ENERGY EFFICIENCY PROPERTY FUNDS PRACTICES OF UNLISTED

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1 In partnership with ASSOCIATION FRANÇAISE DES SOCIÉTÉS DE PLACEMENT IMMOBILIER ENERGY EFFICIENCY PRACTICES OF UNLISTED PROPERTY FUNDS For the second consecutive year, Novethic surveyed French main property fund managers about their knowledge of the energy performances of their portfolios. This year s survey was focussed on the measuring and reporting on energy efficiency improvement strategies. It highlights overall progress by fund managers. June 2012

2 Introduction Methodology Survey conducted from April to May 2012 by a questionnaire sent to 50 AMF-approved «property investment fund» managers. Response rate of 56% or 28 fund managers, most of which are ASPIM** members. * AMF: Autorité des Marchés Financiers (the French financial market regulator) ** ASPIM: Association Française de Sociétés de Placement Immobilier (French Association of Property Investment Funds Survey panel AXA REIM 123 VENTURE AEW Europe SGP ( * ) AMUNDI Immobilier ( * ) BNP PARIBAS REIM France ( * ) CILOGER ( * ) CLEAVELAND CMC-CIC SCPI Gestion ( * ) CORUM AM DELTAGER EURYALE AM ( * ) FIDUCIAL Gérance ( * ) FONCIA Pierre Gestion ( * ) HALIEUTIS PARTNERS HSBC REIM France IMMOVALOR Gestion ( * ) LA FRANÇAISE REM ( * ) LB-P AM ( * ) OFI REIM ( * ) OSCA Fund Management ( * ) NAMI AEW Europe ( * ) PAREF Gestion ( * ) PERIAL AM ( * ) PRIMONIAL REIM SOFIDY ( * ) TISHMAN SPEYER Management OPCI SAS ( * ) UNION INVESTMENT RE ( * ) VIVERIS REIM ( * ) ( * ) Respondents of 2011 and 2012 surveys n Representativity of the panel in the market of regulated unlisted property funds According to IEIF data (Institut de l Épargne Immobilière et Foncière, a French property research institute), Novethic survey respondents manage respectively 87% of AMF-approved SCPIs (property investment partnerships) and 85% of the OPCIs (property collective investment schemes). Gross assets under management ( m) SCPI OPCI Panel Total market Panel Total market Source : IEIF n Representativity of the panel excluding SCPIs and OPCIs Among the property funds concerned by this survey, 64 are dedicated property funds which are neither SCPIs nor OPCIs. Their market value represents 28% of the total panel valued at 47.9 billion. Novethic 2012 Total or partial reproduction is prohibited without the prior consent of Novethic. Using or citing quantitative data is allowed, provided that the source is indicated.

3 Measuring energy performance n The practice of monitoring actual consumption from invoices is increasing Use of energy performance measurement tools increased by 14% between 2011 and % of the fund management surveyed declared using such tools. In most cases they used the French Energy Performance Assessment (EPA) whose display is now mandatory. Use of other types of measurements remains stable, except energy invoices that increased significantly. Measurement of actual consumption is growing all the more since 13% of the panel surveyed also installed energy consumption meters. Changes in the breakdown of measurement tools Internal measurement systems Energy audits Energy Performance Assessment Actual consumption on invoices 35% 36% 45% 36% 55% 57% 80% 79% n 2012 n % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% n An increasing number of fund managers know their average energy performance The installation of measurement tools allows a greater number of firms to know the average energy performance of their portfolios. This level of awareness increased from 32% in 2011 to 47% in The proportion of assets covered is also rising. This year, 11% of property fund managers were aware of the energy performance for all their assets under management compared with only 5% in However, these figures hide significant disparities. For 75% of those aware of their property portfolio consumption, this information is based on energy audits and EPA rather than actual invoices. In contrast, for the two thirds of the 36% that know their energy performance for only a portion of their assets, information is based on actual consumption derived from invoices and remote meters. Knowledge of energy performance for assets under management 5% 36% 27% % 25% 29% 11% % n know the average performance for all their assets n know the average performance for a portion of their assets n will know their energy performance within the next two years n do not know the average energy performance of their assets Novethic Energy efficiency practices of unlisted property funds 3

