March 2015
For professional investors and advisers only.
Schroders
Responsible Real Estate
Investment
Responsible investment
is at the heart of our
investment philosophy
Responsible Real Estate Investment 3
Our
approach
4
Responsible
investment…
is good
investment
6
Responsible
real estate
investment…
is about
developing
resilience
8
Governance,
assurance and
industry
engagement
18
Case studies
Towards zero in Zurich
9
Staying ahead
11
Sustainable technologies
13
See the light!
14
Occupier appeal
15
Regenerating a town centre
16
An innovative concept
17
4 Responsible Real Estate Investment
Our
approach
A knowledge advantage
Developing resilience
With an imperfect real estate market where
risks are often not fully incorporated into prices,
we seek a knowledge advantage through
detailed research and analysis.
The global financial crisis has accentuated the
importance of understanding economic risk that
may affect our investments. The emergence of
environmental and social issues in recent years
is no different. Understanding and managing all
risks is critical to developing resilience within
our portfolios.
Responsible Real Estate Investment 5
Benefiting stakeholders
A successful responsible investment programme
should deliver enhanced returns to investors,
improved business performance to tenants and
tangible benefits to local communities and
wider society.
Duncan Owen,
Head of Real Estate,
Schroders
6 Responsible Real Estate Investment
Responsible
investment…
is good investment
Schroders has been managing real estate
for over 40 years. Over this time we have
witnessed the emergence of a variety of
different risks to real estate and adapted
our business to ensure the assets we
manage continue to offer an attractive
return on investment.
Responsible Real Estate Investment 7
The changes in markets as a consequence
of environmental and social issues are
simply investment risks which Schroders
must understand to protect our clients’
assets from depreciation.
The industry’s potential to cost-effectively
reduce emissions and the consumption of
depleting resources, combined with the
political imperative to tackle issues such
as climate change, means the real estate
sector will remain a prime target for policy
action. This presents new challenges and
opportunities for the real estate industry with
profound implications for both owners
and occupiers.
Offering occupiers resource-efficient
and flexible space is critical to ensure
our investments are fit for purpose and
sustain their value over the long term.
As a landlord, we have the opportunity
A good investment strategy must
to help reduce running costs for
incorporate environmental and social
our occupiers, increase employee
productivity and wellbeing, and contribute issues alongside traditional economic
considerations. At Schroders we believe
to the prosperity of a location through
a complete approach should be
building design and management. If we
rewarded by improved investment
ignored such issues when considering
decisions and performance.
asset management and investments, we
would risk the erosion of income and
value as well as missing opportunities to
“To maximise returns for our clients
enhance investment returns.
we must anticipate and understand
the impact of all issues and trends to
Through its construction, use and
reduce exposure to long term risks.”
demolition, the built environment
accounts for more than one-third of
Neil Turner,
global energy use and is the single
Head of Real Estate Investment Risk,
largest source of greenhouse gas
Indirect Investment & Research,
emissions in many countries.
Schroders
8 Responsible Real Estate Investment
Responsible
real estate
investment…
is about developing
resilience
Resilience to change
Legislation
Attitudes and behaviours are changing
as the world accepts the impact of
climate change, the economic crisis and
changing demography. These impacts
are stimulating a myriad of issues that
directly impact real estate investment
creating different perspectives on risks
old and new. We need to respond and
design approaches to develop investment
resilience to these changes.
It is clear that European legislation is not
only increasing, but has the potential to
significantly change the real estate market,
particularly in relation to energy usage and
management and the protection of the
natural environment.
Responsible investment requires
anticipating and managing all risks to
maximise returns to investors. Risks may
appear absolute such as legislation,
however all require in-depth analysis
founded on local knowledge and dedicated
research. This helps to develop investment
resilience to changing economic, social
and environmental conditions. Our
pan-European investment portfolios enable
Schroders to draw upon best practice from
across our regional teams to develop asset
strategies that incorporate cost-effective
and appropriate solutions.
