Wanted: Socially Responsible Real Estate Investments

(Editor: William Baue, Institutionalshareowner.com)

An academician searches for socially responsible real estate investment trusts, finding few that fit the definition, as well as disagreement over what criteria define SRI REITs.

When Gary Pivo, a professor in the urban planning and the natural resources departments at the University of Arizona, recently returned to the faculty after serving for five years as dean of graduate studies, he asked himself what kind of research he wanted to focus on. He was looking for a way to combine his interests in real estate with his 25-year history of activism in urban planning.

Surveying the landscape, he noticed many socially responsible investment (SRI) mutual funds, but he could not readily identify socially responsible real estate investment trusts (REITs) or other socially responsible real estate investment tools. (REITs are roughly the equivalent of mutual funds that hold real estate investments, instead of securities.)

"Despite there being over 300 real estate investment trusts, I have yet to identify a single one that makes social responsibility or sustainability an explicit goal," writes Dr. Pivo in a November 2004 paper, A Call for the Creation of Socially Responsible Real Estate Investment Products.

"There are some options, but you have to dig for them," he told SocialFunds.com.

Experts recommend allocating 10 to 20 percent of an investment portfolio in real estate to enhance returns and diversify volatility and risk. To gauge market potential, Dr. Pivo divided the $150 billion in SRI mutual funds in the US, according to the 2003 Social Investment Forum (SIF) Trends Report, by 10 to 20 percent to yield a $15 to $30 billion potential market for SRI REITs.

However, gauging what constitutes a socially responsible real estate investment proved more complex.

"People seem to differentiate between the social responsibility of the management company managing the property and the social responsibility of the underlying properties themselves," Dr. Pivo said. "There’s no certainty among investors what a socially responsible property portfolio looks like."

For example, the Forward Funds Uniplan Real Estate Investment Fund (ticker: FFREX) filters potential investments according to SRI criteria. However, a quick glance at the funds’ top holding reveals an REIT that operates regional shopping malls, Simon Property Group (SPG).

"Most people in the SRI community would say there’s nothing socially responsible about shopping malls," Dr. Pivo said. Malls typically displace acres of land with buildings and pavement to park the cars shoppers must drive to get there, polluting the environment. "But it turns out Simon Malls has won some awards for training inner city residents to get jobs in the retail industry and links them up with employment opportunities in the malls."

On the other end of the spectrum, enhancing properties’ ecological efficiency could qualify as socially responsible. For example, the Environmental Protection Agency (EPA) named Arden Realty (ARI) the ENERGY STAR Partner of the Year for three years running, from 2000 through 2002. More than 100 Arden properties are certified by ENERGY STAR, a voluntarily EPA program supporting companies’ efforts to measure, benchmark, and improve the energy efficiency of their facilities, contributing to $4.8 million in reduced annual energy costs.

As it turns out, ENERGY STAR participation turns out to be a good proxy for strong financial performance. An October 2002 study by SRI research firm Innovest Strategic Value Advisors- found that active ENERGY STAR partners outperformed less active ENERGY STAR partners by 600 basis points from June 2000 to June 2002. And active ENERGY STAR partners outperformed non-partners by twice as much–1,200 basis points.

Some real estate investments that may qualify as socially responsible don’t market themselves as such. For example, the American Ventures Urban Initiatives Fund supports Community Reinvestment Act (CRA) investments in commercial, industrial, and multi-family properties in low- and moderate-income (LMI) neighborhoods, but does not call itself SRI.

"There’s a need for real estate mutual funds and REITs to be established that are explicitly built on principles of the triple bottom line," said Dr. Pivo, referring to economic, social, and environmental performance indicators.

Dr. Pivo is working with a group of sponsors and interested investors to rectify the lack of an SRI REIT. Investors looking for such an option may hear more on this development at the SRI in the Rockies conference in September 2005. There, Dr. Pivo will be speaking on a panel on socially responsible real estate investment that will also include Forward Uniplan portfolio manager Richard Imperiale.

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