James Coke and Robin Jones explore how diversified property portfolios can deliver positive financial and environmental outcomes for investors
Focus is a publication that aims to bring you face-to-face with a selection of key investment managers, advisers and providers from across the institutional market.
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Climate change is affecting every sector of our economy, and it remains one of the most important factors to consider when making long term investment decisions. If industries are to become net-zero carbon emitters by 2050, investor capital needs to be managed responsibly to deliver tangible positive impact. Real Assets, specifically commercial property portfolios, present investors with an opportunity to deliver positive environmental outcomes which are aligned to financial performance.
IN THIS EDITION
For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). All data is sourced from Columbia Threadneedle Investments as at 31 December 2022, unless otherwise stated. The value of investments and any income from them can go down as well as up. Past performance is not a guide to future performance This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. This presentation and its contents are confidential and proprietary. The information provided in this presentation is for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of Columbia Threadneedle Investments. This presentation is the property of Columbia Threadneedle Investments and must be returned upon request. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. In the UK, the Trust is an unregulated collective investment scheme for the purposes of Section 238 of the Financial Services and Markets Act 2000. Accordingly, this document must not be communicated to retail persons in the UK but may only be communicated in the UK to persons described in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) Exemptions Order 2001 and to persons whom units are permitted to be promoted in accordance with the FCA’s Conduct of Business rules. Approved for UK purposes by Threadneedle Asset Management Limited and Threadneedle Portfolio Services Limited. Authorised and regulated by the Financial Conduct Authority. Investors are advised that the protections afforded by the UK regulatory system may not apply to an investment in the Fund and compensation will not be available under the UK Financial Services Compensation Scheme. In Jersey, the Trust, which is regulated by the Jersey Financial Services Commission, is treated as an unclassified fund for the purposes of the Collective Investment Funds (Jersey) Law 1998. Units in the Trust may only be promoted in accordance with the aforementioned legislation. This document should not be circulated to private investors. This document does not constitute or form any part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase, any units nor shall it or the fact of its distribution form the basis of, or be relied on in connection with any contract therefore. Recipients of this document who intend to apply for units are reminded that any such application may be made solely on the basis of the information and opinions contained in the prospectus and seek independent taxation advice. Issued by Threadneedle Investments (Channel Islands) Limited Registered No. 82489. Registered in Jersey. Registered Office: IFC1, The Esplanade, St Helier, Jersey JE1 4BP Regulated by the Jersey Financial Services Commission. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.
No Capital Guarantee - Positive returns are not guaranteed and no form of capital protection applies. Property Liquidity Risk - It may be difficult or impossible to realise an investment in the fund because the underlying property concerned may not be readily saleable. Property Valuation Risk - The value of a property is a matter of a valuer's opinion and the true value may not be recognised until the property is sold. Property Market Risk - The performance of the fund would be adversely affected by a downturn in the Property market in terms of capital value or a weakening of rental yields.
Threadneedle Property Unit Trust
For Professional Investors only.
Sustainability is not a new concept in the property industry, and changes required to ensure the industry is as sustainable as possible are already being made. However, to achieve Net Zero ahead of 2050 requires management that makes intelligent and proactive decisions at scale.
In this guide, Professional Pensions and Columbia Threadneedle Investments explore how the firm maintains the return profile of its funds without compromising on ambitious sustainability goals.
