Socially Responsible Investment

What if one equity research firm was to send to a company it covers a questionnaire asking specifically for nonpublic information. This would be done in order to provide its clients with a “more accurate picture” of the company that what is achievable through public disclosure. How would the company react? And how would the compliance department of the research firm react?

You think no one would do that? Think again. It is done every year for a significant number of companies among the most respected one. It is done every year by research firm that publish report about the Corporate Social Responsibility (CSR) of issuers. It is to a certain extend ironic that these questionnaires will all circle around corporate governance and compliance issues. In order to fill them, you need to break one basic rule of corporate governance: Equal treatment of shareholders.

I realized this was the case, following changes at the GRESB (www.GRESB.com), a real estate CSR benchmarking non-profit group.  We have been submitting data to the GRESB for the last two years (Our latest answers can be found here http://aox.ag/UzTCzV). What I, and probably a number of other companies initially overlooked, is that the GRESB is not only a benchmarking tool. In actual fact the data we would submit to GRESB would be re-used by GRESB, and fed into (paid?) research, that would be provided to selected investors.

My first reaction was to write the GRESB management a letter explaining that I did not felt that this was appropriate. However, before drafting such a letter I have done some research about how other do it. The most prominent of theses research firm (as they provide the research for Footsie4Good) is EIRIS (www.EIRIS.org). Much to my surprise, they actually openly and specifically mention that they would ask companies for non-public information. The headline on the company survey page reads as follow: “The EIRIS survey is a way for us to get the information that our clients require that is not already publicly available.” http://www.eiris.org/companies/eiris_survey.html

You might argue that this kind of information is not relevant for the investment decision. However, it seems important enough for AXA, BlackRock, and a number of other high profile investor to pay to get access to this information. It is also interesting to see that this information will then be available (against payment) on websites like www.CSRhub.com

Another high profile CSR adviser SAM (which deal with the Dow Jones sustainability index) is less explicit about the nature of the information it asks companies to report on. The website mentions that : "The annual assessment is based on an online questionnaire supported by extensive company documentation" http://www.sam-group.com/en/sustainability-insight/sam-corporate-sustainability-assessment.jsp

Anyway, this does not seem to have been caught up by any regulator, which tends to demonstrate that non-financial information is not considered as critical by regulators.

From today on, alstria will publish on its website the full extent of the questionnaire that we fill up to these kind of research firms, in order to make sure everyone have access to the same level of information. I will also still ask GRESB what their position on the topic is. It might as well be that I have it all wrong. 

Adding the numbers

A short mathematical problem for my eight years old son to solve:



·       At 30/09/2011, the total NAV (Net Asset Value)of the German open ended funds was 85.151 mEUR.

·       At 30/09/2012 (a year later) the total NAV  ofthe German open ended funds was 83.173 mEUR

Assuming that over the period the asset value is only influenced by net flows, can you calculate how much theses in(out)flows are ?

Here is my son’s answer (and any other kid for that matter):The total flow for the period is equal 83.173 – 85.151 = - 1.979. Given that this number is negative, this is an OUTFLOW.

You think this is obvious. Well it is not. At least not for the Bundesverband Deutscher Investment-Gesellschaften or BVI. For the German Funds Association which states that “it enforces improvements for fund-investors and promotes equal treatment for all investors in the financial markets. BVI`s investor education programs support students and citizens to improve their financial knowledge”, the simple math above do not work.

According to the BVI the correct answer to the question above is a net INFLOW of EUR 2.766 mEUR. In other words 83.173– 85.151 = +2.766…

This is not an isolated mistake. If you look for the BVI net inflow publications for real estate open ended funds from 2007 to 2011 theses are the numbers you will dig out:

 

While “NET inflow” for the period was around EUR 13.7 b, the total NAV of the funds grew by a little less than a 10^th of that. How does this work? 

In order to understand the forces at work, you need to take a look at the same set of numbers, published this time by the Deustche-Bundesbank. The Bundesbank publishes two additional numbers. One is the total outflow, and the second one is the total distribution paid. The Bundesbank also make it crystal clear that the NET-inflow numbers disregard any distribution.

The previous table looks like this in the Bundesbank report:

 

 

With this additional information the numbers make sense (the reason why the numbers do not add-up exactly is because of the underlying performance of the funds which impacts the NAV). The so called Net Inflow, is for the most of it, not more than a dividend re-investment scheme. It has NO influence whatsoever on the amount of money available to invest in real estate.  

