Real estate is extremely capital intensive and PGGM has the scale and expertise to invest in this sector. This provides our clients and their participants with access to return that would otherwise be impossible. This return consists of dividend and the increase in the value of buildings. By collectively investing in private real estate, the team behind Private Real Estate spreads the risk across different types of buildings, such as offices, homes or shops. We also minimise the costs, such as management costs and tax.
A number of reviews in 2019 showed that the team behind Private Real Estate (PRE) was considered ‘best in class’. This is excellent recognition which inspires pride in the team, as acknowledgement of a lot of hard work. A number of initiatives were launched to further streamline business operations and thus implement PGGM strategy. A good analysis of the portfolio is an essential part of the investment strategy.
The implementation of eFront in Private Real Estate in 2019 further fleshed out the realisation of a robust and scalable system landscape. PRE also invests time and energy in ‘Business Intelligence’ (BI) to translate large volumes of available data into valuable information. The realisation that the future belongs to data-driven organisations is becoming more widely recognised and investments in collecting, analysing and sharing data are increasing at PGGM. Private Real Estate was closely involved in setting up a new data management platform, for instance.
PRE regards climate change as a financial risk. A distinction is made here between the physical risk of climate change and the transition risk. PRE has charted out the physical risk of climate change for its global real estate portfolio. This was the result of a cooperation with German re-insurer Munich Re. PRE was also involved in an initiative to gain insight into the transition risk that climate change poses for global real estate portfolios. This initiative was a continuation of the European CRREM project (Carbon Risk Real Estate Monitor), aimed at identifying the ‘stranding risk’ for real estate and developing ‘decarbonisation pathways’.
Over the course of 2019, the PGGM PRE team worked closely with Munich Re, one of the largest re-insurance companies, where charting out climate risk has been part of its central operations for decades. What was special about the analysis performed was the level of detail, whereby the exact XY coordinates of the almost 4,000 buildings in which the PGGM Private Real Estate Fund has invested were used. The results of this analysis will be analysed further and as such constitute part of the portfolio optimisation decisions. In the next several years, this analysis will be updated periodically due to purchases/sales in the portfolio and further development of the model at Munich Re, based on new and permanently uncertain climate models.
In addition to an analysis of the physical climate risk, the PGGM PRE team started up a project to better visualise the transition risk. This means that all buildings worldwide will be screened to determine whether they can continue to satisfy regulations for CO2 emissions and building efficiency in the coming years. This initiative is a continuation of the European CRREM project, whereby pathways for countries outside the European Union are now being determined as well. For this specific project, the PRE team is using the data supplied each year by Global Real Estate Sustainability Benchmark (GRESB) participants. GRESB compares, measures and scores real estate investments worldwide in terms of sustainability. A few of the individual components analysed by PRE are the energy consumption and greenhouse gas emissions of the buildings in which the PGGM Private Real Estate Fund invests. Charting out these values, in combination with monitoring new legislation and regulations on greenhouse gas emissions, will ultimately result in improved insight into the transition risk.
Good result during the annual GRESB survey
In 2019, the PGGM Private Real Estate Fund (PREF) once again achieved excellent results in the GRESB survey 2019. The score for the total portfolio rose significantly, further outperforming the global GRESB average and the relevant benchmark for non-listed real estate. This is the result of improvements in both policy and implementation. 95% of the funds currently has ‘Green Star’ status and 35% even has the highest possible score of 5 stars. As such, these funds are among the 20% of best-scoring GRESB participants and are shown in figure 1 as green circles. There are also four funds within PREF which can call themselves worldwide sector leaders and eight funds that are sector leaders in the region. The total portfolio received a 4-star rating. The development of the score for PREF over the past several years can be seen in figure 2 below.
Figure 1 ♦ PREF GRESB scores 2019 / Source: GRESB and PGGM
Figure 2 ♦ Development in PREF GRESB scores 2012-2019/ Source: GRESB and PGGM
An important component of our engagement in relation to ESG is based on the annual GRESB (Global Real Estate Sustainability Benchmark) ratings. GRESB enables us to compare the scores of participating funds on various ESG aspects with those of other equivalent funds. PREF requires all its managers to participate in the GRESB survey. The PREF investment team uses these results to start a dialogue on sustainability with the management of the companies and funds which are invested in. In this way, efforts are made towards further progress in investments in the area of sustainability. Not only the policy and transparency are important in this context, but also the implementation, and the measurement and reduction of energy consumption, CO2 emissions, water consumption and waste. Based on the results, an in-depth analysis of the entire portfolio and of each individual fund ensues. This analysis looks beyond the total score by zooming in on the individual components underlying this score. These scores can then be compared to the relevant benchmark. The GRESB analysis thus constitutes the basis for engagement with the various managers in order to further improve the ESG profile of the entire real estate portfolio each year.
In consultation with APG and MN, PGGM decided to classify the positive contribution of real estate investments in relation to sustainability as Sustainable Development Goal (SDG) 11. PRE Fund (PREF) investments with a GRESB score in the top two quintiles (quintiles 4 and 5) are classified as SDI (Sustainable Development Investments). These investments are characterised by good sustainability policy and positive results in terms of energy consumption, CO2 emissions, water consumption and waste management. Other investments can be eligible for an SDI classification if accessible and/or affordable housing, student and/or senior housing or health care-related real estate is invested in. The number of PREF investments classified as SDI in 2018 was 38, 30 of which qualified based on their GRESB score. Nine new investments were added to the list with respect to the previous year. This puts the total PGGM PREF SDI volume at almost €8 billion, an increase of over 20% compared to the previous year.
PRE is therefore actively involved in a number of sustainability initiatives such as GRESB and the CRREM project. The cooperation with Munich Re also made it possible to chart out the physical risk of climate change for our global real estate portfolio.