Threadneedle Pensions Limited Pooled Property Fund
For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). All data is sourced from Columbia Threadneedle Investments as of 31 December 2022, unless otherwise stated. Past performance is not a guide to future performance. Your capital is at risk. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. The mention of any specific shares or bonds should not be taken as a recommendation to deal. Performance figures relating to a fund or a representative account may differ from that of other separately managed accounts due to such differences as cash flows, charges, applicable taxes, and differences in investment strategy and restrictions. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. Threadneedle Pensions Limited provides insurance policies that entitle to holder to the value determined with reference to the underlying investment in a pooled pension fund. The holder of a policy does not own the units in the selected fund. Columbia Threadneedle Investments does not give investment advice. References to individual securities, strategies or funds should not be read as a recommendation to buy, sell or hold them. The specialist and strategy pooled funds referred to in this document are not available for direct investment by the public. If you are in doubt about the suitability of any investment, you should speak to your financial adviser. Tax treatment depends on individual circumstances. Tax concessions are not guaranteed and tax legislation may change in the future. This presentation is not investment, legal, tax, or accounting advice. Investors should consult with their own professional advisors for advice on any investment, legal, tax, or accounting issues relating an investment with Columbia Threadneedle Investments. This presentation and its contents are confidential and proprietary. The information provided in this presentation is for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of Columbia Threadneedle Investments. This presentation is the property of Columbia Threadneedle Investments and must be returned upon request. The Threadneedle Pooled Pension Funds Key Features Document (KFD) is available on the institutional site of www.columbiathreadneeedle.co.uk. The KFD gives a summary of information about Threadneedle Pension Limited's pooled pensions in order to help you decide if you want to invest in funds, as well as a full list of risk factors applying to the funds. Please refer to the ‘Risk Factors’ section of the Key Features Document for all risks applicable to investing in any fund and specifically this Fund. Threadneedle Pensions Limited. Registered in England and Wales, No. 984167. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.
No Capital Guarantee - Positive returns are not guaranteed and no form of capital protection applies. Property Liquidity Risk - It may be difficult or impossible to realise an investment in the fund because the underlying property concerned may not be readily saleable. Property Valuation Risk - The value of a property is a matter of a valuer's opinion and the true value may not be recognised until the property is sold. Property Market Risk - The performance of the fund would be adversely affected by a downturn in the Property market in terms of capital value or a weakening of rental yields. Uninvested Cash – Due to the illiquid nature of property and the time it can take to buy or sell assets, under normal circumstances up to 20% of the fund's assets may be help in cash deposits. In exceptional circumstances, the level of cash held by the fund may be significantly higher. Holding high levels of cash will have an impact on the performance of the fund and its distributable income until the excess cash is invested in property assets.
the interview
Delivering a sustainable future for property
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To achieve Net Zero, action is required at scale. While there are Impact funds that deliver strong sustainable metrics, they tend to be in their infancy and are typically smaller in scale. By contrast, diversified property funds already have significant existing property portfolios (the MSCI/AREF UK Quarterly Property Fund Index comprises assets valued over £48 billion as at 31 December 2022) which present the opportunity for investors to participate in decarbonisation at scale.
Importance of scale
to achieve impact requires active management to ensure properties deliver against sustainability objectives.
he investing landscape is changing. Increasingly, investors expect their capital to move the needle in the transition to Net Zero, and the property sector provides the opportunity to deliver a real impact through direct intervention. However,
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However, just because a fund is bigger doesn’t mean it needs to compromise on its sustainable focus. Coke highlights how research from their Environmental Consultants found that it is in the financial interest of the funds to be ambitious from a sustainability perspective. That analysis demonstrated that once the cost of offsetting is taken into account, it is financially more advantageous to achieve net-zero in advance of the 2050 deadline. As a result, Coke says their goal for their Threadneedle Pensions Limited, Property Fund (TPEN PF) and the Threadneedle Property Unit Trust (TPUT) funds is to be operationally net-zero by 2040, rather than 2050.
Coke says: “Delivering operational net-zero by 2040 across over 300 assets* is a big deal. There are not many others in the industry with the potential to directly influence positive outcomes on this scale.”
As well as mobilising capital, decarbonising is about working smarter. Some changes required to make properties more sustainable, for example LED lights and improved insulation, do not represent a substantial departure from existing industry best practice, and are not necessarily more expensive to implement. The concept of refurbishing buildings is not new, but a few tweaks in approach and design can make the outcomes a lot more sustainable.
Smarter rather than harder
He adds that ESG interventions are not just a building cost, they help deliver superior returns by delivering best in class product to vibrant occupational markets. He says: “What we're trying to do is get ahead of that curve to capture that green premium.”
Jones highlights that as an active manager, delivering higher income return through shorter-term leases allows them earlier opportunities to refurbish properties and make them more sustainable, which simultaneously delivers characteristics which are attractive to tenants and will attract a rental premium, thus maximising income return potential.
