Why Environmental Impact Needs to Be Top Of Mind For Property Owners and Their Ecosystem

Requirement for all property developers and managers to strengthen the ‘E’ in ESG
By SAREIT CEO, Joanne Solomon

Since the establishment of the REIT regime in 2013, the industry has faced many challenges from an Environmental, Social and Governance (ESG) perspective, such as climate change which has brought sustainability into the spotlight on most political and business agendas. In light of this, reporting on environmental issues has become more critical than ever as tenants, consumers and investors demand greater transparency on how property owners operate and manage their assets on a day-to-day basis.

Fast forward to 2021, when broad socio-economic challenges, coupled with environmental issues, are taking precedence, the property sector requires collective effort to position itself for recovery. It has been a year since the onset of COVID-19, and one thing the pandemic has highlighted is it will be the businesses that prioritise their environments and communities that will come out stronger on the other side. Consequently, it is not surprising that we have swiftly moved away from sustainability being regarded as mere corporate philanthropy but a more concerted effort that is integrated within businesses’ core strategies and values. For that reason, listed REITs and property owners should further entrench sustainability into the ethos of everything they do.

As an industry, the property sector has been proactive and fared relatively well in terms of sustainability compared to other sectors and we should applaud the industry for taking up a leadership role. Many of the property funds and their respective portfolios have been awarded green-star ratings, are LEED-certified, and most consistently seeking innovative ways to reduce energy consumption and manage waste to protect their respective environments. As much as the sector has forged the path with regards to responsible property development and management, the industry should not take a back seat but rather improve by adhering to the global, best-in-class sustainability standards that will position the asset class favourably.

For new, smaller entrants within the property sector, it is understandable to be overwhelmed by the sustainability elements of owning and managing properties given the traditional challenges such as limited access to funding and incentives or even the misunderstandings associated with costs versus benefits. However, it is encouraging to see that South African REITs are ensuring they have measures and policies in place that hold them accountable. Furthermore, as an industry body exposed to 28 JSE-listed REITs, it is reassuring to see members tirelessly working to prioritise their environments sustainably.

As the property sector navigates this challenging cycle, the key to surviving and thriving will be environmental sustainability. Here are some benefits why sustainability should remain at the forefront of every property owner and managers’ business:


Long term rewards

According to the 2019 MSCI South Africa Green Annual Property Index, green-certified buildings have proven to deliver higher returns compared to non-certified properties, with green-certified properties averaging 7.6% and non-certified ranging about 5.1% growth. Despite the impacts of COVID-19, which have negatively affected property values, it is still worth noting that green-rated properties achieved higher capital growth, therefore holding their value better amidst a subdued economic backdrop. Also, given the current trading environment, there is no doubt that property investors would gravitate towards green-rated properties, given their defensive nature. The defensiveness can be attributed to their ability to outperform non-green-certified buildings on critical investment metrics of occupancy, net operating income and operating cost ratios. Although the rewards may lag, particularly in South Africa, the long-term rewards still outweigh the immediate shortcomings.


Cost Saving

Contrary to popular belief, developing properties in a sustainable way does not always result in significantly higher costs, and green building features are not just expensive add-ons. If anything, the costs may even be equivalent to conventional buildings. Further to building sustainably, the cost of occupancy becomes lower when green and innovative initiatives are introduced for the day-to-day running of buildings. These efficiencies may include improved energy performance, lower utility bills, decreased operational and maintenance costs, healthier indoor environment with better air quality, resulting in well-positioned properties that attract and retain tenants in the long run. The abovementioned factors indicate that the future savings exceed the upfront costs, making green buildings both affordable and sustainable – a win-win.


Enhanced competitive advantage for capital

With the growth of impact investing, ESG has rapidly become an integral part of the investment decision process. So much so that a company’s ESG performance contributes towards modelling the stock to determine prospective returns. Locally, we have seen ESG teams from institutional investors play an active role within the investment committees and engage more with management teams to better understand matters such as climate risk and overall sustainability performance. Therefore, prioritising the environmental issues alongside the social and governance aspects will enhance the company’s investment value proposition.

Amidst climate change and other social issues making global headlines daily, the sector’s stakeholders are placing more pressure on REITs and property owners by demanding further transparency due to the increasing importance of how these companies interact with and impact their communities. Ultimately, as an industry, we all need to come together, assist the new, smaller players and set out a uniform roadmap on how we can work towards meeting the environmental expectations while ensuring the overall business objectives are achieved. At the end of the day, it is the properties that showcase green design and overall environmental consciousness that will stand out from the crowd.