While there is some consistency provided
by the EU, national governments continue
to implement a variety of legislative,
regulatory and fiscal controls which
have varying impacts on occupiers and
landlords. Schroders monitors emerging
legislation and seeks to participate with
industry bodies to help shape the agenda.
Responsible Real Estate Investment 9
Energy and emissions
Developing energy efficiency and reducing
emissions is a key EU focus. The EU
climate change and energy package
brought in energy and climate change
targets for 2020. These are a 20%
reduction in greenhouse gas emissions,
a 20% reduction in energy consumption
through efficiency improvements and
for 20% of energy to be provided by
renewables. Member states have set
strategies for these goals.
In the UK it was announced in 2012 that
buildings with poor Energy Performance
Certificates (“EPCs”) may not be lettable
from 2018. The regulations were granted
Parliamentary approval in March 2015.
This should act as a catalyst for
improvements to building stock and
occupational efficiency, many landlords
had been waiting for the law to come
into effect before taking action. We
are assessing exposure to lower rated
properties and developing appropriate
asset strategies.
In France, the Grenelle law is aiming to
reduce energy consumption in buildings
by at least 38% by 2020 and could
accelerate the emergence of a two-tier
market. From 2013, an environmental
appendix is mandatory in every
commercial lease or renewal signed.
The appendix sets some obligations
from tenant and landlord to meet and
discuss how to improve the building’s
environmental efficiency. It can also
include obligation from tenants in order
to reduce their energy consumption in
the building.
In contrast, the Swiss government
has taken a different approach and is
encouraging the improvement of the
existing stock by providing subsidies for
‘sustainable’ refurbishments. For investors,
this offers an opportunity to add value
without incurring additional cost.
At Schroders we aim to improve the energy
efficiency and consumption within buildings
in our portfolios where appropriate.
Case study
Towards zero in Zurich
In Schroder ImmoPLUS, we are undertaking
an extensive refurbishment of the ZRH+
office building to create a more desirable and
efficient space for Zurich-based occupiers.
By improving the Building Management
System, replacing the heating and cooling
system and converting from gas to geothermal, we should achieve a two thirds
reduction in the heating demand and reduce
associated CO2 emissions.
“We considered a range of options and worked hard to balance the economic
and environmental considerations for this refurbishment. The result will be a
vastly more efficient building and a very comfortable working environment.”
Roger Hennig, Head of Real Estate Investment, Switzerland, Schroders
10 Responsible Real Estate Investment
Renewable energy
Governments are trying to reduce carbon
emissions associated with national
energy production which has led to
the proliferation of onsite and offsite
renewable energy generation across
Europe. Many governments have provided
support, albeit often short term, in the
form of guaranteed prices for onsite
generation. The challenge with these
initiatives is, therefore determining cost
effective technologies which offer benefits
to landlords and tenants over the longer
term. At Schroders we explore renewable
technologies where appropriate.
Corporate responsibility
Reputation is core to any business
and measures which require disclosure
and encourage transparency, whether
by legislation or by investors and
consumers, should stimulate corporates
to act more responsibly across all
aspects of their operations.
In 2014 EU member countries began to
implement Article 8 of the Energy Efficiency
Directive which requires large companies to
undertake energy audits. The first audit is
required by 5 December 2015 and then at
four yearly intervals. We are establishing the
requirements of the UK’s Energy Savings
Opportunity Scheme and other member
country schemes to ensure compliance.
The UK scheme does not require public
disclosure however companies may opt
to disclose compliance to confirm their
commitment to acting responsibly.
The value of research
and analysis
This diverse regulatory landscape requires
Schroders to have detailed local knowledge
of our markets which extends beyond
compliance. We must understand and
anticipate the unintended consequences
of such legislation as the market reacts.
We must be prepared to take the
investment decisions necessary to ensure
our assets are not only compliant, but
prepared for tighter and stricter regulation
in the future.
“We are continually assessing changing
legislative requirements, occupier attitudes
and evolving investor demands. Each
asset requires a customised approach.”
