Environmental Factors Drive Long-Term Real Estate Demand, LaSalle Finds
A broad array of environmental factors are expected to significantly contribute to the financial performance of real estate portfolios over the coming years, according to LaSalle Investment Management (“LaSalle”). The analysis, published in a recent whitepaper by LaSalle, suggests that an increased focus on a ‘green premium’ will yield higher returns.
The report reveals that environmental factors are closely linked to the secular, long-term drivers of real estate demand such as demographics, technology and urbanization (DTU). In recognition of the presumed impact of environmental factors, LaSalle has added a fourth “environmental” pillar to the DTU, renewing its secular pillars to be abbreviated as “DTU+E.” As it relates to environmental sustainability initiatives in North America, the report identifies the following:
The U.S. is both a leader and laggard in incorporating environmental sustainability into real estate investment. The U.S. approach to sustainability emphasizes discretionary participation, focuses on building level measurement and improvement and allows market forces to drive behavior rather than regulation. Canada’s real estate investors rank amongst the world’s leaders with respect to environmental sustainability.
Institutional investors continue to drive the Canadian agenda within its real estate sector, along with noticeable support from smaller property owners and participants.
Eric Duchon, LaSalle’s Global Head of Sustainability, said: “A wide and growing range of environmental factors have been on our radar screens and part of our asset management best practices for over a decade. Our working hypothesis is that these secular drivers have the power to shape real estate markets in ways that supersede and outlast the shorter-term property cycles. Most importantly, our review of the available research suggests that environmental factors are already influencing the financial performance of buildings in multiple ways. LaSalle expects that this trend will continue and grow over time as the broader investment market also recognizes that environmental factors matter in numerous ways.”
The report notes that few investors are willing to sacrifice return or to increase risk for the sake of improving their sustainability credentials. Nonetheless, the report finds that a growing pool of investors are asking fund managers and REIT executives to report on their progress toward establishing and meeting environmental and sustainability goals. LaSalle’s participation in the UN PRI Assessment is a direct reflection of this trend, and the firm recently achieved an A+ rating in Strategy & Governance, accompanied by an A rating in Listed Equity-Incorporation, and an A the Property category.
The whitepaper findings illustrate 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.
Richard Kleinman, LaSalle’s Head of U.S. Research & Strategy, said: “The drivers for sustainability vary considerably by country and by market. In the US, market forces are often more powerful than regulatory ones. In other countries, like Canada, the re-shuffling of national or provincial priorities places a greater emphasis on regulatory change and on voluntary participation in sustainability initiatives. Despite many common concerns at the global level, our analysis shows that the regulatory responses to the environmental factors vary greatly by country, by metro and by municipality. Overall, while the recent national policy environment may keep the U.S. from becoming a global leader in environmental sustainability, significant progress and innovation will still be found at the municipal level, or through changing occupier preferences, and in privately financed projects.”
To download the full report click HERE.