Benchmarking risk with EcoPAS

In Australia, investors can be pretty sure that sustainability makes commercial sense. This is because performance analyst Investment Property Databank (IPD) compiles an Australian Green Property Index, which tracks the investment performance of A$53bn (£34bn) of commercial office buildings that have been awarded a Green Star environmental performance rating. In the year to June 2012, this benchmarking tool reported that Green Star rated offices delivered an annualised return of 10.6%, sneaking ahead of the all-office sector’s return of 10.5%.

In the UK, a lack of investment-related environmental information means that it has never been clear whether sustainable properties deliver a better return or not. Now, with the recent launch of IPD’s Eco-Portfolio Analysis Service (EcoPAS), experts are predicting that the same differentials will start to become apparent here.

How it works

EcoPAS is effectively a risk benchmarking facility for real estate owners, investors, developers and valuers. It was launched in March 2012 by IPD and property valuation firm CBRE, and has the full support of the RICS: “Eventually EcoPas will enable investors to compare the sustainability risks of different portfolios to enable the market to make investment decisions,” says Ben Elder, RICS global director of valuation.

Under the service, every asset in a portfolio is evaluated using seven sustainability criteria that are thought most likely to impact on asset value and performance: energy, flooding, water, waste, accessibility, flexibility and quality (see box, overleaf). This will enable both individual properties and entire portfolios to be benchmarked. “The exciting thing about EcoPAS is that some of the biggest property owners have agreed to answer the same questions about all of the properties in their portfolios, which will provide a massive amount of data in a very short time,” Elder says.

A simple process means that much of the data can be collected by valuers on their regular site visits. “EcoPAS has begun its data assembly modestly to ensure that you don’t need to be a sustainability expert to answer the questions,” says Jessica Stevens, sustainability risk analyst at IPD. “Once this current set of questions has become embedded into valuers’ regular duties then we hope the questions will become more sophisticated.”

The sustainability data is analysed at both asset and portfolio level to assess investment performance and produce confidential reports for clients. IPD will also issue more general information on the performance of sustainable property to the market. “We will focus on releasing sustainable property performance results, such as how the investment performance of properties with an F or G Energy Performance Certificate (EPC) compares with those with a D rating or better,” says Stevens.

The initiative has the backing of some of the UK’s biggest real estate investors. “EcoPAS will help us to identify which are the most sustainable and which are the least sustainable assets, so that we can start to look at those assets to understand the underlying performance and what we can do to improve that performance,” says Nina Reid, director of responsible property investment at real estate fund manager PRUPIM. “Initially, EcoPAS will highlight [sustainability] risk and opportunity, but over time it will enable us to see what impact sustainability has on investment performance.”

An example of how EcoPAS may help to highlight risk in a portfolio is with the planned changes to the Energy Act. The government is proposing that from April 2018 it may be unlawful to let F and G EPC-rated buildings. Using data gathered under EcoPAS will help property funds to assess how much rent they have tied up with F and G rated properties and whether a fund’s exposure is higher or lower than the industry benchmark. “We are looking at the risk the act could pose to our portfolio, taking into account potential improvement costs and the overall plan for the asset,” says Reid.

Valuer added

The fact that much of the data needed for the benchmark will be collected by valuation surveyors is seen as one of the key advantages of EcoPAS. Valuation firm CBRE backed the EcoPAS launch, helped to draw up the checklist of sustainability questions for a property, and has been using EcoPAS to analyse properties on 10 clients’ investment funds. “If you monitor an investment’s performance over time,” says Michael Brodtman, head of valuation at CBRE, “you will be able to see whether sustainable buildings have delivered better rental growth, better yields and better capital values.”

The involvement of valuers is expected to help raise awareness of the impact of sustainability factors on investment performance, which should help to factor these into market value. “The real difference with this initiative is in getting the valuers involved in collecting data and inspections to help raise knowledge of sustainability issues in the valuation community,” Reid says.

Others are less convinced of the impact that the involvement of valuation surveyors will have on the price of sustainable real estate. “Contrary to the expectations of some people, the debate about sustainability and the price of an asset is not going to be driven by the valuers. It can only be driven by the market - the people that buy and sell real estate,” says Bill Hughes, managing director of Legal & General Property, one of the investors backing EcoPAS.

We are looking at the risk the Energy Act could pose to our portfolio

Nina Reid, Prupim

He says that sustainability is already fundamentally entwined in investment values, even if not everybody recognises it. “Right now, it feels to me that sustainability is one of the key issues changing the way real estate owners have to think because of regulation, legislation and energy costs and because the significance of sustainability is even greater in a patchy, flat occupier market where the differentials between good and bad real estate are more and more focused upon,” he says.

According to Hughes, Legal & General is “utterly committed to the belief” that sustainability has a direct impact on investment performance. “We don’t need lots of empirical evidence to back up that belief - I’m highly confident the link exists and that it will become more and more visible as we move forward,” he says.

For Hughes, the advantage of EcoPAS is that it will provide evidence of that link for non-believers. “You need a well thought through project that gathers data and then makes the empirical link between sustainability and investment performance because that is the way to get sustainability into the boardrooms of those organisations yet to believe that it is an issue”.

UK investors will not have long to wait for investment-relevant environmental data. The IPD is planning to release the first tranche of sustainable property results later this month. The results will be based on data from those funds backing the benchmarking service: Aviva Investments, Henderson Global Investors, Hermes, Legal & General, PRUPIM and five others that signed up after the launch.

Regardless of the initial outcomes, the RICS is planning to use EcoPAS to raise the profile of sustainability with valuation surveyors in its Valuation Information Paper 13, which is currently being revised in preparation for its re-issue as a RICS Guidance Note next year. As the RICS’ Elder says: “Sustainability has now entered commercial property decisions.”