Commercial real estate; upgrading and sustainability

Inertia or innovation?

These are difficult times for owners of commercial real estate in The Netherlands. A market in over supply and slow (or negative) economic growth do not inspire confidence. It is markets like these where innovation is most needed but where managers are reluctant to spend. Inertia, waiting for the trend to change, is also a choice, and one easily made.

Low interest rates have caused the bubble

The fact is that interest rates are very low and have been low for a long time now. Recent research by Christian Hott and Terhi Jokipii (economists at respectively Zurich insurance and The Swiss National Bank) shows how low interest rates are a main reason for the property bubble. Low long term interest rates indicate that a recovery of the economy is not yet to be expected so it is not likely that economic growth pushes prices back to top of the bubble. Waiting, inertia, is not an option.

Invest or pull down

So what to do? The answer is clear. For real estate to retain its value it will have to be upgraded. Keeping real estate without investing in it will open the owner up to the risk of lower rents and, worse, no rent income at all.

The trend is sustainability, also for commercial real estate

If real estate has to be upgraded, what kind of up grade makes most sense? The major trend in companies would appear to be sustainability. Companies with a good ESG score are considered better run and a sounder investment. So developing and executing a sustainability programme makes economic sense. This is relevant for the owners of commercial real estate as well as for companies when choosing what property to rent.

Provada lucheon meeting on sustainability

During a luncheon conference at the Provada, the annual real estate conference/exhibition in The Netherlands it was correctly stated that in order for offices to retain their value and remain attractive in a over supplies market, the upgrade to very energy efficient (or even energy neutral) is a must.

The offices which will not be upgraded will only fetch a lower rent and will in several years be pulled down. There surely is a market for these cheap (but nasty) offices, but it will only be for a short while.

Investors will create the sustainable world

Sustainability is a bottom up process

The green bio based economy will not be created by governments. It will be created by consumers and investors. It will be a bottom up movement. This is just as well, it is not likely that governments will chose the right method, the right technology and the right measures. Governments have too many interests to balance and are never spending their own money. On the other hand investors only have to consider the return on their own money.

Below a short summary of various articles from, mainly, the Financial Times. The trend is clear. Investors are opting for sustainability.

1. FT 11 March 2012 (1).

Rabobank of The Netherlands introduced two new investment products (one with European stock and one with global investments) based on the premise that the best current investments is in sustainability.
The results speak for themselves (back tested over the past 10 years)

• Europe Fund: annual return of 7,8% against 0,8% for the MSCI Europe Index
• World Fund annula return 8,1% against 0,2% for the MSCI World index.

2. FT 11 March 2012 (2)

Already more than 6.000 companies world wide report CSR data. In 2005 thjis was a mere 700- 800 companies.

One quotes at  the bottom of the article deserve extra emphasis
“There is a perception, particularly in the US, that the return on investment (from investing in CSR) is not there – but it is, and large companies have a lot of cash right now. This is a great time to put that money to good use to make their operations more efficient and robust.”

3. FT 1 April 2012 (1)

This article describes how the number of companies providing CSR data is not growing as quickly as was hoped. Despite the low growth already 15% of the global institutional investors market have signed up to the UN Principles of Responsible Investment.
Also Eiris research launched a sustainability ratings service. They quoted in a separate article
“Demand from investors for a definitive assessment of corporate sustainability performance that can be easily fed into investment analysis triggered the launch of the ratings.”

4. FT 16 April 2012

The title of this article (and the content) speaks for itself: “Investors drive sustainability.”
Since the roof fell in on the international property market the relationship between the built environment and sustainability has flourished.

5. FT 18 May 2012

An Ipsos Mori report in 2011 found 65 per cent of investors with more than £100,000 in investable assets wanted to achieve social impact from their investments as well as financial returns. And last December, when JPMorgan polled 52 (social)impact investors, it found they planned to invest almost $4bn over the next 12 months.

6. FT 21 May 2012

Hugo Bänziger, chief risk officer of Deatsche bank states that “Lenders will have to demonstrate that their future business models are beneficial to society, that they can be run safely and that they are able to restore profitability to make them attractive investments again.”

So far some of the Financial Times articles. To round it off please let me refer you to the very read worthy Schumpeter of this week’s economist.
Good business, nice beaches.
The most important quote:

“The proportion of managers who say they think that “sustainability” is a key to competitive success has risen from 55% in 2010 to 67% last year, according to an annual survey of 4,000 managers in 113 countries by the MIT Sloan Management Review and the Boston Consulting Group.”

