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Responsible Property Investing

2017 Update & Targets for 2018 – ‘Progress in many areas but room for improvement’
January 2018
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Risk Disclaimer

Past performance should not be seen as an indication of future performance. Stock market and currency movements mean the value of, and income from, investments in the strategy are not guaranteed. They can go down as well as up and you may not get back the amount you invest.

The fund continues to advance its responsible property investment activities, both in terms of setting strategy and implementing actions.Whilst the investment team at BMO Real Estate Partners has been totally focused on investing inflows, the sustainability team has been busy meeting the fund’s wider sustainability responsibility.

This has been independently acknowledged through a third consecutive year of improvement in the influential GRESB (Global Real Estate Sustainability Benchmark) survey. Whilst the survey reported improvement in six of the seven categories analysed, as well as the fund achieving almost the top score for management oversight of environmental, social and governance (ESG) issues, the more important consideration is the areas it highlighted for improvement.

Key improvement areas for the forthcoming year are:

  • Policy & Disclosure
  • Monitoring & Environmental Management System (EMS)
  • Performance Indicators

Risk Disclaimer

Past performance should not be seen as an indication of future performance. Stock market and currency movements mean the value of, and income from, investments in the strategy are not guaranteed. They can go down as well as up and you may not get back the amount you invest.

BMO UK Property Fund – GRESB assessment

Source: BMO Global Asset Management, as at 31 December 2017

Use our handy glossary to look up any technical jargon you are unfamiliar with.

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An example of the fund seeking improvement in the EMS section is the work currently being undertaken to achieve ISO 14001 environmental accreditation. The target for this to be completed is the end of Q1 2018. This accreditation is designed to show that we are taking actions to limit and control risk of environmental pollution, to manage third party service providers robustly, and to ensure regulatory documentation is properly completed and accessible.

 

A framework for delivery

The fund’s responsible investment activities are also now driven by a detailed framework which was developed at the start of 2017. The framework identifies the various disciplines involved in the property investment process, and their typical needs in terms of responsible investing information and data. The overall objective is to provide a common and coherent approach that can deliver tangible results. The framework is outlined below.

Simplified responsible property investment framework

Being responsible at the individual asset level

A key task undertaken this year has been the production of Responsible Property Investment (RPI) appraisals for each individual asset using a class-leading intuitive tool developed for the fund by Hillbreak, a respected sustainability consultancy. This essentially looks to capture a range of ESG characteristics and metrics on each property in order to produce a sustainability profile, distinguishing investment critical features from more general investment qualities. The use of the tool has been supported by specific training delivered to all professional staff engaged in the fund. Many of the significant issues covered in the training and instruction are summarised in the corporate position statement produced earlier this year in parallel with the framework. 

Completion of the RPI appraisals allows the fund to perform two critical tasks, first, to assign a relative classification to individual assets to identify priority for consideration or action, and second, to undertake portfolio analysis and identify opportunities and threats.

 

Worked example – preparing for the Minimum Energy Efficiency Standards (MEES)

An example of this is a study of the individual assets’ Energy Performance Certificates (EPC) and their associated ratings in the context of forthcoming Minimum Energy Efficiency Standards (MEES) to permit new lettings from April 2018 and to undertake renewals from 2023.

The table below shows the current distribution of EPCs within the fund at occupier level. Benefiting from foresight in previous years, the fund currently has an attractive distribution profile with a bell-shaped curve, centred over a C rating and very low exposure below threshold. This compares with conventional institutional stock that typically centres over a D rating and has more than five times as much exposure below threshold.

Distribution of EPCs – BMO UK Property Fund

 

Source: BMO Global Asset Management, as at 31 December 2017

Critically, the RPI appraisal identifies clearly where intervention might need to be explored and in this respect, the RPI appraisal outcomes are fully integrated into the wider asset business plan exercise. Not only is risk mitigation considered at this point but also opportunities for improvement. These inevitably will be centred around refurbishment cycles or lease events.

 

Integrating ESG factors into asset due diligence

As a further expansion of the fund’s RPI appraisal process, new acquisitions are now subject to a more intense due diligence process, with consultants going beyond traditional contamination and flood risk analysis by investigating and considering a range of ESG factors such as metering strategies, energy performance and carbon intensities, the presence of ‘green lease’ clauses within existing lettings, and potential climate impacts on the asset.

Metering remains one area of focus for the fund, driven by a desire to achieve maximum automatic energy consumption data flows in order to establish more accurate carbon intensities for the fund as a whole. This objective requires effort beyond the landlord controlled areas and will necessitate direct engagement with occupiers who, in the case of full repairing and insuring (FRI) leases, usually have sole responsibility for procuring and
settling energy accounts. Building on some limited success earlier in 2017 from occupier engagement, the fund is looking to use asset management angles to open up dialogues with occupiers on metering and data sharing.

 
Additional team resource

The fund will benefit from the recent expansion of in-house resource with the appointment of a sustainability analyst to the team at BMO Real Estate Partners. The additional staff member will focus on data management and will look to establish relationships with, and data flows from, occupiers as well as supporting the team on ever evolving carbon reporting requirements and strategies. In this latter respect, we are currently evaluating a piece of work to determine appropriate longer-term targets that recognise COP21 and the Paris Agreement, and additionally align with the Science Based Targets Initiative.

Finally, for 2018, the fund has set itself a target of achieving Living Wage Accreditation.

For all directly-managed property assets, the fund has once again secured 12-month electricity supply contracts taken from 100% renewable sources, whilst also expanding this to include all landlord-controlled gas supplies.

Case study – Looking to 2018

 

Guildford Gateway on Woodbridge Road is an office building extending to around 16,000 square feet located in the centre of Guildford, a short walk from the railway station. The office was built in 2008 and there is the potential that one of the tenants could vacate the building in August 2018. To achieve the best prospect of an early re-letting at an enhanced rent, it is clear that we could improve the building not only from an aesthetic viewpoint but also from a sustainability perspective.

For most businesses staff costs are one of the highest overheads and occupiers are increasingly seeking modern, flexible and sustainable accommodation which compliments their ability to attract and retain staff.

Recognising these requirements, a scheme has been prepared which includes the installation of:

  • New car charging bays in the car park
  • Rooftop solar panels
  • Improved bicycle storage facilities and associated shower facilities
  • Sensor controlled taps that reduce water wastage
  • New LED energy efficient lighting
  • Smart energy meters
  • Building management system (BMS) improvements to the heating and cooling systems

By undertaking these works, an improvement to the current EPC rating is targeted, thereby future proofing the building for the next 15 years.

We are confident that by incorporating the above we will secure a high calibre of tenant that should translate into the building achieving higher rents, shorter void periods, less void costs, a keener yield profile, improved energy efficiency and, just as important, a better and more productive office environment for our occupier.

Thank you for your support and we hope to report on further successes in our next responsible property investing update.

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