Responsible Property Investment Strategies

By M. Isi Eromosele

Property investors should mitigate risks to future returns by incorporating sustainability

considerations into decisions about acquisitions, management and the sale of real estate.

Investors will find numerous opportunities to capitalize on the market shift towards sustainable real estate. Property owners that fail to respond to the challenges posed by environmental, social and ethical criteria may find the viability of their assets being jeopardized.

Responsible Property Investment (RPI) calls for investors to take account of core environmental, social, and governance (ESG) issues in their decision-making processes. As the field advances, investors need to develop coherent strategies that integrate ESG analysis across the various aspects of their key business practices.

The application of ESG issues to the design and implementation of property investment strategies is complex, given the ever-changing kaleidoscope of interests and stakeholders involved at different stages of the life of a real estate asset.

Building An Investment Rationale

The first step in translating a general commitment to RPI into a sound strategy is to identify the business case for adopting specific changes in business practice – the reasons why an activity might increase opportunity or mitigate risk.

Investors may wish to undertake a review of the issues they believe material to their organizations in order to better articulate investment propositions that support organizational change.

Such a review may begin by listing a broad range of ESG issues and then identifying which of them has surfaced in internal discussions among business lines or external discussions with stakeholders.  Issues may be ranked, for instance, by their immediate effect on income or their potential to reveal future risks.

Such a process will help tie specific insights on the ESG performance of properties into their direct and indirect effects on asset value. Stating investment rationales may allow investors to more clearly articulate investment strategies. It also allows investors to identify analytical models and research needs which test their rationales.

Integrating RPI Into The Investment Process

The real estate investment process is multi-faceted. Multi-asset investors must first decide on the relative place real estate will play in their overall allocations, a process determined by an investor’s time horizon, risk and liquidity preference and future liabilities, in conjunction with tactical market analysis of the relative performance expectations of the various asset classes over a given time frame.

Within the real estate asset class itself, there are similar strategic allocation decisions made about real estate sub-asset classes (i.e. residential, commercial, retail, industrial), risk/return profiles (i.e. core, value-added, and opportunistic investments) and target geographies.

Once allocation decisions are made, investors then decide on properties within those allocations to buy, sell or build, and how to manage the buildings within the portfolio.

RPI has a role to play at each stage of the real estate investment process. These phases may typically be categorized as follows:

• Strategic/tactical allocation
• Property selection
• Property management

 Incorporating RPI considerations into strategic and tactical allocation decisions involves the application of long- and medium-term trend analysis to asset classes and target geographies.

For instance, issues such as climate risk analysis may lead investors to reposition the geographical weight of their portfolios in light of physical risks or potential resource scarcity in specific places.

Within asset classes, analysis of demographic or consumer trends which favor denser urban communities may lead investors to invest more in mixed-use and transit-accessible properties in their portfolios.

Standard setting for RPI can be compared to similar approaches in public equity investing. Some investors may adopt a “best in class” approach to property selection. This method sets ESG standards by which to evaluate specific sub-sectors of investment, and then limit stock selection to the best performing buildings relative to their peers

within those subsectors.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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