The importance of social criteria for responsible property investment: A Swiss view on the market success of sustainable real estate funds

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The importance of social criteria for responsible
property investment A Swiss view on the market
success of sustainable real estate funds

• Scholz, R.W., Bügl, R., Hüni, G.R. and
  Leimgruber, C.
• ERES Conference 2009, Stockholm, June 24-28, 2009
• Workshop Session 6-C Investment and Finance

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Outline

• Introduction
• Results
• 2.1. Sample description
• 2.2. Sustainability criteria
• 2.3. Market acceptance
• Sustainability - What can we learn?
• Conclusions and outlook

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1. Introduction (1/4) Swiss real estate market
Bio. US

• Total real estate value in Switzerland is about
  1436 bio. US
• This equals factor 4 of the Swiss GDP and factor
  2 of the stock market capitalization in
  Switzerland
• About 50 property ownership and 30 property to
  rent

2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
3. Sustainability - What can we learn?
4. Conclusions and outlook
Sources Cf. Graf (2008) Wüest Partner (2006).
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1. Introduction (2/4) Sustainable property
investment

• ETH-UNS case studies Gothenburg (Lundby), Zürich
  Nord, Sulzer-Escher Wyss, Basel and other cities
  and regions
• Certification according to Minergie standards is
  rapidly upcoming, but this certification just
  equals about 0.5 - 0.75 of the total building
  stock in Switzerland (Minergie, 2008 SFSO, 2006)
• Shares of energy for room heating, warm water
  supply and CO2 emissions generated by energy at
  home are almost about 40 (Ankirchner, 2006
  Weber and Perrels, 2000)
• Improving waste management Amount of building
  waste is enormous, and recycling often means
  material downgrading (cf. Spörri et al., 2009ab)
• Strong ecological commitment (Minergie, SIA
  112/1, Life cycle analysis, ...), but social
  criteria are missing

2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
3. Sustainability - What can we learn?
4. Conclusions and outlook
5
1. Introduction (3/4) - Research questions

• Which sustainability criteria do key financial
  stakeholders view as important for the market
  success of S-REFS?
• What is the role of sustainable social
  infrastructure?
• How is the market acceptance of S-REFs by
  financial stakeholders, and what role do
  cognitive drivers and institutional context play
  ?

2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
3. Sustainability - What can we learn?
4. Conclusions and outlook
6
1. Introduction (4/4) - Methods

• Procedure of the study - basic modules
• Focus groups (N 15) ? Generation of
  sustainability components
• Questionnaire study (N 68) ? Anticipated
  importance, market acceptance
• Sample of the questionnaire study
• 58 institutional real estate investors (from 44
  employing institutions)
• 10 real estate funds suppliers (from 4 major REF
  supplying companies)
• Market acceptance indicators
• Decision to invest
• Investment volume
• Willingness to accept return shortfalls

2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
3. Sustainability - What can we learn?
4. Conclusions and outlook
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2.1. Sample description (1/1)

• Capital investment categories

2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
3. Sustainability - What can we learn?
4. Conclusions and outlook
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2.2. Sustainability criteria (1/3) - Focus groups

• Attractivity of location
• Energy for usage
• Well-being
• Return on investment
• Building materials
• most important criteria

Mean
green areas community quality of floors cost of
maintenance cost of repair fabric
structure building materials return on
investment well-being energy for
usage attractivity of location
2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
3. Sustainability - What can we learn?
4. Conclusions and outlook
9
2.2. Sustainability criteria (2/3)
Questionnaire study
Building materials and energy Expenses, return and flexibility Green space design Landscape natural ecology
Explained variance 83.1
Low pollutant-loading of building materials Long life cycle of structural components Little sealing of soils Quality of landscape and few natural hazards
Low-energy demand for warm water Low costs for construction and conservation Support for endemic plants on green areas Conservation and creation of pristine areas
High proportion of renewable energy Low-maintenance constructions Greening of roofs and facades
Low electricity demand during operation Low expenses for value conservation
Indoor air quality Easy substitutability of technical components
Eco-friendly raw building materials Slim building technique
High proportion of recycl. building materials Above-average return on tenancy Blue above-average import. for market success
Little demand for realty areas Red below-average import. for market success
? Sustainability criteria for REFs ?
economic sustainability criteria are dominant
for market success
ecological sustainability criteria are of minor
importance for market success
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2.2. Sustainability criteria (3/3) Social
infrastructure
Sustainable Social infrastructure

