“Green premium” to increasingly drive investor demand for real estate, LaSalle research finds
HONG KONG (August 03, 2017) — Environmental factors will contribute significantly to the financial performance of real estate portfolios over the coming years, and investors will need to put increasing focus on this ‘green premium’ if they are to maximise returns, according to LaSalle Investment Management’s ‘Environmental Factors & Real Estate Demand’ whitepaper.
The report notes that while few investors are willing to sacrifice return or to increase risk for the sake of improving their sustainability credentials, a growing pool of investors are asking fund managers and REIT Chief Executives to report on their progress toward establishing and meeting environmental and sustainability goals. More investors are also gaining an awareness of the published evidence that shows that, in many situations, investments in sustainability improve asset-level and portfolio-level financial performance.
LaSalle believes that the Environment (E) factors – which join the Demographics, Technology and Urbanization (DTU) factors previously identified by LaSalle as the secular drivers of real estate demand –are worthy of examination on every investment considered by a real estate fund manager in much the same way that supply-demand factors are analyzed, priced, and brought into the risk-return evaluation of each asset. By focusing on these factors, real estate owners can improve a building’s flexibility, resilience and efficiency.
Elysia Tse, Head of Research & Strategy, Asia Pacific, LaSalle Investment Management, said: “Although sustainable features in Asian buildings are currently not prevalent, sustainability standards in global real estate are changing due to evolving certification systems, market forces and governments recognizing the need to involve the real estate sector in order to meet their climate change objectives. There could be early-mover advantage for those firms which are able to seize the opportunities.”
Tse added, “Mainstream investment analysis is still early in the process of recognizing the impact of these factors, hence investor payback for improving the environmental performance of buildings could become a strong contributor to financial performance. Our research finds that buildings with green attributes deserve a higher price in recognition of their lower risk profile, and that investors could therefore consider accepting returns that are 65 basis points lower for the right property.”
Australia is well-advanced and standard-setting is a shared responsibility of local governments and industry associations. China recently made environmental improvement a national priority, but the regulatory focus has been on manufacturing and transportation more than on real estate. In other Asian markets such as Singapore, Hong Kong and Japan, governments have set national long-range energy reduction targets that also apply to the real estate industry.
Tom Miller, Chief Sustainability Officer and Head of Development for LaSalle in Asia Pacific, said: “We expect that ‘sustainability’ will gradually expand from a focus that is only on the management of a building’s ‘carbon footprint’, to include the inevitable consequences of climate change. And by raising environmental considerations as worthy of close attention, we suggest that they will, in time, have the power to drive long-term occupier and investor demand on a vast scale equivalent to the original DTU factors we identified over six years ago.”
“Investors are already following the lead of tenants and placing more significance on the consideration of ESG (environmental, social and governance) factors in their investment decisions. Those who excel at understanding the E-Factors and incorporating this knowledge into their asset underwriting and asset management practices can achieve the maxim of doing well (financially), while doing good (for the planet).”
Over the last ten years, LaSalle has developed a strong commitment to environmentally sustainable practices in the operation of the buildings it manages. It was an early signatory to the United Nations Principles of Responsible Investment that reinforced its commitment to factors beyond financial performance when evaluating investments. LaSalle also made a commitment in 2011 to capture baseline data and to monitor progress toward improvement goals for reducing the carbon footprint of the buildings it manages.
The full report is available upon request.
About LaSalle Investment Management
LaSalle Investment Management is one of the world's leading real estate investment managers. On a global basis, we manage approximately $71 billion of assets in private equity, debt and public real estate investments as of Q4 2020. The firm sponsors a complete range of investment vehicles including open- and closed-end funds, separate accounts and indirect investments. Our diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. For more information please visit www.lasalle.com and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.