4 Energy performance n Disparate reporting practices The tools used by panel respondents to measure average energy consumption differ significantly. These disparities concern the type of energy measured (primary or final energy consumption), the coverage of consumption data (shared services or whole-building consumption) and the areas involved (common areas or the total lettable area) While 90% of published averages concern both tenants demises and common areas of buildings under management, the uses taken into account vary significantly. Accordingly, 56% of the panel reports HVAC operating consumption (heating, air conditioning, ventilation) while the remainder publishes consumption data for all uses (plug loads included). n Disparities in energy consumption present a misleading picture Comparing average data reported by respondents highlights significant divergences in energy performances for logistics and retail properties. This contrasts with office property portfolios for which data remains relatively homogeneous. These divergences reflect the diversity of the activities exercised within these properties. Primary energy consumption for all uses combined (kwh/m²/yr.) Offices Retail Logistics kwh/m 2 /yr In contrast, these gaps are reduced if one takes into account intrinsic building energy consumption without factoring in consumption specifically related to the activities carried out within the building. Final energy consumption for HVAC only (intrinsic consumption) (kwh/m²/yr.) Offices Retail Logistics kwh/m 2 /yr n Energy breakdown more relevant than average consumption By nature, average performance does not reflect discrepancies within a property type. For example, for a single property fund, energy consumption of office buildings may range between 1 to 5 according to the construction date or to the users behaviour. To measure actual performance of portfolios, a breakdown of the portfolio by energy consumption level is therefore more relevant. However, in 2012 only 14% of management companies know such a breakdown. 4 Novethic Energy efficiency practices of unlisted property funds

5 Certifications and labels n A gradual rise in the number of environmental certifications The number of property funds with labelled and/or certified assets (properties under construction or completed) has risen significantly, exceeding estimates of last year s survey. In 2012, 54% of the panel has at least one certified asset in their portfolio, as compared to 68% in One possible explanation is the good performance of property funds in raising capital which allowed managers to acquire new certified buildings. Proportion of respondents indicating they had or wish to acquire certified and/or labelled buildings 41% % 32% 25% 21% % n possess at least one certified or labelled asset n intend to acquire a certified and/or labelled asset within the next two years n possess no certified and/or labelled assets though limited overall coverage for portfolios under management However, the proportion of certified and/or labelled buildings at the level of portfolios under management remains limited. Overall, only 7.2% of floor area under management by panel members were certified or labelled in Furthermore, maintenance labelling (BREEAM in use or HQE Exploitation certification) represents only 14% of this figure. n HQE certification prevails More than half of certified assets have HQE certification. This mainly concerns commercial properties. This is followed by the French energyefficient BBC label for residential properties that is becoming the industry standard. BBC labelled assets now account for 21% of the total. This label is of particular interest for management companies seeking to propose property investment vehicles known as SCPI Scellier BBC funds. These latter funds are eligible for tax reductions under the Scellier BBC law and comprised exclusively of low energy building BBClabelled residential properties. Breakdown of certified property by type of certification and/or label 12% BREEAM 58% HQE 3% LEED 3% 3% HPE THPE 21% BBC n Representativity of HQE certified commercial property held by the panel According to data published by the French building certification agency, Certivéa, the panel holds 6% of HQE certified commercial property (retail, offices, logistics). Novethic Energy efficiency practices of unlisted property funds 5

