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Scholz, R.W., Bügl, R., Hüni, G.R. and Leimgruber, C.

The importance of social criteria for responsible property investment: A Swiss view on the market success of sustainable real estate funds. Scholz, R.W., Bügl, R., Hüni, G.R. and Leimgruber, C. ERES Conference 2009, Stockholm, June 24-28, 2009 Workshop Session 6-C Investment and Finance.

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Scholz, R.W., Bügl, R., Hüni, G.R. and Leimgruber, C.

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  1. The importance of social criteria for responsible property investment: A Swiss view on the market success of sustainable real estate funds Scholz, R.W., Bügl, R., Hüni, G.R. and Leimgruber, C. ERES Conference 2009, Stockholm, June 24-28, 2009 Workshop Session 6-C Investment and Finance

  2. Outline • Introduction • Results 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance • Sustainability - What can we learn? • Conclusions and outlook

  3. 1. Introduction (1/4) – Swiss real estate market Bio. US$ • Total real estate value in Switzerland is about 1436 bio. US$ • This equals factor 4 of the Swiss GDP and factor 2 of the stock market capitalization in Switzerland • About 50% property ownership and 30% property to rent 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions and outlook 1. Introduction Sources: Cf. Graf (2008); Wüest & Partner (2006).

  4. 1. Introduction(2/4)–Sustainablepropertyinvestment • ETH-UNS case studies: Gothenburg (Lundby), Zürich Nord, Sulzer-Escher Wyss, Basel and other cities and regions • Certification according to Minergie standards is rapidly upcoming, but this certification just equals about 0.5 - 0.75% of the total building stock in Switzerland (Minergie, 2008; SFSO, 2006) • Shares of energy for room heating, warm water supply and CO2 emissions generated by energy at home are almost about 40% (Ankirchner, 2006; Weber and Perrels, 2000) • Improvingwastemanagement:Amount of building waste is enormous, andrecyclingoftenmeansmaterialdowngrading(cf.Spörrietal.,2009ab) • Strongecologicalcommitment(Minergie,SIA112/1,Lifecycleanalysis, ...), but social criteria are missing 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions and outlook 1. Introduction

  5. 1. Introduction (3/4) - Research questions • Which sustainability criteria do key financial stakeholders view as important for the market success of S-REFS? • What is the role of sustainable social infrastructure? • How is the market acceptance of S-REFs by financial stakeholders, and what role do cognitive drivers and institutional context play ? 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions and outlook 1. Introduction

  6. 1. Introduction (4/4) - Methods Procedure of the study - basic modules: • Focus groups (N=15)  Generation of sustainability components • Questionnairestudy (N=68) Anticipatedimportance,marketacceptance Sample of the questionnaire study: • 58 institutional real estate investors (from 44 employing institutions) • 10 real estate funds suppliers (from 4 major REF supplying companies) Market acceptance indicators: • Decision to invest • Investment volume • Willingness to accept return shortfalls 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions and outlook 1. Introduction

  7. 2.1. Sample description (1/1) Capital investment categories: 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions and outlook 1. Introduction

  8. 2.2. Sustainability criteria (1/3) - Focus groups • Attractivity of location • Energy for usage • Well-being • Return on investment • Building materials = most important criteria Mean green areas community quality of floors cost of maintenance cost of repair fabric structure building materials return on investment well-being energy for usage attractivity of location 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions and outlook 1. Introduction

  9. 2.2. Sustainabilitycriteria(2/3)–Questionnairestudy Explained variance = 83.1%  Sustainability criteria for REFs  economic sustainability criteria are dominant for market success ecological sustainability criteria are of minor importance for market success

  10. 2.2. Sustainabilitycriteria(3/3)– Socialinfrastructure • Social sustainability is no independent factor • Substantial correlation of “Sustainable social infrastructure“andorthogonalsustainabilityfactors • Fundamental dilemma of sustainable real estate investment: • Key finance stakeholders aspire maximum return on investment and avoid social investments of public use • Critical social factors are underestimated with regard to the added value of sustainability • They view sustainability as a mean of risk reduction  Sustainability criteria for REFs  Social sustainability criteria large spread of importance

  11. 2.3. Market acceptance (1/2)– Willingness to invest • 3 out of 4 institutional real estate investors are potential S-REF investors • 9.3 Mio. Swiss Francs (7.04 mio. US$)mean willingness to invest of potential S-REF investors • 60 percent of the real estate funds suppliers are potential S-REF suppliers if the supply of sustainable real estate is enough • Acceptance of return shortfalls: • 38% of responding investors are willing to accept return shortfall • Average absolute rate return shortfall of 0.85% under benchmark = Mean relative interest rate decrease of 21% (SWX Immobilienfonds Index, average return of 4.0% 2004-2005) 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions and outlook 1. Introduction

  12. 2.3. Market acceptance (2/2) - Drivers Positive impacts Negative impacts Mixed impacts 12

  13. 3. Sustainability (1/2) - What can we learn? What can the finance sector learn? • Develop S-REFs from a social and ecological perspective • Show the sustainability management effect of S-REFs • Sustainability assessment of S-REFs has to inform classical finance evaluation What is missing for sustainable development? • Real estate stock of sustainable buildings with gentrification potential is critical but also at top-level locations (eco-friendly, lifestyles, ...) • Sustainable buildings exist in the residential sector (single-family houses), but sustainable buildings for multi-storey superstructures, offices, trade/commerce and industry are very rare (diversification) • Sound differentiation of sustainable vs. conventional REFs: Under which conditions can a REF be called “sustainable”?

