RE 26000
Risk Management & Asset Performance
www.pwc.com
RE 26000
PwC
Agenda
1. Real Estate Risk Management
2. Introduction to Green Value
3. “RE 26000”
Risk & Sustainable performance Management tool (PwC © 2013)
4. Other areas of expertise
RE 26000
2
PwC
What is “Responsible Property Investing”
“The integration of Environmental, Social and Governance (ESG) issues into investors’ decision-
making regarding real estate.”
UN Environment Programme Finance Initiative, 2012
3
RE 26000
PwC
The business case hypothesis
Business benefits
• Improved operational efficiency • Preserve licence to operate
• Enhanced brand and reputation • Promoting and increasing innovation
• Customer attraction and retention • Improved access to capital
• Enhance human and intellectual capital • Building and sustaining shareholder value
• Attracting and retaining talented staff • Identification of new opportunities
• Improving risk management • Generating increased revenues
RE 26000 4
PwC
Real Estate Risk Management
5
PwC
RE Risk Management
Law pressure:
Directive 2010/31/UE on the energy performance of buildings (19 May 2010)
It promotes the improvement of the energy performance of buildings within the Union, notably:
• “ …minimum energy performance requirements for buildings […] are set with a view to achieving cost-optimal levels.” both for new and existing buildings;
• “by 31 December 2020, all new buildings are nearly zero-energy buildings…”.
6
RE 26000
PwC
RE Risk Management
Sustainability pressure:
GRI: Sustainability reporting is gaining momentum:
• GRI produces one of the world's most prevalent standards for sustainability reporting. GRI seeks to make sustainability reporting as routine as financial reporting.
• A dedicated “Construction and Real Estate Sector Supplement” (CRESS) has been created for the Global Reporting Initiative (GRI). A CRESS exists a in the former 3.1 scheme. The GRI scheme 4.0 has been issued in May 2013 without any updated CRESS version.
• PwC Luxembourg is GRI official trainer.
ISO 26000: Social responsibility, and sustainable management
Core social responsibility subjects : Consumer issues, Environment, community involvement and development, etc.
7
RE 26000
PwC
RE Risk Management
Customer pressure:
What they are looking for…
• Comfort, health and well being:
More and more quality standards are requested, notably EN 13779, about rate of air exchange, and EN ISO 7730:2005 that determines and interprets the thermal comfort using PMV (Predicted Mean Vote) and PPD (Predicted Percentage of Dissatisfied) indices and local thermal comfort criteria.
• Lower operational expenses, as it directly impacts the tenant’s P&L;
• Better sanitary conditions: air quality (temperature, moisture, venting),
epidemiological study, …
8
RE 26000
PwC
RE Risk Management
Law, environment and customer pressures now expose any RE portfolio to more depreciation
Any building is subject to depreciation and obsolescence:
• However, the changing RE environment implies an even higher depreciation and sooner obsolescence for buildings that won’t adapt quickly enough;
• On the other hand, buildings that are able to adapt quickly enough will decrease depreciation and postpone obsolescence.
Market Value depreciation is caused by many factors:
Building depreciation
Building-related factors
Site value changes
Changes in supply and demand
Environmental obsolescence
Building obsolescence Physical obsolescence
Functional obsolescence
Technological obsolescence Tenure-related
factors Decreasing
tenure quality
9
RE 26000
PwC
RE Risk Management
This combined regulatory and market evolution has several direct and indirect impacts on the real estate industry:
• Non-green characteristics become increasingly less desirable to tenants than green alternatives : non-green properties will end up with lower rents and take longer to re-lease;
• Non-green assets will depreciate more quickly and carry higher risks than their green counterparts;
• Property owners will find it harder to raise rents in energy-inefficient properties where tenants are already paying higher energy costs. This will also make non-green properties less desirable to other investors;
• Awareness of owners who develop a sensitivity to these issues, including for example the concepts of environmental engineering in their recruitment conditions for asset managers (30% of investors in 2007, 60% in 2009 according to a AXA Real Estate study).