6 Contractual commitments n Preparing the way for «green leases» Adoption of energy performance contracts has risen significantly with 39% of management companies surveyed implementing such programms, as compared to 23% in Property fund managers have in this way anticipated the decree on environmental riders entering into force starting January 1 st 2012 for the signature of all new commercial leases for properties larger than 2,000m². Furthermore, 33% of these entities have formalised these commitments with property managers through Energy Performance Contracts (EPC). Implementation of energy performance contracting tools 27% 23% 32% 39% 36% EPC and green leases % % 64% Green leases only n adopt contracting tools n intend to adopt such tools within the next two years n do not use contracting tools n Limited commitments despite better integrated reduction requirements Only 29% of the panel has formalised targets for reducing energy consumption. This percentage has not really changed since 2011 and targets defined correspond to those provided for under Grenelle 2 French environmental law for commercial property. Only one respondent made a quantitative environmental performance commitment for a target other than energy. The existence of pragmatic eco-efficiency strategies among property funds without formalised commitments should nevertheless be noted. Accordingly, one third reported to systematically assess energy efficiency upgrades when premises are vacated by tenants. 11% also indicated that they perform annual energy reviews asset by asset or produce five-year plans for major maintenance work. Public targets for reducing energy consumption 23% 25% % 4% n Reduction targets compatible with Grenelle objectives n Specific targets n No targets 68% 71% 6 Novethic Energy efficiency practices of unlisted property funds

7 Strategies for improvement n Evaluating costs for energy retrofit programs The obligation to reduce energy consumption for commercial property by 38% by 2020 under the Grenelle 2 environmental law has still not been formally enacted by an implementing decree. This has not however prevented asset managers from quantifying compliance costs for their portfolios. 29% of the panel indicated that they had already estimated the necessary costs and 53% would like to estimate these costs within two years. If 52% of the panel considered that the target was achievable, this figure increased to 63% for respondents having already attempted to evaluate the costs. 26% 7% 15% n The target can reasonably be achieved for a budget comparable to budgets provisioned for major repairs and renovation n The target can be achieved though will require very significant investments n The target is difficult to achieve: the deadlines are too short 15% 37% n The target is difficult to achieve: investment amounts are too large n The target cannot be met: the legal status does not permit the major renovations that would be required n Two priorities: optimising maintenance and replacing technical equipment To improve the energy efficiency of their portfolios, property fund managers focus mainly on heating and airconditioning installations, whether by replacing existing installations or optimising management systems. This is followed in second place by measures focusing on overall energy consumption based on actual energy use. The disposal of the least energy-efficient assets is seen as a solution of last resort and as such mentioned in the last place. Strategies adopted or considered for improving energy efficiency Work on heating and air-conditioning equipment Optimising management systems Energy performance contracting with users Insulation work Installing energy consumption meters Disposal of the asset 77% 76% 62% 56% 40% 39% 0% 10% 20% 30% 40% 50% 60% 70% 80% Novethic Energy efficiency practices of unlisted property funds 7

8 Communications and customer relations n The practice of systematic communications with tenants is still not widespread More than two thirds of the panel do not provide tenants with energy performance information on premises under management. However, awareness-raising campaigns on energy efficiency and good practices are developing. These are accomplished either through user guides provided to occupants or through meetings on environmental riders added to leases or through operating certifications. The systematic adoption of these approaches for the time being concerns only 14% of the panel and is largely limited to the distribution of guides. Tenant energy efficiency awareness-raising initiatives No awareness-raising initiatives 36% Awareness-raising 35% 20% 50% n through user guides n through energy performance contracting 30% n others 29% Awareness-raising initiatives planned within the next two years n Limited communications for investors Communication by management companies to their partners and shareholders is also limited. If 32% of respondents indicate that they provide information on their energy performance to their customers, none of them provide specific information in this area for each fund. Communication consists of either institutional communications on strategies adopted or communications on property funds focused on integrating eco-efficiency criteria. 18% 68% 14% No information General information Information on selected funds 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 67% 79% Institutional investors Retail investors n 2011 n % 39% n Growing demand for ecoefficiency If fund managers observed an increasing number of institutional investors demanding that eco-efficiency criteria be integrated in the property asset management activity, demand is also growing among individual retail investors. In this latter category, demand reaches nearly 40%. Fund managers surveyed are gradually adopting ad hoc marketing strategies. Among these, 39% indicated that they have adopted customer marketing initiatives focusing on the environmental performance of their products. 8 Novethic Energy efficiency practices of unlisted property funds

