Responsible Property Investing: Location! Location!! Location!!!
Co-Chair, Peter Kinder’s, Opening Remarks(1)
American Conference Institute
Warwick Hotel, New York City
February 27, 2008
What are the only three things you need to know about real estate? Location. Location. Location!
Well, there’s the conference….
Actually, ‘location’ is the conference. And I want to take a few minutes this morning to argue why the old saw is spot on.
But first, I want to thank the American Conference Institute and especially Finale Patal for mounting this timely, provocative conference.
And thank you all for coming and making the discourse possible. You’ve chosen a conference run the way I would. You’re going to hear presentations, not sound bites.
RPI Defined
So what is responsible property investing (RPI). Here’s what the UNEP Finance Initiative Property Working Group says:
Responsible Property Investing (RPI) means property investment or
management strategies that go beyond compliance with minimum legal
requirements in order to address environmental, social and governance
issues….
Because so many factors contribute to the social and environmental
performance of buildings, RPI touches upon literally dozens of property
location, design, management, and investment strategies….
There are two types of financially sound RPI strategies: no cost and value added approaches. With the no cost approach, managers find ways to improve the social or environmental performance of their properties at zero added expense. Turning out the lights in unoccupied areas, for example, is a no cost strategy that fights global warming and reduces energy bills. Value added strategies, on the other hand, require some initial financial outlays, but pay for themselves by either increasing net incomes (via higher rents or lower costs) or reducing risk premiums (via lower environmental risks, less depreciation or less marketability risk) (2).
While adequate, this description doesn’t come close to doing justice to the unique challenges and exciting new opportunities cropping up in this area.
So, why are we here?
Market Motives
We’re here because our clients – and others – don’t feel neutral or dispassionate about RPI. Especially in today’s market. Some investors feel terrified – that was the consensus at a party I attended Sunday in N.J. Others feel exhilarated at the prospect of finally doing property investing right.
At the same time, a rapidly growing group of stakeholders are insisting that corporations, institutional investors, foundations and endowments be not just responsible but accountable property investors.
There is an immense difference between responsibility – which is self-initiated and self-regulated – and accountability – which is imposed and enforced from without.
The Obvious Motivators
Why is accountability coming? Location, Location, Location.
First, there’s the burst housing bubble.
Look at its effect on the physical community. The only sign these days more common than Golden Arches is ‘For Sale’. Think what that means in terms of Americans aspirations for better lives. Then look at the collateral damage from the subprime scandal in the auction-rate market. Consider the implications for that same community of a student loan commission – like Michigan’s two weeks ago – that can’t float its debt.
Second, we may be skittering on the top of a commercial real estate bubble as well. Prime office space in Boston has passed $100 psf. Office towers are shooting up where ever they can be wedged without regard for community, mass transit or other support systems.
Hidden Motivators
Some reasons why accountable property investment is coming aren’t so obvious as the current real estate bubbles – whether popped or still rising.
1. Chris Lineberger in this month’s Atlantic argues that today’s exurbs will be tomorrow’s slums. Their demands on infrastructure and human psyches are not sustainable.
2. Jim Rogers, the famous motorcyclist and commodities investor, has said that we’re about half way through an 18-year cyclical commodities boom (3). What’s happened to commodities prices over the past couple of years is now showing up in our rapidly-rising inflation rate.
And more to the point of this conference, it’s showing up in proposals to develop mineral reserves that were uneconomical earlier this decade. The economic and environmental effects of exploiting the Canadian oil sands could be very costly.
3. Shrinking world food reserves – and growing Ethanol demand – will make fertile land more valuable for farming than for development. This will be especially true in the US as fuel costs and deteriorating road systems force food production to move closer to its markets.
4. Fuel costs, unsustainable road systems and the like are also forcing reappraisals of old trade routes dictated by physical geography. Railroads are back, as John Stilgoe has convincingly argued in his new book, Train Time: Railroads and the Imminent Reshaping of the American Landscape (4).
Coastal shipping, in my view, is not far behind. We have 500 years of coal reserves in the Appalachians but we’re shipping coal from Venezuela because our southeastern rail lines are maxed out.
The renaissance in rails and shipping offer huge opportunities for responsible property investors.
But lest this seem too optimistic, consider the plight of CSX, the largest of the eastern railroads – and an important property investment play. The wonderfully named British hedge fund, the Children’s Investment Fund, has targetted CSX and demanded it cease all capital investment. CSX, it seems has not met investor targets. Keep this in mind when we talk in tomorrow’s session about the asserted duty to maximise returns.
5. And finally, another huge opportunity for investors is the population’s return to the cities and the inner suburbs. An aging population is looking for more convenient, walkable places to live while the younger generations identify cities with excitement and community.
Again huge long-term opportunities – and ones that will be greatly influenced by revitalized passenger rail and public transportation systems.
Role of Global Warming
Those are some drivers for RPI that aren’t particularly obvious. I want to close by noting the most obvious driver of all: global warming.
We wouldn’t be here this morning if about five years ago institutional investors hadn’t suddenly awoken to global warming.
By anyone’s definition, responsible property investing requires a long-term perspective.
Suppose you’re considering an investment in a Manhattan office tower with a life expectancy of 75 to 100 years. You had better be asking yourself, ‘How much will I be able to get out of this property if it becomes certain there will be a one metre sea level rise in this century? What happens to London real estate when the Thames flood gates become useless?
For two generations, real estate investors and architects have been able to invest and build without really considering geography, history and sociology. ‘If we build it, they will buy.’
Now, we’re back to Location, Location, Location – in a profound sense. And that’s not a bad thing.
References
1. I have revised these remarks modestly since they were given. Their substance remains the same.
3. Nils Pratley, “Best is yet to come, says superbull”, Guardian (UK), June 6, 2006, p. 29.
4. David Warsh in one of his recent, indispensable “Economic Principals” columns brought this to my attention. The article wasn’t posted as of March 1 on his site.
