Articles

  July 2009 Monthly Feature

CSR and the Property Market - Urgent Changes Required

By

Julian Roche, Vice-President, MHC International Ltd

 

Introduction

Companies that are primarily engaged in real estate activities - principally developing and owning commercial and residential property - have just as many corporate responsibilities as manufacturers or retailers.  While construction and maintenance should certainly be seen as the corporate responsibility of the construction company, the consumer (renter or owner) should not ignore the workplace conditions of products they buy.

Green building?

One area where some progress has been made on both sides is sustainability and green building construction guidelines even though these are tough times for real estate environmentalists.
 
Leading real estate advisers Jones Lang Lasalle conducted a global sustainability survey in September/October 2008. Companies talk the talk all right:  three quarters of those surveyed consider green building certification and energy costs a "major" or "tie-breaker" factor in location decisions and more and more of them see a scarcity of green space today.  But as yet they don't walk the walk: the 2008 global average of 40% of respondents globally willing to pay the rental premium for a sustainable building - a paltry 3% - was a drastic drop from the 70% recorded in 2007, and it would hardly be surprising if the number fell again in 2009.  Moreover the price of energy, a major driver of sustainable construction, has of course declined from its peak.  Clearly even here there is CR work still to be done.

Health and Safety?

Much less progress was made during the real estate boom on health and safety.  Construction has a rotten record, but companies leasing new space never - for example - negotiate leases with severe penalties for breaches of health and safety legislation or workplace injuries or deaths.

How much more careful would the construction industry be, one wonders, if the financial returns from selling and leasing their properties depended on how safely they were built?  One very public way this could be achieved is for any building where there has been a construction death to carry a legacy trust fund - monies deducted from the rent payable and directed instead to the relatives of the deceased.  A memorial in the lobby would not go amiss, either!

Too often tenant companies simply divorce themselves from the construction process, which sits ill with the concept of holistic corporate responsibility.  This type of approach would be especially welcome in the Middle East, where construction safety has frequently been neglected, but it would not go amiss in other countries either.

Legislation?

Countries are legislating - for example against the appalling practice of construction workers being transported in open vehicles in countries where everyone else is required to wear a seat belt.  But these laws are often still flaunted and lessee companies see no obligation in inspecting construction in progress to ensure that high standards are maintained throughout construction. CR advocates should call for companies to be able to present comprehensive reports on the construction of the buildings they rent - histories that could carry over to subsequent tenants.  Even safe window-cleaning ought not to be omitted by a responsible tenant.

Green not the only Ethical Aspect of Building

Safely built green buildings should not be the end of the story.  In promoting the ethical aspects of construction, especially environmental responsibilities for energy efficiency, the global real estate industry and its clients have been able to avoid taking responsibility for some of the equally important social and economic issues associated with real estate.  For instance, who should be allowed to be tenants?  Whether differential rents should be encouraged between different types of tenants (done in Switzerland to mix up low and high income tenants so as to avoid ghettos)?  What influence landlords should expect to exert over the business activities of their tenant?  Sustainable construction, to date, has played a similar role in the real estate industry that corporate governance has generally: serving mainly to obfuscate social responsibilities!

So for example Hypo Real Estate identifies the cornerstones of their ‘Building Together' responsibility policy[1] as being efficient resource use, and cuddling up to their customers, local communities and their suppliers.  

Even more vaguely, the Mitsubishi Estate Group has adopted as its fundamental mission the goal to create a truly meaningful society by building attractive, environmentally sound communities where people can live, work and relax with contentment - whatever that means. Quite specifically, Mitsubishi Estate states that it considers compliance as not simply the adherence to legal standards, but as "meeting the expectations of people in society at large, while adhering to internal company rules and ethical corporate standards.  Furthermore, because we recognize how essential compliance is to the profit base of the Company, we view the maintenance of a compliance system as a priority task of management. Moreover, each and every employee is deepening his and her awareness of compliance issues and putting them into practice".

Predictably this is just one aspect of the overall policy - in addition there is an Environmental policy- ‘in addition to taking so-called hard measures, such as introducing a highly efficient central heating, cooling and ventilation system and adding greenery to the roofs and walls of our buildings in these areas, the Company's initiatives also include soft measures, as exemplified by the staging of environment-related events and seminars' - and Community support - ‘As a good corporate citizen, the Mitsubishi Estate Group engages in a wide range of social contribution activities primarily centered on promoting its harmonious coexistence with communities, environmental preservation, social welfare as well as culture and the arts.  Specific Mitsubishi Estate-developed programs include operating the Nature Info Plaza in the Shin- Yurakucho Building and the Marunouchi Bird Song Plaza- which conduct educational activities and disseminate information on nature conservation and environmental preservation-and the annual Dazzling Art Competition, a drawing contest held for disabled children throughout Japan'[2]. 

