working paper 2 – v4 1 eres conference 2010 winning in the long run – a quantified approach to...

Working Paper 2 – V4 1

ERES Conference 2010

Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate

WINNING IN THE LONG RUN ?A Quantified Approach to the Uncertainty ofSustainable Financial Value on Real Estate (Working Paper 2)

• GRANTSRoyal Institution of Chartered Surveyors Education TrustAustrian Chamber of Commerce, Federation of Real Estate Professionals

• AUTHORSVis. Prof. Dr. Juerg R. Bernet, MSC MBA MRICSProf. Sarah Sayce, BSc PhD FRICS IRRVMaarten Vermeulen, MBA MSRE FRICSDI Rupert C. LedlBilly Clements, BSc

• KEYWORDSCommercial Real Estate; Sustainability Metrics; Risk; Worth; Methodology

Milan, 25-06-2010




AGENDA

• RATIONALE: background – issues – aims

• CHALLENGE of a low growth economy

• BENEFITS of a sustainable performance plan

• CONCEPT of the driving systainability indicators

• FRAMEWORK of systainability metrics

• DATA SET for sustainability reporting

• MODEL for measuring the Impact of sustainability

• UNIVERSE of a first study in Europe

• WAY FORWARD searching market evidence




Project Rationale: BACKGROUND• THEORY

Environmental and social footprint – ongoing risk to property portfoliosLink through to value line via various conduits




Project Rationale: BACKGROUND

• REALITYPaucity of evidence to support value differential (Sayce et al, 2010)Limited evidence emerging in US – CERTIFICATION LEVEL

No such evidence for European markets and portfolios

• KEY QUESTIONSWhat sustainability factors impact on property returns?What risks do they present?Are these risks priced appropriately?




Project Rationale: KEY ISSUES

• DEFINING SUSTAINABILITYNo globally accepted definition or criteria setExisting empirical studies tie to CERTIFICATION as a surrogate (e.g. LEED)

BUT

Not necessarily an indication of ‘full’ or ongoing sustainabilityAccreditation uptake in Europe is limitedGrading and specific CRITERIA not extrapolated (w/exception of Energy Star)

Identify aspects of commonality amongst existing rating systems/tools




Project Rationale: KEY ISSUES

• MEASURING SUSTAINABILITYData measurement and collection core to building sustainability CRITERIA into financial modelling and worth forecastsBUTMeasurement practices globally remain limitedKey metrics (e.g. Energy) only collected by 19% of investors (Kok et al. 2010)

Identify those metrics which are most commonly collected and held by portfolio managers




Project Rationale: AIMS

• OVERARCHING AIMDevelop a deeper understanding of how individual sustainability risks are translating into market responses to inform investment decision making

• OBJECTIVES[1] To decompose existing rating systems to establish in particular which characteristics are most widely included[2] To establish which sustainability characteristics are most likely to have an impact on risk/return performance moving forward[3] To set up a mathematical model capable of analysing risk and returns on assets against a selected range of sustainability and conventional performance characteristics[4] To trial the model on actual assets to test whether data can in practice be collated




The Challenge of a Low Growth Economy

Income Yield

Income Growth

RATE OF RETURN

Non-Recoverable Cost

Capital Expenditure

Property Tax

PR

ES

ER

VE ! R

ED

UC

E

!

(Inflation) ?

OUTIN

Perf

orm

an

ce

Att

rib

uti

on




The Benefits of a Sustainable Performance Plan

Standing Investment

SHORT POSITION

Ob

serv

ati

ons

Performance Drivers

Income Yield

Income Growth

Non-Recoverable Cost

Capital Expenditure

Property Tax

Exp

ect

ati

ons

Sustainable Investment

LONG POSITION

-

PERFORMANCE PLAN




MANAGEMENT

The Concept of Driving Sustainability Indicators

ENVIRONMENT

economic

natural social

PROPERTY




Towards a Framework of SustainabilityMetrics

REGULATORSEC (EPBD; GBP), ISO,

CEN (EN15643-4)

ASSESSORSBRE (BREEAM), GBCI (LEED), DGNB (DGNB), BMVBS (BNB), AHQE (HQE)

AUDITORSKPMG, PWC, VERITAS,

FERI

ASSOCIATIONSRICS, ICSC (BREEAM), INREV, EPRA

COUNCILSUNEP-FI/SBCI (FSMR), GRI (CRESS), WGBC, SBA (CMF)

CONSULTANTSJLL (OSCAR), IPD (ISPI), CBRE

INVESTORSISA (BREEAM), GRA (GR),

GBA (GBA-CM)

UNIVERSITIESKU (SAP), TUK, UM, HBS,

CCRS (ESI), DUK

SIRE




Natural SocialPhysical Economic Strategic Financial

The Data Set for Sustainability Reporting

PROPERTY ENVIRONMENT MANAGEMENT

Natural

ACCOUNTASSET ISSUE UNIT AMOUNT

Electricity

Fuels

Water used

Waste disposed to landfill

Waste disposed to other

Green house gas emissions

Emissions saved

Water recycled / harvested

ENERGY

WATER

WASTE

CARBON

kWh

kWh

m3

t

t

t CO2e

t CO2e

m3

Sou

rce:

GB

A (

Ellis

on

& B

row

n

20

10

)




A Model for Measuring the Impact of Sustainability

SUSTAINABILITYINDICATORS

Explaning Variables

PROPERTY

ENVIRONMENT economic

social natural

MANAGEMENT

PERFORMANCE DRIVERS

Explained Variables

(Income Yield)

INCOME GROWTHNON-RECOVERABLE COSTCAPITAL EXPENDITURE

(Property Tax)

ANALYTICALMODEL

Mathematical Functions

DCFDisconted Cash-Flow

MFRMulti-Factor Regression

ROAReal Option Analysis




The Universe of a First Studyin Europe

RESEARCH PORTFOLIO

INVESTMENT FUNDSPOLICY, LEADERSHIP

Investors

Pool-Size

F/COUNTRY ≥ 2, F/POOL ≤ 25%

200-300 ASSETS




The Way Forward Searching for Market Evidence

5) SPECIFY APPROACHdescribe methodology for analysis of other markets

4) TEST LIMITATIONSverify gereralisation and restrictions and for further research

3) FIND EVIDENCEevaluate observations of sustainablility worth

2) DESIGN MODELevaluate the available data with alternative model settings

1) COLLECT DATAstructure the data base and set up the data template




• ACKNOWLEDMENTS .

Royal Institution of Chartered Surveyors RICS Education TrustAustrian Chamber of Commerce, Federation of Real Estate Professionals

Milan, 21-06-2010

Acknowledgements

working paper 2 – v4 1 eres conference 2010 winning in the long run – a quantified approach to...

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real estate working

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real estate agenda rationale

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