Nick Montgomery,
Head of UK Real Estate Investment,
Schroders
Responsible Real Estate Investment 11
Case study
Staying ahead
We are testing a new approach with the Schroder UK Real Estate
Fund to develop improved sustainability risk profiles for assets and
the Fund. Our focus is to identify portfolio resilience to emerging
regulation, legislation and occupier preferences.
The analysis considered the implications of climate change
and socio-economic impacts addressing building fabric, flood,
energy performance, legislative compliance and tenant retention.
Opportunities to improve resilience have been identified across the
portfolio ranging from low and no cost options through to higher
cost capital expenditure measures.
17
12 Responsible Real Estate Investment
Adapting to a
changing climate
The rising frequency of extreme weather
events across Europe confirms the natural
risks presented by climate change to both
property owners and occupiers. Prolonged
higher temperatures may reveal the
inadequacy of existing cooling equipment
to maintain internal temperatures, and
changing rainfall patterns require analysis of
potential disruption to business operations
and investment value from flooding. We
recognise the implications of climate
change and the need for our buildings to
adapt to meet the needs of our occupiers
now and in the future.
Flooding
The increased incidence of flooding as
seen in the UK, France, Germany and Italy
is impacting the physical viability of some
locations. The ability to obtain insurance
adds to the challenge. The overall effect
could be to accelerate the obsolescence
of certain locations. Schroders is taking
steps to analyse the flood exposure of
our portfolios and reflecting the results in
asset business plans.
Technology
The physical effects of climate change
coupled with the desire for efficiency and
reduced emissions, necessitate scrutiny of
building technologies. For many buildings
this involves optimising existing systems
and plant and machinery, which requires
analysis of patterns of actual consumption
and occupier demands. This means
ensuring metering is in place and fine
tuning Building Management Systems.
One of the most cost effective ways to
improve energy usage is to make changes
to the type of lighting source and usage.
EU emissions targets also affect emissions
from gases involved in plant, for example
air conditioning systems, measured in
carbon dioxide equivalents.
Technologies deployed for refurbishments
and developments, therefore, require
analysis and specialist advice to determine
specifications appropriate to balance
the needs and finances of occupiers
and investors and to meet legislative
requirements and building standards.
Schroders seeks to ensure our
buildings’ technological configuration
and management delivers appropriate,
effective, efficient and compliant solutions
for occupiers.
Water
The global demand for water and potential
for scarcity requires changes to the way
buildings are managed and maintained.
Technologies need to minimise the volume
of water used whilst protecting users’
health. Short flush toilets and regulated
taps for hand washing are common.
However, rainwater harvesting for toilets
and watering grass and planting provides
health risk challenges which need to be
balanced with the desire to achieve a
responsible approach.
Schroders aims to ensure that water is
used responsibly and safely in all areas of
a property under our control and encourage
tenants to adopt similar practices.
We aim to install water saving devices
where appropriate.
17
Case study
Sustainable Technologies
Through the Bracknell Regeneration Partnership, Schroders worked
with Waitrose, a major UK supermarket operator, to develop a new
25,000 sq ft store in Bracknell, Berkshire. The building incorporates
numerous responsible technologies including an on-site energy
centre, air quality controls, presence controlled lighting, sun tubes,
smart water systems and a green roof. The building is rated BREEAM
‘Outstanding’ and in December 2012 won a British Council for
Shopping Centres Gold Award Commendation for Sustainability.
14 Responsible Real Estate Investment
Delivering on
occupiers’ needs
As landlords it is our business to provide
desirable and efficient space to occupiers.
Lowering operational costs for us and our
occupiers through efficiencies in energy,
water and waste, is one of the most
immediate ways we pursue a responsible
investment approach and realise financial
benefits. Schroders considers this an
integral part of good asset management.
We expect our property managers to
monitor these issues with the same rigour
they apply to rent collection. It makes good
economic and environmental sense to add
value to our properties by making them
more cost-efficient.
We also need to ensure buildings support
the activities of the occupier, current and
future. This may involve rethinking building
configurations to increase occupancy
due to cost control and changing working
patterns or improving accessibility in view
of the environmental and lifestyle cost of
car bourne commuting.
