Tackling environment and social issues in listed property

14 March 2022

Listed property is an asset class that has delivered steady income as well as capital growth over the long-term. The predictability of income streams from underlying properties is fundamental to the investment merits and returns of this asset class and naturally informs the investment decision making process.

However, over the past few years there has been a growing focus on aspects related to Environmental, Social and Governance (ESG) when it comes to property investments, with emphasis on the environmental part.

According to a World Green Building Council global status report, buildings and construction together account for 36% of global final energy use and 39% of energy-related carbon dioxide (CO2) emissions when upstream power generation is included. The energy intensity per square meter (m2) of the global buildings sector needs to improve on average by 30% by 2030 (compared to 2015) to be on track to meet global climate ambitions set out in the Paris agreement. This is why there is a push towards a net zero emission strategy adoption by property owners.

The listed property sector has certainly made inroads when it comes to the environmental component, which was often necessitated by unreliable water and unsustainable electricity price increases from local government and/or Eskom. It’s for this reason that landlords have had to adopt technology and invest in infrastructure that provides more efficient and environmentally friendly use of resources such as water and electricity.                                             

Examples include:

- Building management systems that monitor and manage water and electricity consumption – some of these have been adopted for a number of years but the technology continues to advance/improve.

- At a grander scale, the roll out of renewable energy projects by various funds is being accelerated following the increase in the self-generation cap from 1MW to 100MW. 

Despite obvious benefits to the environment, there is also a financial benefit as the cost of new technology declines and becomes more efficient relative to traditional sources of supply and methods. For example, a typical solar PV project is now reported to yield an attractive 20% to 25% return on cost.

The Coronavirus pandemic has heightened the focus on ESG and put a greater focus on the S in ESG.

This is especially relevant and important in a country like South Africa (SA) which faces significant socio-economic challenges. Since the start of the pandemic, the SA listed property sector has been at the forefront of providing substantial relief to small businesses and tenants in order to support jobs and ensure the survival of these businesses through the various lockdowns and waves of the pandemic. The SA REIT Association estimates that the listed property sector has so far provided rental relief of c.R3 billion. 

What is often not clearly articulated is that property has always had a strong social utility, much of which is intangible and difficult to quantify. Think of mankind’s basic need for shelter which is catered for by the residential developments in the inner cities as well as high-end mixed-use developments. Property is also a vital part of the supply chain that enables the global and local distribution of goods and large warehouse facilities which are springing up to fulfil this role. Retail centres, student accommodation and offices have always been places of social confluence within safe environments.

One of the things to reflect on is how the eco-system around rural and township retail centres plays a role in social dignity and upliftment of communities within which they operate.

From their development up to operation, jobs are being created. These centres also create safe environments for the disbursement of social grants as they are located closer to communities. Transport costs to travel to collect grants are reduced. There is always some form of informal trade that also exists alongside these centres, typically small informal traders or retailers operating just outside their perimeter.     

Although to ensure inclusivity, it would be ideal if property owners found a way of working together with informal traders and make them part of the greater retail precinct instead of having them operate outside the centres. Local taxi operators are never left behind, benefitting from the footfall and infrastructure provided in the form of small taxi ranks. Communities also realise the role these centres are playing as it was seen when they rallied to protect various centres during the civil unrest in July.

For investors and fund managers, it is important to also evaluate property funds against their social upliftment plans. Property companies must not only talk to their intentions but also provide tangible evidence and examples of putting this into action and advancing the social imperative.

Investors must also engage with property companies to assist them in finding ways to unlock the social values of properties and their role in addressing our country’s socio-economic challenges.