9 Obstacles and motivations Between 2011 and 2012, the perception of management companies on the main motivations and different obstacles for implementing environmental approaches remained very stable. Trends are being confirmed. n Risk prevention as a key motivation If eco-efficiency strategies appear essential in terms of risk management, only one quarter of the panel identified them as a factor contributing to improved financial performance. Changes in the sector are largely linked to expected regulatory developments. Two strategies appear to coexist: a prevailing approach that integrates ecoefficiency criteria according to market trends and the emergence of more ambitious strategies. Anticipate the property business risks (obsolescence, depreciation, etc.) Anticipate regulatory non-compliance risks 68% 29% 4% 61% 32% 7% n Very important n Rather important n Not very important n Not important Meet demand from clients 43% 50% 4% 4% Aim for better financial performance (green value) 25% 46% 18% 11% 0% 20% 40% 60% 80% 100% n ROI considered insufficient While property management companies have integrated the need for an environmental approach, different obstacles appear to be preventing implementation of ambitious strategies. A majority of respondents mentioned that tenant demand is not sufficient to offset the costs of certified assets and energy refurbishment measures. For these entities, there is an immediate risk of a loss in returns for partners and investors. This in turn conflicts with performance goals for SCPI and OPCI property investment vehicles. In contrast, others propose «value added» funds focused on acquiring certified or refurbishing assets to achieve capital gains on property investments. An inadequate return from eco-efficiency strategies (cost/return trade-off) Legal requirements on SCPIs (property investment partnerships) and OPCIs (property collective investment schemes) 54% 29% 14% 4% 41% 33% 19% 7% n Very important n Rather important n Not very important n Not important A «green» building offering that remains limited 21% 61% 11%7% Tools for assessments that are still not operational 21% 43% 25% 11% 0% 20% 40% 60% 80% 100% Novethic Energy efficiency practices of unlisted property funds 9

10 Socially Responsible Property Investment (SRPI) SRPIs, that impose the integration of Environmental, Social and Governance (ESG) criteria in asset management are still an emerging trend in the property sector. There are only two operating SRPI funds, one launched in 2009 by La Française REM and the other in 2011 by Amundi Immobilier. This being said, nearly 20% of management companies surveyed by Novethic intend to propose an SRPI fund in the near term. In this context, 10 out of 28 companies of the panel have SRPI charters. Defined by various terms, SRI, Responsible Property Investing (RPI), environment, these documents nevertheless retain a strong environmental focus. These charters highlight the very gradual development of an SRPI offering to meet a demand that is still limited though subject to very rigorous standards. SRPI fund management viewed by an institutional investor Authorised to diversify its holdings to include property investments since December 30th 2010, the ERAFP (Établissement de la Retraite Additionnelle de la Fonction Publique), the supplemental pension scheme for French civil servants, has gradually delegated property asset management programs to third parties. Its particularity was adopting a complete SRI strategy from its creation in Thus prospective property managers participating in calls for tenders must be able to meet criteria of this nature. Philippe Desfossés, ERAFP CEO, and Olivier Bonnet, Head of SRI share their views. Philippe Desfossés: The first asset management agreement granted in 2011 to AEW Europe permitted the acquisition of the Paris office building where we currently occupy half the space. It is a renovated building though without an environmental label even if, for an older building, renovations made ensure fully satisfactory performances. We have adopted a «best in class» strategy for property investments that we apply to our other asset classes. This means we take into account the actual conditions of the existing portfolio to achieve improvements. We did not opt for acquiring a new eco-efficient property but instead sought to improve the energy efficiency of the existing building through operating procedures. With this objective, we have signed, as the tenant, an environmental rider to the lease. Two other asset management programs were launched. The first concerns property investments in France. The second is for property investments in Europe and OECD countries. Their managers will be selected in the 2012 third quarter though the criteria adopted are in principle much broader than the prevailing practices in the real estate sector based in large part on environmental considerations. It may be noted with satisfaction that despite these rigorous criteria, each of these calls for tenders attracted more than ten prospective managers. Olivier Bonnet: The existing offer does not fully cover the complete scope of our five core values. For the environmental component, we obtain satisfactory responses though for the social component there is room for further improvement. For some, this may be summarised in terms of the well-being of occupants. The building s final function may also represent a top priority. In this way a residential housing facility for students or the elderly has intrinsic social value. Beyond these two approaches, we have also focused on combating discrimination by including building accessibility features for example. We also pay attention to human rights compliance with respect to working conditions by suppliers and builders, and more generally to policies adopted across the supply chain. However, it is clear that time is still required to effectively address all these issues even though progress is being made. We will carefully analyse the first reports submitted by our property managers. 10 Novethic Energy efficiency practices of unlisted property funds