To meet occupiers’ needs we ensure
all aspects of a building work together
to provide an efficient and comfortable
environment for the operation they host.
Case study
See the light!
The refurbishment of a warehouse in Born,
Netherlands, in the Schroder European
Logistics Fund, included the installation of
LED lighting and motion sensors, and marks
an evolution in occupier engagement. As
part of the lease negotiation and in return
for the additional capital outlay for energy
efficient technology, the occupier agreed to
extend the lease and pay a rental premium,
which was more than offset by a reduction
in their annual energy spend.
“Tenants are becoming more aware of the energy saving potential and are
placing more importance on reducing costs and carbon emissions.
If we proactively help these tenants, we will position ourselves as a
landlord of choice.”
Tony Smedley, Head of Continental European Investment for Real Estate,
Schroders
Case study
Occupier appeal
The refurbishment of 82 Dean St in central
London, owned by the Schroder UK Real
Estate Fund, should extend its operational
life by 15 years. The works included new
mechanical and electrical systems, water
saving devices, cycle racks and zone
controlled lighting. We achieved a BREEAM
‘Very Good’ rating and upgraded the EPC
from F to C. We expect to see a 25%
uplift in the rental value as a result of the
refurbishment, enhancing value by more
than double the initial capital outlay. The
building specification was designed to
appeal to media companies, the dominant
occupiers in the locality.
Engagement
Waste
Deploying technological and
management innovations enables
Schroders to deliver more advanced
and cost effective property solutions
to our occupiers. These range from
replacing inefficient lighting and fitting
smart meters, to comprehensive
retrofits, renewable energy programmes
and centralised waste management.
We assess where such measures are
appropriate and cost effective, but given
our responsibility in many instances
extends only to common parts, we
recognise that the greatest opportunities
are found by engaging with occupiers.
It is important to consider not only the
management of waste and how practices
may reduce the amount transported and
the cost to landfill, but also how we can
make better use of waste. The property
industry embraces recycling and using
recycled materials for refurbishments
and developments. The combustion of
waste to produce energy also presents
an opportunity to contribute to renewable
energy targets.
Whether this is formalised through
green leases or not, the key to reducing
operational costs and associated
environmental impacts of the built
environment is through active collaboration
between owner and occupier. In some
regions this is easier than others due
to lease structures and transparency.
Schroders has achieved some success
through open dialogue with informed
occupiers and seeks to apply this approach
to all our portfolios where possible.
Schroders aims to arrange for our tenants’
waste to be recycled for all sites which we
control and use recycled materials where
appropriate within refurbishment and
development projects.
16 Responsible Real Estate Investment
Connecting with
communities
At Schroders we believe in the importance
of understanding a building’s relationship
with the community and its contribution to
the well-being of society. All buildings serve
a social need and managing this dynamic
helps maximise investment value. The
degree of integration varies considerably
from a mixed use scheme of shopping,
offices and housing, which may provide a
complete community including parks and
new transport solutions, to a single office
building meeting the needs of a business
and its employees.
Understanding social change and the needs
of the locality is important in developing
the sustainability of an asset. Changing
business practices, such as flexible and
home working, technology developments
and changing corporate responsibilities,
combined with a more transient yet
connected society, means that occupier
demands will continue to evolve. Creating
aspirational communities within vibrant and
sustainable centres is one of the challenges
facing many towns and cities as they seek
to reinvent themselves and bring people
back into town centres.
At Schroders we look to understand and
develop the community relationship to
ensure our investments provide sustainable
social solutions for the long term.
Case study
Regenerating a town centre
Bracknell in Berkshire (UK) has struggled
to provide for its residents and compete
with neighbouring town centres for many
years. Through the Bracknell Regeneration
Partnership, Schroders has developed a
master plan comprising new shopping,
housing, social amenity, green spaces and
transport routes, all helping reinvigorate and
reposition the town. The project’s success
heavily depends on the community’s
support and trust. The Partnership has
developed initiatives with a multitude of local
groups. Success is evident with Bracknell
winning a Britain in Bloom Gold Award for
a third year and a Green Apple Award for
waste management.