Felix Gruijters

 

The Leadership required for Sustainability.

The leadership required to change a company to embrace Sustainability.

CSR gives a competitive advantage

For most companies Sustainability should have seized to be a marketing tool. There is sufficient proof that companies with a strong emphasis on CSR (of which sustainability is an important aspect) out perform their peers. This makes sustainability (and the other aspects of CSR) a strategic tool to improve the company.

CSR means fundamentally changing the DNA

It is also clear to most companies that sustainability should be more than window dressing. A company that does not fundamentally incorporate sustainability into its product and services will not convince consumers and find that its efforts do not bring the returns it feels it deserves.

 

• First of all it should be clear that the company cannot continue doing what it has been doing in a different way. Taking sustainability serious means that companies have to look at the way they do their business in every aspect of that business. The cars driven by its sales people, the number of flights taken by senior management, the energy use of its offices, the extend to which it adheres to the cradle to cradle principle and the complete carbon footprint of its products and services.
• Secondly companies should realise that sustainability is a long process. Management cannot implement a quick top down programme, sustainability has to be incorporated in the DNA of the organisation in a determined and if necessary prolonged move.

Strong modern leadership is required

Embracing sustainability however is not an easy task. It requires fundamentally changing the company and therefore requires strong leadership. This leadership is different from traditional leadership.

5 leadership practices are relevant

1. Use the momentum
2. Change selectively
3. Encourage experiments
4. Create openness and frankness
5. Crowd-source ideas

1. The leader should use the momentum of the current economic slowdown to install the need for fundamental change. He should create an urgency to change what and how work is done and who does it. This is a delicate task as too much pressure can cause panic and inertia, whereas too little pressure will lead to a return to old ways.

2. The leader should only change those things and move those people that prevent the required change; not everything has to be changed.

3. The leader should encourage experiments. The vision does not have to be produced as a Grand Design by the senior management, it has to be the consequence of much trial and error.

4. The leader should encourage a culture of openness and frankness. In many companies the status quo is protected by higher management preventing any sound of discontend or change to surface at the top floor.

5. The leader should mobilize everyone withing the organisation using for instance the newly developed crowd sourcing methods.

Felix Gruijters

Sustainability, investment, supermarkets and summer festivals

Private investment instead of bank loans

 An interesting article today (7 May 2012)  in The Financial Times. It is interesting to see that a rather negative trend in cleantec was given a very positive spin in this article. It is a fact that banks are somewhat reluctant to lend, at the same time venture capital is recovering from various bloodied noses suffered in the economic slowdown. This is a real problem for new clean development technologies requiring (fresh) capital and could put a break on the continuing development of a sustainable society.

The positive spin put on this development is the fact that if banks do not lend and venture capital does not want to participate, the opportunities are available to private investors. Research done by the FT indicates that these private investors are very interested in sustainable and cleantec opportunities and could make up some of the shortfall. This is good news and fits in with a trend we see elswhere. Smaller scale initiatives (in size and value) are taking the lead.

 Sustainability and Supermarkets

 The interest of private investors sits well with cleantec and sustainability. Much of the drive towards sustainability is driven bottom up. Despit the recession the environment remains high on the worry list of consumers. As a result big supermarket chains as Walmart, Casino, Tesco and Albert Heijn have a clear focus on reducing their impact on the environment. The reason transport companies are now also looking at ways of reducing their carbon footprint is forced on them by these supermarkets. That in turn is the reason that energy companies (and I work for one) are developing electric charging possibilities for trucks. Currently trucks, when stopping overnight, have a diesel working to keep the refrigerated goods at the required low temperature. This polluting and noisy habit could soon be a thing of the past thanks to the demand from consumers, translated by the shops they frequent.

 Sustainability and Festivals

 The same should (and hopefully will) apply to the organisers of summer festivals. Many summer (and spring) festivals work with diesel generation. A diesel generator has an efficiency of approximately 30%. I recently made the calculation for a summer theater festival in The Netherlands. During the summer months they produced with their diesel generators 320 ton of CO_2. Using electricity this could be reduced to zero if renewable sources were used or it could be halved if we use just “normal fossil based” electricity from the Dutch power generators. Despite the fact that diesel costs are nearly 4,5 times as high as the cost of electricity the move away from generators is slow and is only gradually increasing momentum.

 This is a missed opportunity, it is time that visitors to summer festivals, despite their young age, look further than just the need to consume, to be seen and to see the hottest acts and create some pressure on the organizers and promote the use of power during festivals.

Felix Gruijters