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Sustainability and Private Equity Real Estate Returns

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Abstract

This paper explores private equity real estate fund performance and voluntary environmental, social, and governance (ESG) disclosures. Using data from the National Council of Real Estate Investment Fiduciaries (NCREIF), it examines the relationship between performance for funds in the Open Ended Diversified Core Equity (ODCE) Index and reporting to the Global Real Estate Sustainability Benchmark (GRESB), a platform for disclosure about fund/firm-level ESG strategies and performance. The empirical analyses suggest four conclusions. First, there has been substantial adoption of and reporting to GRESB in the last 5 years, suggesting that reporting to GRESB is a form of table stakes for ODCE members. Second, GRESB participation and performance are both significant predictors of cross-sectional fund returns. Third, GRESB participation and performance are associated with the price appreciation component of fund total returns but not with the income component. Fourth, the relationships between fund returns and GRESB participation and scores are independent of local economic conditions. These results close an important gap in the literature about private equity real estate fund performance and ESG/climate change mitigation efforts in commercial real estate markets.

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Notes

  1. See: https://www.ipcc.ch/assessment-report/ar6/

  2. Additional PERE literature includes Shilling and Wurtzebach (2012), Alcock et al. (2013), Andonov et al. (2015), Arnold et al. (2021), Farrelly and Stevenson (2016), Farrelly and Stevenson (2019), Case (2015), van der Spek (2017), and Kiehelä and Falkenbach (2015).

  3. While complementary, reporting through GRESB does not ensure alignment with the other reporting frameworks listed above.

  4. For more detailed information on GRESB questionnaires and component scoring, please visit: https://documents.gresb.com/

  5. Per NCREIF, ODCE funds must have (based on market value): 80% of their real estate assets invested in PERE properties; 95% invested in U.S. real estate; at least 80% invested in office, industrial, apartment, and retail assets; at least 80% invested in operating properties; and, no more than 65% invested in in a single property type or region.

  6. These results are suppressed to conserve data privacy.

  7. T-test results suppressed to conserve space, yet are available upon request. Development component results are not examined as ODCE funds are, by definition, not active real estate developers.

  8. We also compare GRESB-reporting ODCE funds to non-GRESB reporting ODCE funds, and the relationship holds. This comparison, while more insightful, is suppressed to preserve data privacy for the late-adopting GRESB funds.

  9. The absence of volatility in the income return component does not suggest that cash flows from property investments are smooth. In fact, the volatility in the cash flows is reflected in the price appreciation component and income return is reflective of cap rates.

  10. We also tested heating degree days and cooling degree days, but found no additional explanatory power over their combined effect measured in total degree days.

  11. The question of the extent to which firms that have been reporting for longer know better how to score well on GRESB arose and was discarded given a two factors. First, firms may utilize external expertise to prepare/submit their GRESB reporting, effectively buying themselves the GRESB expertise that would otherwise be garnered by a firm reporting for a number of years. Second, the GRESB Grace Period allows first-time reporting firms to not make their results public for one year. This affords anyone interested a one-year period to familiarize their organization with GRESB reporting and calibrate their procedures accordingly.

  12. The difference between the upper and lower quartiles of Management is 19, 19 × 0.01% ≈ 0.2%

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Acknowledgements

Special thanks to the RERI Board of Directors, to our mentors Martha Peyton and Michael Acton, and others who contributed to the improvement of the work. All errors remain the responsibility of the authors.

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Authors and Affiliations

  1. Schulich School of Business, York University, Toronto, ON, Canada

    Avis Devine

  2. McIntire School of Commerce, University of Virginia, Charlottesville, VA, USA

    Andrew Sanderford

  3. Department of Real Estate and Construction, University of Hong Kong, Pokfulam, Hong Kong

    Chongyu Wang

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  1. Avis Devine
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  2. Andrew Sanderford
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  3. Chongyu Wang
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Correspondence to Avis Devine.

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This work was supported by the Real Estate Research Institute, a part of the Pension Real Estate Association. Data access was graciously provided by NCREIF and GRESB.

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Devine, A., Sanderford, A. & Wang, C. Sustainability and Private Equity Real Estate Returns. J Real Estate Finan Econ 68, 161–187 (2024). https://doi.org/10.1007/s11146-022-09914-z

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