“We are proud to be delivering on our vision for Bracknell. The town is a changed
place and is now beginning to serve its residents’ needs with a sense of vitality
that has been absent for a long time.”
Neil Meredith, Head of UK Business Space, Schroder Real Estate
Responsible Real Estate Investment 17
Case study
An innovative concept
www.enjoy-work.com
In the late 1990s we began the development of Chiswick Park in West
London. The concept was to provide high quality office space with good
transport links connected with the local community, to create vibrant
and successful commercial enterprises, pioneering environmental
management, and an engaged and satisfied community. The brief has
been fulfilled, the Park is a great success, has won awards and continues
to attract occupiers ranging from small enterprises to large multinationals.
“Chiswick Park is living proof that responsible investment is
good investment.”
James Lass, Fund Manager Schroder UK Real Estate Fund, Schroders
18 Responsible Real Estate Investment
Governance,
assurance and
industry
engagement
Schroders is committed to responsible investment across
our investment activities. Through governance and industry
engagement, we continue to improve our understanding of
emerging risks, learn from and adopt best practice from our
regional teams and the wider industry, and deliver innovative
solutions to our clients.
Schroder Real Estate
Schroder Real Estate is involved with
numerous industry bodies with interests
in responsible investment. We are a
founding member of the UK Green
Building Council. Initiatives such as
these help ensure we are well placed
to learn from, and contribute to,
industry best practice.
We have submitted three of our UK funds
to the Global Real Estate Sustainability
Benchmark, and will consider the
benefits of expanding our contribution to
this initiative in future years.
We understand the importance of
providing our clients and the wider
investment community with greater
transparency about our management of
environmental and social issues.
We continue to monitor voluntary
initiatives and will participate in those
which offer valuable insight, useful
metrics or improve best practice.
However, it is important to recognise the
limitations of these initiatives if they do
not confirm an understanding of risks and
building resilience and how these need to
be built into investment decisions.
Responsible Real Estate Investment 19
Schroders Plc
Schroders Plc is a signatory of the UN
Principles for Responsible Investment
and we believe that our approach to
responsible investment is in compliance
with the principles.
We were a founding member of
the Institutional Investors Group
on Climate Change.
We are a signatory and special advisor
to the Carbon Disclosure Project and we
commit to greater transparency of our
investment activities, and as members of
UKSIF and EUROSIF we actively promote
socially responsible investing.
Corporate responsibility is important to
Schroders and we have policies and
schemes in place to ensure that the
Group acts in a socially responsible
way in its day-to-day operations.
For more information about
Schroders Plc corporate
responsibility and responsible
investment activities please visit
www.schroders.com/global/aboutschroders/corporate-responsibility
and www.schroders.com/ri
R esponsible
R eal
estate
I nvestment
Trusted heritage
Advanced thinking
Contact us:
About Schroders:
Schroder Real Estate Investment
Management Limited
31 Gresham Street
London
EC2V 7QA
Schroders is a global asset
management company with £319.5
(€441.6/US$474.3) billion under
management. Our clients include
corporations, insurance companies,
local and public authorities, charities,
pension funds, high net worth
individuals and retail investors.
Tel: +44 (0) 20 7658 6000
Fax: +44 (0) 20 7658 3960
realestate@schroders.com
www.schroders.com/realestate
Source: Schroders, at 31 March 2015.
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Important Information: For professional investors and advisers only. This document is not suitable for retail clients. This document is intended to be for information purposes
only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The
material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable
but Schroder Real Estate Investment Management Limited does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This
does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other
regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information
in the document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of
investments and the income from them can go down as well as up and investors may not get back the amount originally invested. The Schroder ImmoPLUS and the Schroder
European Logistics funds are not registered and not available for distribution in the United Kingdom. The Schroder UK Real Estate Fund (the “Fund”) is authorised by the Financial
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