of quarter market value per square foot (log) – Annual income return (log of 1 + return) – Annual appreciation return (log of 1 + return) – Annual total return (log of 1 + return)

Methods

• Independent control variables

– Regional supply (completions) – Regional demand (job growth) – National market (NCREIF index) – Property (age, size) – Region – Environment (crime) – Government (effective property tax rate)

Walk Score

• 0 to 100 index based on distance to desired

destinations (education, retail, food, etc.)

• High score if 1 establishment of each desired

type is within ¼ mile; Low score if greater than 1 mile

• Disadvantages:

– All destinations weighted equally – Ignores barriers – No attention to other correlates of walkability

• Advantages:

– Uses best predictor or walking: proximity – Nationwide coverage

San Marco, Walk Score 80 Normandy Estates, Walkscore 20

All Types Walk Score™ .004*** cemp123 .075*** sta123

• .026***

npitotret 11.2*** age

• .003***

sqft

• 2.14e-07***

proptaxmsa

• .088***

propcrime

• 9.16e-06***

personsSqMi

• 5.93e-06**

transitH .33*** ttime

• .014***

P type dummies

not shown

CBSA dummies

not shown

• bservations

27,320 R-squared 0.33

27,000 observations (buildings x quarters) All controls significant with expected signs 1 unit increase in Walk Score = 0.4% more value Property with 80 Walk Score would be worth about 25% more than

• ne with 20

20% less crime = 1.3% higher property value

Market value, all types

Office Retail Apartment Industrial Walk Score™ .005*** .008*** .000 .006*** cemp123 .068*** .026*** .132*** .056*** sta123

• .018***
• .038**
• .193***

.011 npitotret 7.97 *** 13.7*** 10.0*** 6.87*** age

• .006***
• .0003

.002

• .004***

sqft

• 7.73e-08*** 1.24e-07***
• 1.52e-06***
• 1.75e-07***

proptaxmsa

• .070***
• .103***
• .029
• .030***

propcrime

• .00002*** -.00004***
• .00003***
• .00005***

personsSqMi .00001***

• 5.57e-06 -.00001

9.16e-06***

transitH .018 .317*** 1.10*** .056** ttime

• .016***
• .017

.030***

• .012***

stype .045**

CBSA dummies

not shown

not shown not shown not shown

n 8399 2898 6650 8413 R-squared 0.62 0.63 0.31 0.61

Market value by type

Office +30% Retail +48% Industrial +36% Apts. Neutral -

Disamenity Effect?

Walk Score™

• .00003

cemp123 .0153*** sta123

• .002**

npitotret 3.91*** age

• .0001*

sqft 1.03e-08*** proptaxmsa

• .021***

propcrime

• 6.01e-07**

personssqmi 1.06e-06*** transit .015*** ttime

• .0002

Prop type dummies not shown CBSA dummies not shown Number of obs 22567 R-squared 0.24

Appreciation returns, all types

Walkable properties did not appreciate faster More Demand increases appreciation, more Supply reduces it. Lower appreciation with higher crime Faster appreciation near transit

Office Retail Apartment Industrial .0004***

• .0005**
• .0002
• .00005

Appreciation returns by type

Effects more mixed when viewed by type More walkability offices appreciated faster, walkable retail appreciated slower, and walkable apartments and industrial appreciated the same as less walkable 80 v 20 Walk Score: Offices: 2.4% faster per year Retail: 3.0% slower per year Apartment and Industrial: no difference

Walk Score™

• .0000638***

cemp123

• .001207***

sta123 .000141*** npitotret

• .49351***

age

• .0000217*

sqft

• 7.52e-10**

proptaxmsa .0016323*** propcrime 1.47e-07*** personssqmi

• 3.23e-.08

transit

• .001146*

ttime .0001838*** Prop Type dummies not shown CBSA dummies not shown Number of obs 22932 R-squared 0.2064

Income returns, all types

Lower by 0.6 basis points (0.006%) per year for 1+ Walk Score Equivalent to lower cap rate; income from walkable properties was valued more 80 Walk Score = 0.38% lower income return per year than 20 Walk Score Suggests 25% higher m.v. is from 20% higher income & 5% lower cap rate

Office Retail Apartment Industrial

• .000028
• .00015***
• .000052***
• 8.75e-06

Income returns by type

Lower for all types, but only significantly for retail and apartment Suggest willingness to pay more due to expectations of lower risk or faster income growth and appreciation 80 v 20 Walk Score: Retail: 0.90% lower per year Apartments: 0.31% lower per year Office and Industrial: no difference

Office Retail Apartment Industrial Total Return . 0004**

• .0006***
• .0002*
• .00007

Total returns by type

80 v 20 Walk Score: Office: 2.4% higher per year (higher AR) Retail: -3.6% lower per year (lower AR & IR) Apartments: -1.2% lower per year (lower IR) Industrial: no difference

Average NCREIF Total Return, 98-08 Office 11.3 Retail 12.1 Apartments 10.8 Industrial 11.3

Results Recap

• Market value more than 25% higher for all types
• Appreciation return higher for office, lower for

retail, neutral for apartments and industrial

• Income return lower for retail and apartments,

neutral for office and industrial

• Total returns higher for office, lower for apartments

and retail, neutral for industrial

Overall Conclusions

• RPI is a rapidly developing business strategy seeking triple

bottom line performance

• For developers, there can be an RPI property value premium. If

added costs or risks don’t exhaust it, developers could find RPI more profitable

• For investors, RPI can be neutral or positive for returns but

there can be cases of underperformance as well

• Potential returns and profits may be insufficient to generate a

substantial shift toward RPI without more supportive regulations and incentives

• Since RPI can produce social and environmental benefits while

fulfilling fiduciary obligations, it would be economically irrational in social welfare terms and ethically unjustifiable for investors not to engage in Responsible Property Investing