11 International vision n The GRESB foundation compares listed and private property companies according to ESG criteria. The Global Real Estate Sustainability Benchmark (GRESB) is an initiative of institutional investors, leading academics and industry bodies. Its goal is to improve transparency for Environmental Social and Governance (ESG) practices in the property sector. Investor members (APG, Aviva, Axa Real Estate, Hermes, UBS ) are in this way provided with a tool for comparing extra-financial criteria of funds in which they invest by asking the property companies and portfolio managers to participate in an annual survey. In 2011, this included more than 340 listed and unlisted international funds representing property assets under management of more than US$928 billion. The methodology uses a metrics-based scoring system divided into seven sub-categories: integration of environmental and social responsibility in management practices, monitoring and environmental reporting management systems and social factors (satisfaction of tenants and employees). The overall GRESB score is split into two categories: «Management & Policy» and «Implementation & Measurement» n In 2011, unlisted European companies lagged behind in performance. The results are then sorted according to a four quadrant matrix: Green Starters: companies having initiated policies on sustainability though not well implemented in their portfolio management processes. Green Talk: companies having put in place sustainability management and reporting systems but further progress in implementing their strategies is required. Green Walk: companies integrating sustainability policies and measurement of environmental and social key performance indicators, though lacking transparency with respect to practices and results. Green Stars: companies having implemented integrated and innovative organisational approach towards measurement and management of environmental key performance indicators. The 2011 survey highlighted the supremacy of Australian property funds in both the listed and unlisted categories. European private funds ranked at the bottom of the scale with the exception of the Portuguese fund Sonae Sierra that ranked third and the Hammerson PLC fund in seventh place. Regional scores of listed and private funds according to the GRESB scoreboard Implementation & Measurement Green Walk Asia Europe Asia Europe North america North america Management & Policy Australia Australia Green Stars Green Starters Green Talk n Listed n Private Source : GRESB Research Report 2011 Novethic Energy efficiency practices of unlisted property funds 11

12 A Word from our Partner ASSOCIATION FRANÇAISE DES SOCIÉTÉS DE PLACEMENT IMMOBILIER Among the major issues for the property sector in the coming years, the implementation of «Plan Bâtiment Grenelle» building action plan will no doubt be a top priority. Given this, the ASPIM is actively involved with its members, managers of SCPI and OPCI property funds in this issue. Among the key players in the property investment, they represent around 10,000 buildings with a total area of 15 million m² and net assets under management of nearly 48 billion (at the end of 2011). Consequently, ASPIM follows with interest among the studies undertaken by industry professionals the work of Novethic on measures undertaken to improve energy efficiency and to report on the results achieved. As a partner in this timely and important assesses whose second year results are presented in this study, our association measures the progress that remains to be achieved to meet the corporate citizenship targets set by lawmakers. The quality of future property will also result from such undertaking. Patrick de Lataillade Chairman of the ASPIM Association française des Sociétés de Placement Immobilier (ASPIM), the French association of property investment funds is a not-for-profit organisation created in 1975 as a forum bringing together investors in collective property investment vehicles (SCPIs and OPCIs) and management companies comprising its statutory representatives. These property investment funds, like their management companies, are licensed by the AMF (autorité des marchés financiers), the French financial market authority. Survey conducted by Yona Kamelgarn, sustainable property researcher (Novethic) Produced with the support of ADEME, the French Environment and Energy Management Agency