ESG is playing a bigger role than ever in the property investment sector. Ben Wood explains how it is integral to the team’s value-add process through the property cycle.
Throughout the property cycle, from acquisition, management which includes refurbishment/development and lease negotiations to, ultimately, disposal, we as investors are seeking to add value. Our ESG analysis is closely related to our financial analysis, whereby we aim to ensure that any potential addition to the portfolio is fairly priced and enhances the performance of the Fund in line with its objectives. We consider potential acquisitions from the perspective of their adaptability, potential profitability and ESG credentials. For the LF Canlife UK Property ACS, our focus is on UK commercial property, particularly the retail, office and industrial sectors, as well as other sectors such as leisure and hotels.
As active managers, we consider the long-term risks and opportunities of holding any given property. We aim to mitigate investment and ownership project risks whilst balancing the returns. Obviously, this must be considered in the context of all the levers available to us across proactive management, capital investment, operational changes and risk mitigation. The addition of value through refurbishment is a particularly useful lever at a time when we cannot rely on property markets to keep rising. Commercial viability and responsible investing remain key considerations throughout this assessment process. That said, both the occupier and investment markets are now recognising the emergence of a green premium on those assets with enhanced ESG and wellbeing credentials.
Acquiring new assets
When we are considering, for our due diligence process, whether we will be able to add value to potential assets in the portfolio, ESG considerations are now the starting point. Without assurances that buildings meet, or will be able to meet our ESG standards, we will not invest.
Ensuring that potential acquisitions pass Environmental and Flood Risk Assessments and have an appropriate Energy Performance Certificate have been part of our environmental due diligence process for many years. Since the beginning of 2022, we have also considered potential acquisitions and their future development in the context of our Net Zero Roadmap, our bid to (as part of Phase 1) achieve net zero carbon by 2030 for the assets that we manage as part of our direct UK real estate investment activity.
Refurbishment
Sustainability and wellbeing building features are increasingly being sought by tenants as they strive to reduce their running costs and create an attractive environment for occupants. To this end, in recent years we have started to incorporate into our design wellbeing certifications such as Fitwel, a ‘healthy building’ certification that includes design strategies and policies to optimise health and wellbeing among occupants. We also aim to achieve a minimum rating under the Building Research Establishment Environmental Assessment Method (BREEAM) of ‘Very Good’ or higher, for incorporating sustainability into design.
Ways to add value to the occupier experience and attract customers to retail sites, such as e-vehicle charging points, solar panels, or even improvements to bio -diversity-, are now being considered much more carefully than in previous years. Rather than focusing on a specific set of amenities as a tick-box exercise, the challenge lies in choosing features that add value for the particular property.
Adaptability to current market conditions is key to adding value though ESG. For example, as the retail sector has been affected by structural changes, attention has increasingly turned to making commercial sense of the large units major retailers have traditionally occupied. One way of doing this is tapping into customers and potential customers’ aforementioned focus on creating a work-life balance. One key focus for refurbishment has therefore been designing mixed use spaces with smaller units that can be let to co-working operators.
Asset management
ESG considerations are equally applicable to our existing assets, for all of which we have a detailed asset management plan. This plan looks at the broader opportunities to add value and tracks progress towards achieving both commercial performance and ESG targets. By putting in place green lease clauses - to encourage better data sharing and co-operation over sustainability matters - into tenancy agreements, we are able to monitor the environmental performance of our properties. The use of green lease clauses demonstrates to our occupiers from day one our commitment to sustainability and sets out a framework for better occupier engagement.
We aim to work with occupiers to conserve energy and water, and divert waste from landfill, while we encourage biodiversity where possible, as well as seeking energy and water saving opportunities during routine repairs and refurbishment. We also identify, where feasible, cost-efficient improvements to protect the future quality of each asset.
Looking forward
If a tenant vacates, we complete post-occupancy evaluations to assess success and inform future development plans. While our focus on ESG in design and refurbishment of our assets continues to develop, we are pleased to be able to say that we have successfully integrated it into our property investment process.
Case studies
Phase 4 Leeds City Office Park
Building to sustainable standards
Part of a longstanding office/retail development, Phase 4 Leeds City Office Park was developed by Canada Life in 2006. It was designed to a BREEAM ‘Excellent’ environmental standard. This was achieved through a building envelope (outer shell) designed to achieve an optimum energy profile, by providing the right amount of glazing and solar shading to achieve a good level of natural lighting whilst avoiding over-heating.
To ensure future proofing of the asset, we are also incorporating Wellbeing aspects into the refurbishment of the building as these requirements are now vital for an increasing number of occupiers. For this refurbishment we are targeting a 2-star Fitwell rating through adding additional welfare facilities such as bike storage, lockers, changing and shower facilities as well as multi-purpose wellbeing area.
54 Clarendon Road, Watford
Incorporating ESG elements through refurbishment.
We engaged an architectural firm to refurbish and extend an office building to achieve leading sustainable design standards and smart technology, as well as modernising the appearance, to meet future market requirements. The updated design uses new brickwork and glazing combined with extensive planting including ‘living walls’ and terracing to make the building both visually appealing and enhance the outside space for occupants.
The building incorporates sustainable design principles and best practice, designed to achieve BREEAM Outstanding, WELL (building wellbeing features) Platinum, EPC A rating and Wired (digital connectivity) standards. Canada Life Asset Management tends to favour refurbishment over full scale redevelopment as this usually has a lower carbon impact. At Clarendon Road this approach will save approximately 730 tonnes of carbon compared to a demolition and new build scheme of the same scale.
Regent Arcade Shopping Centre in Cheltenham
Sustainability through partnership: integrating ESG factors into our management process
Following sustainability audits, we have encouraged certain tenants to make changes to improve the energy efficiency of buildings, by providing specific examples and costings for how the properties could be improved. One such property is Regent Arcade Shopping Centre in Cheltenham, which has put in place the following energy- and water-saving initiatives, in conjunction with the managing agents and property manager:
- A rolling programme to install LED lighting
- Water management initiatives, such as waterless urinals
- Upgrading utilities meter technology to provide more accurate measurements and adding timers to existing boilers to ensure efficient use out of hours
- We installed 181 photovoltaic (PV; solar energy) cells in 2019, funded jointly in partnership with the centre occupiers. At installation this initiative was expected to generate 12% of the centre’s annual electricity supply
Important information
The value of investments may fall as well as rise and investors may not get back the amount invested.
The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors.
No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Asset Management.
This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the regulated fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at https://www.canadalifeassetmanagement.co.uk/
The LF Canlife UK Property ACS is an Authorised Contractual Scheme and is suitable for institutional and professional investors. The fund invests in assets that may at times be hard to sell. This means that there may be occasions when you experience a delay or receive less than you might otherwise expect when selling your investment. For more information on risks see the prospectus and key investor information document.
Requests for redemptions of units are subject to a notice period of up to 185 days. In normal market conditions this notice period is waived at the discretion of the manager and units can be sold without giving notice. The value of property is generally a matter of a valuer’s opinion rather than fact. Costs of buying and selling real property are generally much higher than for other types of assets. Property investments may be subject to significantly wider price spreads than bonds and equities which could affect the valuation of the fund by up to 8.00%.
Please note that while Canada Life Asset Management Limited and Canada Life Limited are regulated as stated below, outside of regulated funds, property management and the provision of commercial mortgages are not regulated activities.
Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Expiry date 31/10/2023
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