10
RE 26000
PwC
Positioning a response
Managing sustainability issues will maintain or increase the value of the business
Value creation
Value erosion
Compliance: • Operational risk • Regulatory compliance • Reputational risk • Licence to operate
Leadership: • Extending positive impact • Product/service/operating
model innovation • Market leading
Leverage: • Relationships • Assets • Employees Operational effectiveness:
• Reduce direct impact • Organisational savings • “Eco-efficiency”
Risk management/ value preservation
Managing for value Strategic advantage/ value creation
Increasing maturity of sustainability approach
11
Re 26000
PwC
Introduction to Green Value
Green Premium & Depreciation
12
PwC
Introduction to Green Value
13
RE 26000
𝐺𝑟𝑒𝑒𝑛 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑅𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 = 𝑮𝒓𝒆𝒆𝒏 𝑽𝒂𝒍𝒖𝒆
Summary of Green Office Value Studies
PwC
Managing Risk
& Sustainable Performance
14
Created by PwC Luxembourg © 2013
PwC
RE 26000/Performance Assessment The link between environmental and financial performance
Thanks to a unique combination of engineering and financial skills, PwC has setup a new method to manage the risks and performance of a RE portfolio.
It enables a completely new perspective on the performance of your portfolio, all along the investment lifecycle:
• At acquisition: it incorporates sustainability performance issues in your due diligence process;
• During the holding period: it proposes a monitoring and reporting framework to help you assessing the evolution of the performance of each asset to make the most appropriate decisions;
• When a strategic decision has to be made (refurbishment, disposal…): it assists you in selecting the most profitable options…
15
RE 26000
PwC
RE 26000/Performance Assessment The link between environmental and financial performance
RE 26000/Key objectives:
• Enhance transparency for the investor and stakeholders;
• Provide a framework for monitoring and managing macro and micro- risks of a real estate portfolio;
• KPI’s measurement/Portfolio benchmark;
• Investment strategy definition.
The tool helps the Asset Manager to:
• Assess the risk profile and potential of a RE portfolio;
• Identify and manage green features;
• Reduce impact of depreciation;
• Improve green premium.
16
RE 26000
PwC
RE 26000/Performance Assessment The link between environmental and financial performance
Consider RE 26000 KPI’s in decision-making
• When allocating assets or managing portfolio composition; • When creating new investment vehicles; • When selecting properties for acquisition; • When managing existing property assets.
RE 26000 KPI’s
17
RE 26000
• Age; • Location; • Management; • Technical and physical qualities; • Functional flexibility; • Tenancy structure; • Financial. => ∑ PwC Sust. Perf. index
PwC
On the basis of a review of relevant literature and of our professional experience, we have identified (and weighted with the Analytic Hierarchy Process (AHP) Multicriteria analysis) 7 main attributes determining the value of a real estate asset:
The PwC Sustainability performance index is computed according to the following formula:
Constructing the PwC Sustainability Performance Index (SPI)
PwC Sustainability Performance Index
1. Age 2. Location 3. Management 4. Technical and
physical qualities
5. Functional flexibility
6. Tenants 7. Financials
7
1j
ijji xY
Yi Index score
j Asset attributes
i Asset under consideration
βj Weight of each attribute
xij Score obtained for each attribute resulting from the survey
RE 26000/Performance Assessment
18
RE 26000
Index score
PwC
ESG
RE 26000/Performance Assessment The link between environmental and financial performance
Integrating ESG Risk Management into Real Estate
• Emphasis on long-term value creation;
• Importance of the creation of sustainable value;
Does not only refers to commercial value but:
“long-term responsible and sustainable RE investments”
19
RE 26000
Social concerns
Environmental concerns
Corporate governance
Responsible investment
Disclosure and regulation
Water management
Children’s rights
Climate change
RE perf KPI’s
PwC
RE 26000/Performance Assessment
Step 2
Step 1
Who ? How ?