Need for Ethical Letting Policy?

But the scope of real estate CR should not stop at green buildings, high health and safety standards and a few charitable donations.  In a properly balanced CR framework, real estate companies with commercial properties surely cannot walk away from their responsibilities as landlords any more than can landlords of residential properties. The third and equally important aspect of CR and real estate is an ethical letting policy.  CR has scored an own goal in not highlighting this.

What is an ‘ethical letting policy'?  A search revealed very little.  Evidently the idea is pretty novel for real estate companies.  But it is simple.  Although many realtors in the United States have ‘ethics' as one of the kingpins of their training, what does this involve?  Usually it concerns matters of conflicts of interest, such as owning shares in a buyer's company whilst acting for a seller or confidentiality and disclosure, for example of defects and encumbrances.  For example the Ethics Code of the US National Association of Realtors[3] states that realtors, though their primary duties are to their clients, must treat all parties honestly.  So they must not mislead, exaggerate or mis-inform potential clients about particular real estate. It is a nice example of corporate governance practice: not a single mention of fairness, equality, justice, poverty, or even human rights.  This is a migration of ethics away from its familiar terrain.

Light on the Horizon?

The picture is not entirely bleak.  There have been some academic papers written on measuring the metrics for the responsibility of property portfolios (Sayce and Ellison 2003, Kimmet and Boyd 2004, Boyd 2005, Boyd and Kimmet 2005, Pivo 2008)[4].

 Perhaps for guidance on what an ethical letting policy might look like we could look to Islamic finance.  Islamic funds may invest in real estate, indeed it is one of the investment areas with which Islamic investors feel most comfortable.  But there are constraints: a minimal percentage of income can be raised from a tenant selling alcohol, for instance.  Now it may be wrong to ask a Western real estate firm to care very much about what percentage of its portfolio is dedicated to alcohol sales (although if those sales were to children or binge drinkers it would most certainly not be wrong) but there are a number of questions that could reasonably be asked of a real estate company.  These include:

  1. Are you charging reasonable rents? Charging the same fully commercial rent to a charity or a humanitarian agency, say the United Nations, as to a business is not ethical.  A responsible real estate firm discriminates in its rents depending on the ethical standing of its tenants.  Even one firm is not the same as another - a firm making medical equipment, for instance, surely deserves a lower rent than a gambling concern.  It is not yet usual practice to discriminate in this way, but it is long overdue as part of the introduction of a genuine ethical letting policy.
  2. Are some tenants unacceptable? Again, Islam provides a clear code on this which, although it is illogical to expect Western companies to follow in detail, does at least represent a model.  Some tenants are prohibited altogether.  It would be interesting, to say the least, to put such a proposed code to shareholders of real estate companies.  They should at least be asked whether they would like to exclude casinos from the list of potential tenants, for example.
  3. Should we specify the revenues we derive from certain sources? There is a rule in Islamic finance which limits the total rental revenue from unacceptable causes to a certain percentage.  A similar rule could be imposed globally - ‘no more than X% of our rents will come from [a list of types of firms].  The opposite could also be enforced - a minimum percentage of tenants to be from not-for-profit organisations, for instance.

Concluding remarks

So few, if any, these last three areas are practices of major Western real estate companies, although there is no evidence that shareholders would be averse to them.  Indeed, if they are perceived as good CR practice, we know share prices will benefit.  But evidently it will require a great deal more effort from the real estate industry and chartered surveyors themselves, not just academics and the UN system, to start a systematic process of corporate responsibility in the real estate industry where issues such as ethical letting are thoroughly aired.  The time to start is now.



[1] Corporate Social Responsibility at Hypo Real Estate see: www.hyporealestate.com/eng/pdf/Social_Responsibility.pdf, accessed July 16 2009

 2]Mitsubishi CSR Report 2008 See www.mec.co.jp/e/csr/csrreport/pdf/csr2008_e_1.pdf accessed 16 July 2009

[3]  Code of Ethics and Standards of Practice of the National Association of Realtors see:  http://www.pstaines.com/files/158130/ethics%20in%20real%20estate.pdf accessed 16 July 2009

 ] See James A. Grasskamp: ‘What are the leaders doing?' UNEP Financial Initiative, Responsible Property Investing,  unepfi.org/fileadmin/documents/responsible_property_investing_01.pdf , accessed July 16th 2009