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.
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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
Working Paper 2 – V4 2
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
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
Working Paper 2 – V4 3
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
Project Rationale: BACKGROUND• THEORY
Environmental and social footprint – ongoing risk to property portfoliosLink through to value line via various conduits
Working Paper 2 – V4 4
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
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?
Working Paper 2 – V4 5
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
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
Working Paper 2 – V4 6
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
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
Working Paper 2 – V4 7
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
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
Working Paper 2 – V4 8
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
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
Working Paper 2 – V4 9
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
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
Working Paper 2 – V4 10
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
MANAGEMENT
The Concept of Driving Sustainability Indicators
ENVIRONMENT
economic
natural social
PROPERTY
Working Paper 2 – V4 11
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
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
Working Paper 2 – V4 12
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
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
)
Working Paper 2 – V4 13
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
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
Working Paper 2 – V4 14
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
The Universe of a First Studyin Europe
RESEARCH PORTFOLIO
INVESTMENT FUNDSPOLICY, LEADERSHIP
Investors
Pool-Size
F/COUNTRY ≥ 2, F/POOL ≤ 25%
200-300 ASSETS
Working Paper 2 – V4 15
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
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
Working Paper 2 – V4 16
ERES Conference 2010
Winning in the Long Run – A Quantified Approach to the Uncertainty of Sustainable Financial Value on Real Estate
• ACKNOWLEDMENTS .
Royal Institution of Chartered Surveyors RICS Education TrustAustrian Chamber of Commerce, Federation of Real Estate Professionals
Milan, 21-06-2010
Acknowledgements
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