Asset Manager 20 questions
brief assessment
Asset Manager / PwC 130 questions
detailed level
Step 3
Result ?
Asset Manager / PwC
AM wishes, PwC
expertise, outcomes
of the tool
Focus study on
relevant assets through
a classification
Evaluate performance
Compare them &
analyse portfolio
Improve the overall
performance of each
asset (improvement of
the potential green
value)
Why ?
20
RE 26000
Essential
Work
Required
Already greenBulk of portfolio
How does it work? Methodology
PwC
RE 26000/Performance Assessment
Step 1:
Selecting the right assets to work on
• A quick pre-assessment of 20 questions carried out by the AM all over the portfolio allows to obtain an overview of the asset’s performance through a quick assessment;
• There are usually 3 types of assets:
- Those which are “already green”, and ready for the upcoming challenges;
- Those which cannot become green assets with reasonable investment;
- Those which could become green if certain refurbishments are undertaken.
Essential
Work
Required
Already green Bulk of portfolio
Our team helps you to • Understand in which category
each of your building lies; • Our review shall focus on
“bulk of portfolio” buildings.
21
RE 26000
PwC
Step 2:
Assessing the current performance of the selected assets regarding today’s RE environment (1/3)
Based on the information provided by the AM, the PwC experts will complete a comprehensive form on an asset by asset basis allowing to deeply examine the performance of each building in today’s RE environment.
RE 26000/Performance Assessment
22
Re 26000
PwC
Step 2:
Assessing the current performance of the selected assets regarding today’s RE environment (2/3)
This examination is carried out in seven dimensions, each of them determining a SPI score.
The aggregation of the different scores makes the PwC SPI.
RE 26000/Performance Assessment
23
RE 26000
0.02.04.06.08.0
10.0Management
Technicalfeatures
Flexibility
TenancyFinancial
Performance
Age
Location
PwC
RE 26000/Performance Assessment
Step 3:
Identifying achievable improvements (1/3)
Regarding the initial PwC SPI, areas of improvement can be determined
24
ESG in Real Estate
0
2
4
6
8
10Management
TechnicalFeatures
Flexibility
TenancyFinancial
performance
Age
Location
PwC
Step 3:
Identifying achievable improvements (2/3)
• Regarding the original PwC SPI, the potential forecast capital expenditures, the AM wishes & the PwC expertise, a target performance score is determined.
- Sample of actions & score impacts.
RE 26000/Performance Assessment
Age Location Management Technical
features Flexibility Tenancy
Financial
properties
Energetic Audit direct direct
Indirect
Establishment of a Building
Management System direct direct direct
Environmental certification "in
operation" direct direct
Replacement/Improvement of
technical equipment direct direct
Implementation of a green lease direct
Improvement of energy counting and
monitoring direct
25
RE 26000
PwC
Step 3:
Identifying achievable improvements (3/3)
RE 26000/Performance Assessment
26
RE 26000
PwC
Other areas of expertise
27
PwC
Other Areas of Expertise
• Carbon emission assessment;
• Life Cycle Cost/Life Cycle Assessment;
• Asset certification (design stage, post construction, in use) under various standards:
- BREEAM;
- HQE;
- LEED;
- DGNB;
• On-site renewable energy generation capacity.
28
RE 26000
Alexandre Goossens Senior Manager, Real Estate - MRICS +352 49 48 48 - 2043 [email protected]
Laurent Rouach Partner, Sustainability +352 49 48 48 - 4111 [email protected]
This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the
information contained in this document without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the
accuracy or completeness of the information contained in this document, and, to the extent permitted by law, PricewaterhouseCoopers, Société coopérative, its
members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or
refraining to act, in reliance on the information contained in this document or for any decision based on it.
© 2014 PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers, Société coopérative
Luxembourg, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
Contacts