Coke explains: "I would say we have a competitive advantage, because we are active managers. We typically have a slightly shorter lease term than peer funds, so opportunities for ESG interventions are more frequent than they would be if you were invested in a more passive strategy."**
* Threadneedle Pensions Limited, Property Fund (TPEN) and Threadneedle Property Unit Trust (TPUT) number of direct property assets and combined NAV £2.8 billion as at 31 December 2022 ** Portfolio WAULT circa 6 years vs MSCI Monthly Index average circa 6.6 years
Real Estate presents a potential opportunity for investors to make a tangible difference to the decarbonisation of our economy, but do sustainability and investment returns go together?
Robin Jones and James Coke, Co-heads of Institutional UK Real Estate at Columbia Threadneedle Investments, share their thoughts on how their £2.8 billion property portfolios* can deliver investment returns to investors while achieving ambitious sustainability targets.
Coke says: “I think they (Impact funds) do a great job, but you're raising relatively small amounts of capital, so you are always going to have a relatively modest impact on what is a big issue for our economy and the climate.”
One of the main challenges to Environmental, Social, and Corporate Governance (ESG) adoption in property within the time frame needed for de-carbonisation is long leases. Jones explains that leases can be over 25 years long and may only be altered when the contract allows. This can make it a challenge to make buildings significantly more sustainable in the shorter-term.
Sustainability and profitability convergence
Coke cites an example of refurbishing a property where consideration of replacing or reinsulating the roof was required. He explains that in this case, the embodied carbon involved in replacing the roof made it very expensive in carbon as well as financial terms, and insulation was therefore the preferred option.
Coke says: “The default 5 years ago may have been to replace the roof because the assumption was that's what people wanted, without too much further thought. Now, actually, when you analyse it, you'd say we can create a better product with the materials that are already on site, for a lower cost, using less embodied carbon.“
This type of intelligent decision making, combined with smart Building Management systems, the introduction of on-site renewable power, and engaged occupiers signed up to green lease clauses and data sharing, collectively have the potential to deliver significant energy efficiency improvements at scale.
While the interventions taken on actively managed funds such as Threadneedle Pensions Limited, Property Fund and Threadneedle Property Unit Trust are already starting to have a real impact on sustainability, the industry as a whole, as with every sector, is still transitioning.
Jones concludes: “There's no silver bullet that's going to flick a switch and we get to net-zero immediately. It's incremental and it’s always the little things collectively that will get us to where we need to be.”
We're seeing that for properties to remain relevant to occupiers and investors, they need to deliver best in class ESG credentials
Robin Jones, Co-head of Institutional UK Real Estate
What we can offer investors is impact at scale. Our 300+ assets provide multiple opportunities for direct impact
James Coke, Co-head of Institutional UK Real Estate
We aim to deliver positive outcomes that meet the needs of our stakeholders and we commit to always act responsibly, transparently and in the best interests of those who trust us to manage their investments.
RESPONSIBLE BUSINESS VISION
To find out more about the Threadneedle Property Focus Fund visit columbiathreadneedle.co.uk/XXXXXXXXXXXXXXXXX
RESPONSIBLE PARTNER
RESPONSIBLE INVESTOR
RESPONSIBLE EMPLOYER
RESPONSIBLE CITIZEN
RESPECT | INTEGRITY | EXCELLENCE | CLIENT FOCUS
COLUMBIA THREADNEEDLE VALUES
We strive to be a trusted partner to our clients
We strive to be responsible stewards of our clients’ assets within a framework of good governance and transparency
We strive to be a values-led organisation that attracts, develops and retains the best talent
We strive to be a responsible member of our community and influence positive change
Source: Columbia Threadneedle Investments. Key performance indicators as at 31 December 2020.
Sustainability risks are integrated into the fund’s investment decisions making process for financial Risk Management purposes only. The decision to invest in the promoted fund should also take into account all the characteristics or objectives of the promoted fund as described in its prospectus.