The information which is has been provided by the BVI to the market for years is highly misleading. The vast majority of the market participants believe that the net inflow which is publish is what it name says it is: Net inflow, ie. new money that is coming into real estate.  Here are a couple of example of some investors/advisors that have been across the years willingly or not mislead by the BVI communication.

http://portal.cbre.eu/portal/page/portal/RRP/ResearchReportPublicFiles/5_German%20Open-ended%20Funds_September%202012.pdf

http://eres.scix.net/data/works/att/eres2012_ind_103.content.pdf

http://www.prres.net/Papers/Seek_International_Property_Investment_Trends.pdf

Google will provide you with dozens of other examples. Since the publication of the last BVI figures last week, I have received at least 5 daily emails of investment banks mentioning the fact that open-ended funds had EUR 2,7 b of inflow year to date. All of them were hinting to the fact that this money will need to be invested (at least partly), therefore driving demand. This is just not the case. In actual fact, the total amount of money available for investment in real estate went DOWN.

The BVI recently published an analysis where it found that there are significant deficiencies in the corporate governance of German listed companies. That might as well be true. But assuming the BVI really cares about the topic, I would strongly encourage them to start cracking at their own issues first.

NB: all the numbers quoted in this post are sources from:

http://www.bvi.de/fileadmin/user_upload/Statistik/BVI_Investmentstatistik_201209.pdf

http://www.bundesbank.de/Navigation/EN/Publications/Statistical_supplements/statistical_supplements.html (supplement 2 as of 28/09/2012)

Green Lanterns

IPD has started an interesting new index in the French market, called the IPD Green Real estate index. It basically analyses the performance of Green buildings and compares it with both recent non-green buildings as well as with the general IPD index (http://aox.ag/KdpWzJ)  

As far as I know, this is the first time such an indicator is put together. This is more than welcome initiative as it might once and for all stop the rhetorical debate about whether or not Green adds value to the asset.

On the face of it, it looks as if it does add value. Total return last year for the green building stood at 7,4%. That is 1,1% higher than equivalent non green building which showed a total return of 6,3%. However devil is in the details.

Here is how this performance is broken up:

The green building performance is solely driven by a (theoretical?) capital value improvement. It relative performance is very poor in turns of Income Returns with assets yielding around 2% less than the rest of the market.  More interestingly the IPD data reveal that there is no rent difference between Green and non-green buildings (average ERV is at 356 EUR/sqm/year for non-green vs 361 EUR/sqm/year for green building).

These data allow for an interesting (theoretical) analysis about the benefit of investing in the green building.   Let’s assume a green office building which is worth 100. According to IPD data, this asset will generate around 4,2 of rent. Let’s now assume a non-green building asset generating the same rent. According to IPD this asset is yield 6,3% ie. is worth 66,7. From there you can derive the actual value as described in the following table.

As a result of the IPD data, you can determine in a few minutes that the market offers a 71% premium for the value of a “Green” construction over a non-green construction.  At this stage it become clear what you want to build if you are a developper. The only economical explanation for such a premium would be that a green building will depreciate much slower than a non-green building. It would therefore deserve a premium as it would deliver returns on a longuer period of time.  

The table below, summarizes the number of years needed to collect enough rent in order to pay for the construction cost at a given unlevered expected return (the NPV of the cash flow is equal to zero).

What the previous table show is that If you expect a 5% return from a non green building, assumes no terminal value, no rental growth, no capex... you need to collect the rent for 16 full years. For a green building for which a 71% premium was paid, you need to collect rent for 54 years. Another way to say this is that the premium reflect the belief that the green building life will be 3,3 times longuer than the non green building.   

So now, here is the question: Which assets do you think is going to generate the most sustainable returns over time? I am not going to take position. However I have lost faith long ago in Hal Jordan and the believe that “Green is the color of will”

Little Dorrit

Anyone interested in real estate investment is aware of the „difficult“ times the German open ended fund industry is going through. As you can expect the German press is full of article trying to figure out what happened, what a solution would be (may I naively suggest listing?) and whether or not it is safe to invest in them again.

We (almost) made it happen

News that I felt went through pretty much un-noticed in the last month was the publication of the latest Jones Lang LaSalle transparency index (you can register for free on JLL website and download the study here). For the first time since inception, the German market is part of the “tier 1” countries, along side with the UK, Australia, France and 12 other countries. More precisely Germany is quotes by JLL as the 10th more transparent market among the 81 markets covered by the study, and 6th more transparent among the 34 European market surveyed.

Quality rather than quantity

The debate about the need for more transparency in the real estate listed sector is back in the Germany. In principle there is nothing bad about the requirement for more transparency. I hope that alstria has in the past demonstrated many times its willingness to provide the market with the right set of information at the right time.

There is in my opinion a dangerous amalgam between transparency and throwing unsorted information to investors. I make a big difference between being transparent and publishing each and every data available in a company. Being transparent is not equivalent to ticking each box of a list of information that needs to be published by a company. Transparency is a dynamic and subjective notion. It is about disclosing the right information at the right time and in a way that is understandable by an investor. It is a judgment call.