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Risk-Averse Real Estate Investing Is Turning To Sustainability For Strong, Long-Term Financial Returns

Risk-Averse Real Estate Investing Is Turning To Sustainability For Strong, Long-Term Financial Returns

by ESG Business Institute -
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The real estate industry, as a whole, is not known for its innovation. People in the industry often opt for proven methods rather than experimenting with new ideas. FORE Partnership, a real estate development firm operating in the U.K. and Western Europe, however, prides itself on funding innovative, sustainable projects. 

“Real estate is a pretty sleepy industry — people like to do things the way that they did them on the last buildings, because they're very risk averse,” says Basil Demeroutis, managing partner of FORE Partnership. “That’s starting to change.” 

The growth of purposeful businesses — driven by market pressures, consumer and employee values, and increased business visibility — is partly behind this shift. FORE Partnership itself is a newly Certified B Corporation, a business that has met certain social and environmental standards as verified by the nonprofit B Lab.  

But, Demeroutis warns, “What we need is a clear signal to the capital markets to say what will be accepted behavior and what won't. Because when it's too complicated and when there's too many back doors and asterisks, then everyone just spends their time trying to game the system as opposed to innovating.” 

As part of my research on businesses with social and environmental mission, I spoke to Demeroutis about the values that drive FORE Partnership’s investments and how the real estate industry is starting to evolve and innovate, and what it will take to move real estate more fully into environmental sustainability. 

Chris Marquis: What is the current status of the real estate industry and where is it headed? 

Basil Demeroutis: Real estate is a pretty sleepy industry — people like to do things the way that they did them on the last building, because they're very risk averse. Like, “Why would I try some new fancy air conditioning system that may not work. I'll be back for the next five years trying to fix it.” So they just would rather do the tried-and-tested version of it as opposed to doing anything that's different. That’s starting to change. 

What is the most interesting for me is that the market is starting to actually differentiate and to redefine what is state of the art. What’s great today is no longer the tallest building with the most glass and the most glamorous reception. It's the one that makes you feel best and the one that wraps its arms around you and says, “Welcome home. Here I am, and here’s how I support whatever activities that you're doing.” I think the market is much more sophisticated and nuanced now. 

Our mission as a purpose-driven real estate investment firm is to prove that driving environmental sustainability and positive social outcomes is actually good for financial returns and for investors as well as being the right thing to do for society. I think that mission, for me, comes from spending time around Jeff Skoll, the first president of Ebay and the founder of the Skoll Foundation, and people like him. The idea for FORE was born out of his family office, where I was a partner. If we think about climate change or water quality when allocating capital, it actually can lead us to some pretty interesting investment opportunities that, with a normal lens of just a capitalist, private equity guy, you might not get there. 

Marquis: How does the company philosophy work out in practice? 

Demeroutis: A good example is Windmill Green, our recently completed office project in Manchester, which is now the city’s most sustainable new office.  That building was empty for seven years, and people had tried to do skyscrapers and all sorts of very ambitious, mostly new build construction on that site. But none of them ever materialized in part because there were planning issues with them and it was tough getting planning approval for such ambitious city projects. It’s always tricky. 

When we bought it, there was a planning permission in place for a new 17-storey office, but we had a different strategy, which was to keep the existing building’s frame and then repurpose it and rehabilitate it and bring it back to life – that’s so much more economically viable. And planners thought it was much more in keeping with what they saw for the city center. Cities are trying to preserve a certain look and feel. So we replaced the facade, went up two floors and did some infill and enhanced the efficiency of the building. 

Windmill Green is a street corner building. We like buildings that have long views. And corners that face prominent locations. We figure if we're going to make a statement around sustainability, there's no point doing it tucked away in an irrelevant and unimportant location. And ultimately, we need to tackle every building on every street, but why don't we start with the ones that will be exemplars? And so that's what we did. 

Marquis: What will it take to make the real estate industry truly sustainable? Does the government have a role to play in creating policies that set environmental standards for the industry? 

Demeroutis: We need our plastic straw moment. People said, “Oh plastic straws are bad, and I know they’re bad because there's a picture of a plastic straw in a turtle's mouth or a dolphin’s snout.” And suddenly they’re being replaced with sustainable alternatives.  In real estate, understanding environmental impacts is too abstract. Energy intensity is measured in kilowatt hours per meter squared which is confusing to people. We need to distill it down into something that is, first of all, easily relatable and, second of all, blatantly, egregiously wrong, so there's no possibility other than to act. We haven't found that thing. 

In my younger years, I certainly would have said, “Let the free markets decide,” and I've probably softened a little bit on that. I was a staunch free-market capitalist. I do think, ultimately, to be sustainable, these initiatives need to be pragmatic from the private-sector standpoint and, as big as governments are, ultimately the power of the private sector is second to none. And I think you've got to get the private sector catalyzed to act; otherwise, all you're doing is you're throwing buckets of water in the ocean.  

So I think I would still stand by that. But short, sharp, targeted policy decisions can have a powerful impact. For example, the government in the UK is saying they may not allow any more gas furnaces after a certain date, and all furnaces will have to be electric. I think this kind of approache  is a clear sign. What we need are clear signals to the capital markets to say what will be accepted behavior and what won't. Because when it's too complicated and when there's too many back doors and asterisks, then everyone just spends their time trying to game the system as opposed to innovating. 

Marquis: What do you think about the different certifications that exist, and particularly B Corp certification? 

Certifications aren't an outcome. They're evidence of outcomes. I think people often say, “What's your goal? My goal is to get all my buildings certified.” Really? That's an awfully strange goal to have. Isn't a better goal to improve health and wellbeing of people and reduce the carbon footprint of your buildings and, as evidence of that, you might get a bit of paper that says you've achieved it. 

I do think the B Corp Certification is — as a kind of process — better than most certifications because it is so holistic and there are no shortcuts. I know the UK BREEAM (a certification like LEED in the USA) formula like the back of my hand. And I can tell you that if too many desks are more than seven meters from the window you get no points. And if they’re all less than seven meters then you get two points. These things end up being a bit arbitrary in many ways. But the B Corp Certification looks at the core essence of your company evidenced by so many different things, and they get to the heart of who you are in a much more real way. 

At FORE, we felt like we were a green real estate company, we were doing all these fantastic things already, so surely we must be well qualified to be a B Corp. But actually, we found that, while we were making big impacts, candidly, we probably weren't documenting it and making it a rigorous policy and putting repeatable frameworks in place. I could tell you, chapter and verse about the social programs that we're doing and how we treat our staff and everything else. But if you had asked us nine months ago for a copy of our modern slavery policy, we probably would be hard pressed to actually dig it up, so we wrote one and codified our practices.  

I think there's something profound when you put into the legal charter of your company the values that define who you are and that you’re going to work for people and planet, as well as for your own shareholders for profit. It signals to the staff and the wider team that this is what we're about. We could put it in marketing materials and on websites and whatever we want, but we've now put it in our corporate bylaws. And when you break the law — notice bylaws also has the word law in it — bad things happen. So we’re not going to break this law.