Columbia Threadneedle: Responsible Business
UK Real Estate institutional investment approach
Evolution of responsible investment approach within our UK Real Estate institutional funds
Invest Responsibly
Stock Selection
Active Management
Flexible Buyers
High Income Yield
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Focus on assets offering high and sustainable income yield advantage
Avoid ‘trophy’ assets and focus on smaller lot sizes where there is typically less pricing tension
Select investments on individual merit based on forensic asset-by-asset due diligence
Intensive management of individual property assets protects and enhances value
We strive to be responsible stewards of our clients’ capital
investment approach
key differentiators
Spectrum of Responsible Investment approaches:
Fund aims are indicative and are in no way a guarantee of performance. Sustainability risks are integrated into the fund’s investment decisions making process for financial Risk Management purposes only. The decision to invest in the promoted fund should also take into account all the characteristics or objectives of the promoted fund as described in its prospectus.
Sustainability objectives fully aligned with financial objectives in 2022
Impact strategies require non-sustainable investments to be excluded, which is inconsistent with fund philosophies
No ESG focus
Considered
Integrated
Outcomes
Impact
Philanthropic
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Sustainability has always been considered as part of investment and management decision making, and has been increasingly integrated into business processes
2019- 2021
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Net Zero fund pathway (Threadneedle Property Unit Trust)
Portfolio Annual Carbon Intensity
The estimated total capital expenditure required to deliver these initiatives and reduce energy consumption is c£97m or c£5.4m p.a. to 2040
Source: EVORA Net Zero Target & Sensitivity Analysis, Threadneedle Property Unit Trust, as at 31 December 2021. Sustainability risks are integrated into the fund’s investment decisions making process for financial Risk Management purposes only. The decision to invest in the promoted fund should also take into account all the characteristics or objectives of the promoted fund as described in its prospectus.
Between 2017-2021 the fund completed 128 capital projects investing an average £8.7 million per annum in building improvements. Cap ex invested in 2022 totalled approximately £13.1 million
Example: Skydome, Coventry
Source: Columbia Threadneedle Investments, as at 31 March 2022. *Rent achieved is headline rent on expiry of tenant incentive periods
50% of the cost of replacing the boilers and roof covering is being recovered through the S/C. PV panels forecast to generate annualised IRR in excess of 15%
New boilers have reduced energy consumption by 25%. New PV panels generate an additional 10.8% of current electricity usage
Greener energy benefits all users. Additional on-going projects
Outcomes:
Financial
Environmental
Social
New energy efficient boilers have reduced energy consumption by 25% against preceding average use New 417kWp photovoltaic (PV) system using high wattage panels have been installed on the roof, which supply power equivalent to approximately 10.8% of current electricity usage, reducing demand on the Grid Phase 2 works being considered (additional PV panels and upgrade of AHUs) 161,900 sq. ft. leisure complex. Fund’s highest energy consuming asset Sustainability audits undertaken since 2018, resulting in increased awareness of energy action plan Capex of £1.4 million allocated to replace legacy boilers, upgrade and improve the BMC and replace the roof
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How our property funds are delivering sustainable outcomes
Jones: I think property is the most tangible asset class, it's easy to measure, it's easy to make a real difference and you can do it in a relatively short time period. If you were dealing in equities or other listed assets, there's a couple of other decision trees and decision makers in the way. With property you can make an immediate tangible impact and you can record it relatively quickly.
Why should investors look to the property sector to reduce their carbon footprint?
We are making more intelligent decisions about development and particularly the carbon impact of development
James Coke and Robin Jones explain their funds’ investment approach, which focusses on actively managing property assets to deliver positive environmental and social outcomes alongside financial performance.
Coke: That’s not to say the carbon challenge doesn’t affect all sectors. One of the things I get asked about is whether sustainability is going to have a disproportionate cost in real estate? No, because it doesn't matter if you're holding equities or bonds or real estate, the underlying assets have all got to decarbonise. We've got the opportunity to be more hands on and get there more quickly.
Coke: I would say this is about alignment between a few factors. You want to have an objective set in the first instance. That's important because while it's been implicit for a long time, making it a formal commitment ensures everyone is pulling in the same direction. Becoming operationally net-zero by 2040 is a key part of the sustainability targets we are introducing alongside the funds’ financial objectives.