  14. 3. Sustainability (2/2) - What can we learn? Where are the boundaries for investors? • Ecological and social market arguments are perceived as hampering return (anticipated costs > yield) • Critical social criteria and properimplementation in finance instruments are some kind of a blind spot Where is the potential for transdisciplinary action? • Transdisciplinary action is a process of mutual learning of practice and science on equal footing • Development of diversified development funds, object funds, ... • Develop a S-REF from scratch or redevelop a conventional REF 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions and outlook 1. Introduction

  15. 4. Conclusions and outlook (1/1) • S-REFsareabusiness caseincountries with sustainability commitment • Results help to introduce S-REFs in the finance market and to understand the investment behavior of institutional real estate investors • Some critical criteria of social sustainability are missing (cf. Kriese and Scholz, submitted), and views on economic sustainability criteria are dominant for market success than views on ecological criteria • Stock of sustainable real estate in Switzerland, volume of S-REFs and sustainability engagement is critical • Besides technological systems, lifestyles are a key component for the ecological and social efficiency of urban and regional systems • Strong need for sustainability learning and transdisciplinary action for the development of S-REFs in order to ensure quality standards 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions and outlook 1. Introduction

  16. Thank you!

  17. APPENDIX

  18. Swiss real estate market • 1.0% of the total real estate value are stock-traded and 1.5% are invested in indirect real estate investment products (Credit Suisse, 2006) • About 0.8% of the total real estate stock value in Switzerland is traded in open-ended real estate fund (REF) products • Swiss real estate investment funds, which are authorized by the Swiss Federal Banking Commission, had a total asset volume of US$11.1 billion as of midyear 2005 (Swiss National Bank, 2007) • Sustainable real estate funds(S-REFs) are now in the stage of market introduction and product settlement 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions & outlook 1. Introduction

  19. Definitions Sustainable real estate funds (S-REFs): • A definition of S-REFs should meet both the performance demands of financial institutions as well as the impacts of the real estate investment. Sustainable social infrastructure: • Sustainable social infrastructure consists of goods, services and spatial structures that enable human systems to realize their capabilities without social inequality.

  20. Description of hypotheses

  21. Methods

  22. Design of a S-REF

  23. Conclusions and outlook • S-REFs create supply of sustainable building stock which can may attract and foster the expression of sustainable lifestyles. • The application of human-environment systems allows for a more thorough interdisciplinary understanding of lifestyles • Managingtheincentive-barrierstructures,which are linked to sustainable lifestyle settings, is crucial for enabling sustainable urban living. • The urban design of lifestyle settings may aid in structuring improvements onthematerialandculturalspheresthatmay eliminate system disparities. • The proposed conceptualization of lifestyles can be utilized for structuring sustainable transitions of urban and regional systems • S-REFs can enhance the functionality of urban planning (enhanced district planning, integ. participation, future-oriented dialogue processes) 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions & outlook 1. Introduction

  24. Human-environment matrix components Lifestyle components Lifestyle consequences Human matrix H Cognitive-behavioral submatrix: Socio-demographic submatrix: Affective motives Motives Incentive- barrier structures E.g., Instrumental motives Human outcomes Lifestyles Symbolic motives E.g, Habits Affiliation Environmental matrix E Situational submatrix: Socio-cultural submatrix: Environmental outcomes Distinction Identification Habitus

  25. Lifestyles - Fields of transition Fields of transition Energy & mobility Traditional lines of lifestyle research Residential living Consumer behavior Health care Working sphere Lifestyles in urban systems Public health Consumption patterns Urban housing Leisure-time activities Social networking

  26. Further readings Sustainable real estate funds (S-REFs): • Sustainable property funds: financial stakeholders’ views on sustainability criteria and market acceptance. By Bügl, R., Leimgruber, C., Hüni, G.R., & Scholz, R.W. (2009). Building Research & Information. Sustainability criteria for finance products: • Principles for sustainability rating of investment funds. by Koellner, T., Fenchel, M., Weber, O., & Scholz, R.W. (2005). Business Strategy and the Environment. • Incorporating sustainability criteria into credit risk management. By Weber, O., Scholz, R.W., & Michalik, G. (2008). Business Strategy and the Environment. Embedded case study methods - book: • Embedded case study methods: Integrating quantitative and qualitative knowledge. By Scholz, R.W., & Tietje, O. (2002) Environmental literacy - book: • Environmental literacy in science and society: From knowledge to decisions. By Scholz, R.W. (in prep.) 2.1. Sample description 2.2. Sustainability criteria 2.3. Market acceptance 3. Sustainability - Whatcanwelearn? 4. Conclusions & outlook 1. Introduction

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