How UniSuper, Cbus and Future Fund manage property climate risks
Rapidly rising appetite for Australian property among regional and international asset owners could leave the institutions exposed to billions of dollars of lost investment value. However, asset owners such as UniSuper, Future Fund, Cbus, Lendlease and fund managers argue that it's possible to protect returns by combining active investing and pricing in climate risks.
The rising dangers of a warming world are increasingly on the mind of Australian CIOs. On January 11 UniSuper chief investment officer John Pearce took an underweight position in the insurance sector, citing concerns over climate change having implications over insurers’ returns.
The country’s property sector looks particularly vulnerable. A 2019 report by the Climate Council in Australia said local real estate could lose A$571 billion ($436.31 billion) in value by 2030 due to climate change and extreme weather. Climate risks could also cost owners 1% or more of the property’s value per annum.
Despite these risks, local and international asset owners are keen to invest into more Australian property.
International investors named Sydney and Melbourne as their most popular investment locations in Asia Pacific over the next two years, according to a survey by the Asian Association for Investors in Non-Listed Real Estate Vehicles (Anrev), the European Association for Investors in Non-Listed Real Estate Vehicles (Inrev) and the Pension Real Estate Association (PREA) in the US.
Asian asset owners are among the eager buyers. South Korean insurer ABL Life, for example, revealed to AsianInvestor in January that it planned to reshuffle its property investments to gain more exposure to Australia, and in particular commercial real estate and logistics.
“Sydney and Melbourne … are by far the most developed and institutional markets in the Asia Pacific," said Amelie Delaunay, director of research and professional standards at Anrev. “They are also the most liquid and transparent markets in the region, and benefit from the size of their markets relative to other destinations.”
Why the confidence in the cities, given the concerns over the impact of climate change? Partly it's because global investors have become increasingly open to pricing in climate risks in property.
"We don't see a cultural divide in the approach to ESG. For example, if we're a joint owner with an Asian investor in Sydney we're not at loggerheads over an environmental focus," Kent Robbins, head of infrastructure and property at UniSuper told AsianInvestor.
"Another thing to add is a lot of tenants are demanding [strong ESG credentials] here in Australia as well," he said, adding: "All our Reits down here are jumping over themselves to have better environmental credentials than their competitors."
In addition, Delaunay says Australian fund managers have seriously embrace sustainability. "Fund managers in Australia worked on their Task Force on Climate-related Financial Disclosures (TCFD) responses very early, giving investors more transparency on the risks associated with climate change and the financial consequences," she said.
Ann Cole, global head of real estate client strategy at JP Morgan Asset Management, said Sydney is a popular location that boasts decent sustainability credentials.
"Pricing is still very much driven by supply and demand fundamentals in the market," she said. "Sydney is not just considered a tier 1 global city for data centers, but it is also ranked as one of the top 10 global markets in terms of sustainability, as it operates with renewable energy."
Several of Australia’s largest asset owners are increasingly focused on climate change risks. Nicole Bradford, head of responsible investment at Cbus, said Australia’s experience of rampant bushfires in 2019 and 2020 underscored the importance of developing buildings that incorporate sustainable design principles.
She told AsianInvestor that it was increasingly important to invest into “buildings that are designed and built to deliver positive environmental outcomes [and] are carbon neutral (or even positive)”.
UniSuper's Robbins said his strategy involves using tools to map out exposures to risks such as rising sea levels or flood events. Then, his team prices in those risks, which include insurance costs, risk-mitigating measures such as relocating back-up generators, or renewable energy tools such as solar panels.
"We've priced it rather than avoided it; otherwise we miss out on an opportunity," Robbins said. "Australia is a coastal country, so by avoiding it you've probably avoided more populated areas that are more likely to generate [a good] return."
Australia’s sovereign wealth fund Future Fund identified carbon price risk, transition risk and physical risk from climate change as considerations in its investment strategies in its 2020 annual report.
“Investors, and companies in and connected to the real estate sector that are poorly prepared for this issue may find themselves vulnerable to value destruction over time,” Doug Cain, head of unlisted property at the A$161.11 billion sovereign wealth fund, said in an emailed response to AsianInvestor.
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Property assets at higher risk of climate change events such as floods and heatwaves include those with critical systems like data centres, or assets like multi-family, senior housing or healthcare, said Andrew Cole, general manager of sustainability at Sydney-based property developer Lendlease..
“Lendlease uses geographic location and future climate scenarios as an investment screen in both acquisition phase, as well as portfolio management. We assess the asset location and its attributes against worst case physical climate risks to understand what adaption and design interventions are required.”
JP Morgan Asset Management's Cole said her company is conducting similar risk analysis work.
“Let’s say we’re looking at an office building, we’re going to look at where is it located? Is it in a location that may have a risk of flood, and if that is the case, are we comfortable with that? Or are we comfortable with where the mechanical systems are located within the building so that you mitigate the risk of water damage?”
The asset manager is focused on “making sure that we are not investing in assets that may have a level of obsolescence as a result of being unable to manage that climate risk,” Cole added.
She said she does not see any particular sector having a disproportionate risk. That said, "most investors have not fully factored in climate risk to their pricing analysis, which creates potential opportunities for those investors with a more keen awareness of these risks".