New green funds examined

At least four different fund managers are trying to raise money to launch ‘green’ property funds.

Kenmore has teamed up with DTZ to launch Sustento, Palmer Capital Partners is working on a Palmer Green Property Fund and Aberdeen Property Investors has a UK Sustainable Property Investment Fund. Earlier this month, Climate Change Capital also announced a plan to invest in green property.

They all propose that energy-efficient buildings will hold their value better than those with high carbon emissions. This is partly because they will be more popular with occupiers, but also because the increasing weight of environmental legislation across Europe is expected to make high-carbon buildings obsolescent.

Unfortunately, this is not a good time to be launching property funds. The price crash after the credit crunch has made investors reluctant to commit. None of the green property funds had secured any equity as Property Week went to press, let alone bought or developed any buildings. Yet they all remain convinced that green property funds make commercial sense and will eventually attract investment.

Kenmore’s plans are the most ambitious.

It hopes to raise €1bn (£750m) for its Sustento fund, comprising £350m-£400m of equity, making up the rest with debt. The fund will buy office building in cities across western Europe that will be ‘best in class’ in terms of sustainable locations, energy efficiency, water usage and other environmental criteria.

Sustento development

The buildings will be near to public transport hubs, so that reliance on private cars is minimised. Construction consultancy Cyril Sweett has been appointed as adviser on the project and is drafting a standard against which potential acquisitions will be measured.

Most of the assets will be existing buildings, refurbished to higher standards, by installing more efficient heating and cooling systems and building controls to reduce energy usage.

Green leases are an important part of the strategy. Kenmore wants to oblige tenants to work with landlords to minimise carbon emissions for example, by not using the air conditioning when windows are open, or turning lights and equipment off when not needed.

Nick Murray, Kenmore’s head of Europe, believes this strict management regime should deliver energy savings that will make the buildings even more attractive to occupiers.

About 25% of the stock will come from development funded by Sustento. Kenmore also hopes to build closer links with occupiers as a way to acquire buildings that can be upgraded.

‘Part of our strategy is to be in the face of occupiers, because they might be a source of product for us,’ says Kenmore managing director Robert Brook.

Kenmore promises that returns from Sustento will be similar to other ‘core’ property funds, but have an added extra.

‘We are not saying this will give you 3% above a normal office fund,’ says Brook. ‘But we do feel that, in time, you will get extra performance, because more environmental legislation will come in, the obsolescence of our buildings will be reduced and we will be able to attract more occupiers.’

He adds that while most offices have a shelf life of perhaps just 15 years, those that are ‘future-proofed’ by virtue of their green credentials could provide decent returns for longer. ‘Offices tend to have fantastic returns over a three-year period and then they generally have disastrous returns over the next seven,’ says Brook. ‘The biggest challenge is to reduce the obsolescence of offices.’

Equity-raising challenge

Murray admits that raising the equity will be ‘a real challenge’, but remains hopeful the fund will be up and running within six months.

‘There is a flight to prime [property] and whichever way you look at it, Sustento is investing in prime stock,’ he says. ‘The risk profile is low and it’s a very defensive position, because you’re buying into a management system which is going to protect the value of that building going forward.’

Since last autumn Palmer Capital Partners has been trying to raise £75m-£100m for its Palmer Green Fund which, with borrowing, could reach £200m. Palmer director Alex Price says it will fund UK office schemes built to the BREEAM ‘excellent’ environmental standard or higher.

Price is targeting institutional investors in both the UK and overseas and claims the fund could provide a 20% return. ‘Obviously it’s harder to raise money at the moment,’ he says. ‘But in the longer term, the story of green development is compelling. This issue is never going to go away.’

Palmer believes the refurbishment angle is misguided. ‘We believe that taking existing stock and trying to retrofit will be costly and, ultimately, not as efficient as creating new buildings,’ says Price.

So far no equity has been raised. ‘People are finding it difficult to commit large sums of money in the current market, although everyone agrees that it’s the right time to be investing in these opportunities,’ says Price.

‘We are continuing to talk to investors.’

Aberdeen Property Investors, however, is taking the refurbishment route, targeting older office buildings that would score badly under the energy performance certificates that come into effect from April for commercial buildings. It hopes to raise £100m from life funds for its UK Sustainable Property Investment Fund.

‘If a building has a low grading, potentially that will soften the price,’ says managing director Glenn Newson. ‘If we enhance it, that widens the potential occupier base and the rent achievable, and creates potential for a profit.’ Gleeds has been appointed to give technical advice on refurbishment.

Aberdeen Asset Management sold its original property business to Arlington in 2004. In the three years that followed, it had to place its property investments in funds managed by other companies because of an anti-competition clause in the Arlington deal. Aberdeen is now rebuilding its property business, but cannot retrieve the money tied up in other funds at present because of the widespread block on redemptions that followed the credit crunch.

Newson is talking to other investors but admits nothing is committed so far. ‘It would be nice to have some money because there are some interesting deals around,’ he says.

Earlier this month a fourth green fund was announced, from investment bank Climate Change Capital. This is the first time the bank, which has $1.5bn (£765m) worth of assets under management, has moved into property. Most of its investments are in renewable energy.

The project is led by Tim Mockett, a former property director at Stow Securities, and Esme Lowe, most recently a director at property investment firm Capital Trust. The pair declined to say how much they hoped to raise but they intend to concentrate on the UK market, both developing and refurbishing property to high environmental standards.

‘The developments we create and the buildings we refurbish will be over the line in terms of green compliance and low energy use and they will outperform those that are not compliant,’ declares Mockett.

The market downturn has left green property funds struggling to raise equity. But they may yet become a powerful force.