• Social sustainability is no independent factor
• Substantial correlation of Sustainable social
  infrastructure and orthogonal sustainability
  factors
• Fundamental dilemma of sustainable real estate
  investment
• Key finance stakeholders aspire maximum return on
  investment and avoid social investments of public
  use
• Critical social factors are underestimated with
  regard to the added value of sustainability
• They view sustainability as a mean of risk
  reduction

Conventient transportation network
Considering future development
Daylight penetration in the building
Well-being and feeling secure
Obstruction-free and equipped construction
Flexibility and modifiability of building and structures
Playgrounds, sports facilities, seating accomod.
Social mixture of dwellers
? Sustainability criteria for REFs ?
Social sustainability criteria large spread of
importance
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2.3. Market acceptance (1/2) Willingness to
invest

• 3 out of 4 institutional real estate investors
  are potential S-REF investors
• 9.3 Mio. Swiss Francs (7.04 mio. US) mean
  willingness to invest of potential S-REF
  investors
• 60 percent of the real estate funds suppliers are
  potential S-REF suppliers if the supply of
  sustainable real estate is enough
• Acceptance of return shortfalls
• 38 of responding investors are willing to accept
  return shortfall
• Average absolute rate return shortfall of 0.85
  under benchmark
• Mean relative interest rate decrease of 21
• (SWX Immobilienfonds Index, average return of
  4.0 2004-2005)

2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
3. Sustainability - What can we learn?
4. Conclusions and outlook
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2.3. Market acceptance (2/2) - Drivers
Positive impacts
Negative impacts
Mixed impacts
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3. Sustainability (1/2) - What can we learn?

• What can the finance sector learn?
• Develop S-REFs from a social and ecological
  perspective
• Show the sustainability management effect of
  S-REFs
• Sustainability assessment of S-REFs has to inform
  classical finance evaluation
• What is missing for sustainable development?
• Real estate stock of sustainable buildings with
  gentrification potential is critical but also at
  top-level locations (eco-friendly, lifestyles,
  ...)
• Sustainable buildings exist in the residential
  sector (single-family houses), but sustainable
  buildings for multi-storey superstructures,
  offices, trade/commerce and industry are very
  rare (diversification)
• Sound differentiation of sustainable vs.
  conventional REFs
• Under which conditions can a REF be called
  sustainable?

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3. Sustainability (2/2) - What can we learn?

• Where are the boundaries for investors?
• Ecological and social market arguments are
  perceived as hampering return (anticipated costs
  gt yield)
• Critical social criteria and proper
  implementation in finance instruments are some
  kind of a blind spot
• Where is the potential for transdisciplinary
  action?
• Transdisciplinary action is a process of mutual
  learning of practice and science on equal footing
• Development of diversified development funds,
  object funds, ...
• Develop a S-REF from scratch or redevelop a
  conventional REF

2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
4. Conclusions and outlook
3. Sustainability - What can we learn?
15
4. Conclusions and outlook (1/1)

• S-REFs are a business case in countries with
  sustainability commitment
• Results help to introduce S-REFs in the finance
  market and to understand the investment behavior
  of institutional real estate investors
• Some critical criteria of social sustainability
  are missing (cf. Kriese and Scholz, submitted),
  and views on economic sustainability criteria are
  dominant for market success than views on
  ecological criteria
• Stock of sustainable real estate in Switzerland,
  volume of S-REFs and sustainability engagement is
  critical
• Besides technological systems, lifestyles are a
  key component for the ecological and social
  efficiency of urban and regional systems
• Strong need for sustainability learning and
  transdisciplinary action for the development of
  S-REFs in order to ensure quality standards

2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
4. Conclusions and outlook
3. Sustainability - What can we learn?
16

• Thank you!

