By John Devine
Special to Ontario Construction Report
Green is increasingly the currency of large-scale developments as investors looking for long-term returns put their money in energy-efficient buildings that benefit the people working in them, the environment, and real estate portfolios.
Investors with deep pockets are actively seeking to invest in, or outright own, energy-efficient properties that carry climate-friendly certifications, such as Leadership in Energy and Environmental Design (LEED) and BOMA Canada. Canada’s pension plans are among the most active in seeking green investments that provide sustainable and long-term benefits.
The plans are fully invested in a green tomorrow, including energy-efficient buildings and properties, and they are looking for information to support their investment decisions. Last November, for instance, the CEOs of the country’s largest plans, with combined assets of about $1.6 trillion, urged companies to be more proactive in providing environmental, social, and governance (ESG) data which could be used to determine investment value and risk.
Together, Canadian pension plans combine to be the country’s largest owner of real estate, with the Pension Investment Association of Canada saying they held $278.7 billion in property assets in 2019, up four per cent from the previous year. They are actively looking to increase their holdings, Jim Wong, Senior Portfolio Manager, Real Estate Investments, for OPTrust told Ontario Construction Report recently.
“Going green is not only proving to mitigate the damage to the environment, it’s also showing to add value for investors seeking long-term financial gains from buildings certified to have environmental standards,” he said. “Investors have been looking to ramp up their exposure in energy-efficient buildings.”
Environmental certification used to be largely reserved for office buildings, but now, said Wong, a range of properties, including retail, apartments, and industrial, are being built with materials and standards leading to green certification.
That development has allowed an investor like OPTrust to spend in an array of property types in the commercial space, helping to diversify its certifications across the portfolio, said Wong.
“They all have standards in place now, and you can get all property types certified … a whole universe of real estate that could be improved upon to achieve energy-efficiency. That’s good to see.”
In 2020, the plan, with net assets of more than $23 billion, achieved a net investment return of 8.9 per cent and remains fully funded.
About 60 per cent of its direct (ownership or control) real estate investments have achieved some level of environmental certification, said Wong, adding “every new real estate development that we look at is going to be reviewed for LEED or BOMA BEST certification.”
That’s not to say every property the plan invests in carries some type of green certification, but it is a preferred option.
“It’s not a requirement or mandatory to invest in properties that are certified. I think we have to remember that the investible universe for real estate is also made up of existing buildings that could be great investments that complement a portfolio, but they may not have achieved or strived to achieve certification, which is the case for a lot of older buildings,” said Wong.
“A building that is not certified can also be an investment opportunity, to improve upon that building and create value which we have done before and will continue to do. We won’t limit ourselves to just buying into LEED or BOMA-certified properties.”
Reliable returns on real estate investments are a vital component of the plan’s overall member-driven investment strategy, which aims to keep the plan fully funded by managing investment and risk.
“The real estate portfolio is an important diversifier for the total fund, lowering funded status volatility, and providing predictable income to fulfill our pension obligations. Real estate can provide attractive risk-adjusted returns and is also a hedge against inflation over the long term,” said the plan in its 2020 funded status report.
When it comes to properties that are energy-efficient, investors like OPTrust consider a number of factors, including materials used in the construction process that will extend a property’s lifespan and systems, such as HVAC, in place that will reduce its carbon footprint, all of which lead to green certification.
“If a building is energy-efficient, it has likely been built to last, contribute to the health and wellbeing of our tenants, and minimize the negative effects that buildings have on the environment, and reduce the cost to our tenants,” said Wong. “All these things are important to OPTrust and help to mitigate a number of risks, so it’s certainly considered in our decision-making process.”
The plan is currently reviewing an industrial development for a zero-carbon design, which, he added, pushes the boundaries of what typical green initiatives are today.
“As we go through the planning and development of that property, we are going to be using that project, to see how we can design it where it emits zero carbon on a net basis. That will be something exciting that we will be able to take a look at and see if it is achievable.”
As an investor in real estate and properties, OPTrust hasn’t had much experience with subdivision-type housing, as that area doesn’t present much opportunity for long-term returns, but Wong said energy-efficient homes offer both builders and home buyers the same advantages as those found in large, green developments.
“It’s not only investors and tenants who want it, so do consumers and homeowners. We look into these features for our homes, wanting to save money and do what’s good for the planet. That’s what I hope is going to steer and guide what builders are going to do, and where the industry is going to take it. I have to believe it’s going to go that way, if not already moving in that direction.”
Indeed, homes have become more energy-efficient, with standards built into building codes and builders offering home purchasers a range of energy-efficient upgrades. New homes are now 50 per cent more energy-efficient than they were just 30 years ago.
Canada’s large pension plans all have climate-mitigating strategies built into their investment decisions, seeking properties with a low carbon footprint. And with them actively seeking to increase their portfolio of green buildings, a heavenly match would seem to be present between builder and investor.
“Good pension plans are built to last so we focus on managing risk and sustainability, both of the plan and the planet. Buildings, as we know, impact the environment, from the materials manufactured to build it, greenhouse-gas emissions to warm and cool it, the electricity and water it consumes, and the waste it produces,” said Wong.
“By placing importance on green initiatives in our investment strategy, we’ll minimize the negative impacts on the environment, which aligns well with the plan’s climate change-mitigation strategy. It also ensures that the building operates efficiently, reduces cost, and contributes to people’s health and wellbeing, which is what tenants want. When they are happy, it secures their long-term tenancy and our rental revenue.”