How are you ensuring that your funds deliver their net zero ambitions?
After setting your objectives the second step is about implementation. How do you deliver those outcomes, recognising that profitability and sustainability are equally important? We believe this is about making ESG everyone’s responsibility, and we embed ESG principles within each teams’ business activities. For example, it is part of our pre purchase due diligence when we buy, it forms the core of our Refurbishment Guide when we make building improvements, and we encourage active engagement with our tenants when we let and renew leases.
The third point is how do you measure that? What's the data? It's very important because if we're going to collectively decarbonise, we need to know what base line we're working from. How much energy are we consuming and how do we work to reduce that? EPCs are a useful starting point but they only measure energy performance potential, not in-use performance. That requires installing smart meters, and working with our managing agents to ask tenants if they will share their data with us.
The fourth step is reporting, to ensure our clients are appropriately informed about the impact their investments are having. It's aggregating all of that together, and being able to put it in an articulate manner that is easy to understand that continues to stimulate support for the agenda.
Jones: In TPEN PF we have been working up plans to redevelop a warehouse estate in Woodford, Northeast London, which will be one of the first estates we've developed since implementing our net zero policies. We are making more intelligent decisions about development and particularly the carbon input of development. For instance, the steel we're using to build the warehousing is coming from a geographically closer region than we'd normally use. It doesn’t mean a real increase in cost, but it does mean less truck miles to be delivered to the UK, which means less fuel and less carbon emissions. This level of detailed work undertaken enabled us to monetise the asset via sale.
Do you have any real world examples?
Coke: In TPUT we also have an asset in Coventry called Skydome which is a leisure asset. It's the fund's highest energy consuming asset. We've been doing energy audits on it since 2018 to understand what the energy consumption is and how we reduce it. That information gathering process led to an asset management plan, an action plan. We replaced all of the boilers with new energy efficient boilers which resulted in a 25% drop in energy consumption. We also installed PV panels on the roof which supply c11% of the site’s electricity, with the resulting ‘green’ electricity recharged to the tenants to deliver a financial return. When we, as real estate managers, put our minds to this, that's the sort of quantum of reduction you can deliver.
Jones: Obviously, it's had a big impact on the office market, and also the city centre retail market. What we're starting to see is that people are using offices pretty intensively 3 days a week. No surprises for which days that is: Tuesday, Wednesday, Thursday. But we're still seeing high demand for offices that are best in class, best located and are worth making the commute for. So that's creating more of an impetus to make sure your buildings are best in class, which includes being sustainable, and are best positioned. If you have this, you're achieving record rents, as occupiers are prepared to pay a premium for best in class space.
How has remote working affected the sustainability agenda?
There is also the supply side to consider. An estimated 59 million square feet of offices in England and Wales has been converted to residential via Permitted Development Rights, which has kept supply tight. When we talk about ‘Grade B’ or ‘Secondary’ offices, it is important to remember that there may be alternative uses for those assets, and in many cases we are selling vacant offices to developers who are undertaking building and energy efficiency improvements themselves.
Coke: This is a really interesting time for our industry and for investors who want their capital to deliver sustainable outcomes as well as generate a financial return. The property industry has, by and large, embraced sustainability and specifically the decarbonising agenda, recognising that it presents financial opportunity as well as cost through the transition of assets from grey to green. While ‘Impact’ funds offer investors opportunities to make specific interventions, balanced funds offer greater potential to do so at scale.
How would you summarise the opportunity for investors?
Jones: While we are not going to achieve net zero overnight, we believe our active management approach gives us a competitive advantage in this area. The ambitious commitment we have made to achieve operational net zero by 2040 on our institutional portfolios underlines our intent to deliver sustainable outcomes, and we have an experienced asset management team capable of delivering building improvements at scale.
It doesn't matter if you're holding equities or bonds or real estate, the underlying assets have all got to decarbonise. We've got the opportunity to be more hands on and get there more quickly
* Comments applicable to TPEN and TPUT ** As at 31 March 2022 *** As at 31 December 2021. Source: Savills and MHCLG