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APPENDIX
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Swiss real estate market

• 1.0 of the total real estate value are
  stock-traded and 1.5 are invested in indirect
  real estate investment products (Credit Suisse,
  2006)
• About 0.8 of the total real estate stock value
  in Switzerland is traded in open-ended real
  estate fund (REF) products
• Swiss real estate investment funds, which are
  authorized by the Swiss Federal Banking
  Commission, had a total asset volume of US11.1
  billion as of midyear 2005 (Swiss National Bank,
  2007)
• Sustainable real estate funds (S-REFs) are now in
  the stage of market introduction and product
  settlement

2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
4. Conclusions outlook
3. Sustainability - What can we learn?
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Definitions

• Sustainable real estate funds (S-REFs)
• A definition of S-REFs should meet both the
  performance demands of financial institutions as
  well as the impacts of the real estate
  investment.
• Sustainable social infrastructure
• Sustainable social infrastructure consists of
  goods, services and spatial structures that
  enable human systems to realize their
  capabilities without social inequality.

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Description of hypotheses
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Methods
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Design of a S-REF
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Conclusions and outlook

• S-REFs create supply of sustainable building
  stock which can may attract and foster the
  expression of sustainable lifestyles.
• The application of human-environment systems
  allows for a more thorough interdisciplinary
  understanding of lifestyles
• Managing the incentive-barrier structures, which
  are linked to sustainable lifestyle settings, is
  crucial for enabling sustainable urban living.
• The urban design of lifestyle settings may aid in
  structuring improvements on the material and
  cultural spheres that may eliminate system
  disparities.
• The proposed conceptualization of lifestyles can
  be utilized for structuring sustainable
  transitions of urban and regional systems
• S-REFs can enhance the functionality of urban
  planning (enhanced district planning, integ.
  participation, future-oriented dialogue
  processes)

2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
4. Conclusions outlook
3. Sustainability - What can we learn?
24
E.g., - Attitudes - Risk perception
- Awareness - Salience
- Dissonance - Skills
- Interests - Values
E.g., - Health status, human toxicity
- Income distribution, property equity
- Life expectancy, direct victims
- Population, community structure
- Quality of life, well-being
Migration, social exclusion
- Social equity, access to resources
Social exclusion, cultural landscape
E.g., - Age - Life cycle status
- Family status - Nationality
- Gender Social status
- Income - Wealth
E.g.,
- Energy mobility
- Residential living
- Health care
- Working sphere
- Consumption patterns
- Leisure-time activities
- Social networking

• Environmental matrix
• E
• Situational submatrix
• Socio-cultural submatrix

E.g., - Acidification
- Depletion of (a)biotic raw materials
- Eutrophication
- Ecotoxicity
- Greenhouse effect
- Ozone layer depletion
Physical ecosystem degradation
Smog, noise, odor
E.g., - Built environ. - Formation
- Climate - Legislation
- Density - Media coverage
- Ecology - Urbanization
E.g., - Acculturation - Reference groups
- Cultural env. - Social capital
- Integration - Social norms
- Hist. context - Segregation
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Lifestyles - Fields of transition
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Further readings

• Sustainable real estate funds (S-REFs)
• Sustainable property funds financial
  stakeholders views on sustainability criteria
  and market acceptance.
• By Bügl, R., Leimgruber, C., Hüni, G.R.,
  Scholz, R.W. (2009). Building Research
  Information.
• Sustainability criteria for finance products
• Principles for sustainability rating of
  investment funds.
• by Koellner, T., Fenchel, M., Weber, O.,
  Scholz, R.W. (2005). Business Strategy and the
  Environment.
• Incorporating sustainability criteria into credit
  risk management.
• By Weber, O., Scholz, R.W., Michalik, G.
  (2008). Business Strategy and the Environment.
• Embedded case study methods - book
• Embedded case study methods Integrating
  quantitative and qualitative knowledge.
• By Scholz, R.W., Tietje, O. (2002)
• Environmental literacy - book
• Environmental literacy in science and society
  From knowledge to decisions.
• By Scholz, R.W. (in prep.)

2.1. Sample description
1. Introduction
2.2. Sustainability criteria
2.3. Market acceptance
4. Conclusions outlook
3. Sustainability - What can we learn?