The benefits of responsible investing in property


(Pictured: Indy Karlekar)

The adoption of a responsible property investing (RPI) strategy will reduce operating costs and increase operating income as well as asset values over the medium term, according to Indy Karlekar, the managing director, global research and strategy, for Principal Global Investors.

Karlekar was in Australia last week for a CIE conference, where he spoke about the various challenges and opportunities for international property investors, including the growing awareness of RPI.

He said that adopting RPI principles could reduce operating costs for a building by about 8-9 per cent a year, or about 15 per cent a year over five years. The building’s value could be increased by 5-7 per cent. The payback period for investing in RPI processes was about seven or eight years, he said.

While RPI was broadly derived from the UNPRI membership base, now widely adopted by pension funds and managers, especially in Australia, it had been honed down for property investments to assist owners, landlords and tenants who had ESG concerns.

“It incorporates better ways to make greener buildings,” he said. “It’s more than just being about energy efficiency. It’s about improving the quality of the tenants’ experience. For instance, better construction, better lighting, cooling, foliage and so on leads to higher employee productivity. There are also increased health benefits. You may have heard of ‘sick building syndrome’ whereby older, less environmentally friendly, buildings tend to have higher employee absenteeism and sick days.”

Karlekar believes that social media is influencing the way tenants think and act. The “social element” of tenancy is important, he says, and this is helping to drive the trend for RPI.

The types of properties for which RPI was most applicable at the moment, he said, were multi-family apartments, office buildings and retail stores. The trend was also starting to be detected in the logistics industry through greener factories.

Karlekar said that property investing was possibly the last of the major assert classes to “go global”. For Australian investors, the property market was heavily securitized and “running out of ideas”.

A common theme outside of Australia for the next three-four years was the implications from the interest rate cycle which had seen rates down to zero and probably on the way back up.

“As a result we have seen a remarkable revitalization of property returns in the US, Asia including japan and the UK,” he said. “There been a return to fundamental value investing in property.” The global search for yield among investors has pushed multi-family buildings reach new levels of valuation.

In the retail sector, disintermediation has occurred overseas, as well as Australia, due to the rise of online shopping. Karlekar said that top-end luxury goods stores continued to do well, as did the discount chains. But the middle ground, such as Macy’s and JC Penny in the US, were being squeezed.