Schroders boss wants green premium to narrow stock discount

The fund manager behind Schroder REIT is targeting a jump in returns as the firm doubles down on its commitment to making its portfolio greener. The REIT is putting a new investment objective to shareholders, centred on making improved sustainability metrics a formal part of its approach. The shift will formalise a “sustainability improvement and decarbonisation strategy focused on adapting existing buildings into those that are both modern and fit for purpose”, the company said. “It’s an evolution, not a revolution,” said fund manager Nick Montgomery, adding that the financial objectives of the company will not change. Instead, the move is an effort to bring out new benefits from a growing interest from investors in the sustainability performance of real estate assets, with a generally accepted “green premium” in price and rental terms for the right buildings. “We’ve got real conviction that it will lead to enhanced long-term returns for shareholders, and it will differentiate us,” Montgomery said. “And it’s a message that is resonating with the wealth management community, many of whom increasingly have their own specific sustainability objectives, but also investors coming through the retail platforms.” Over the three years to September, the REIT delivered a property level return of almost 7% compared with a benchmark of about 2%. Montgomery highlighted various factors contributing to that, including a focus on multi-let industrial properties and a reduction in office exposure. But the sustainability efforts cannot be ignored, he added. “Where we have really gone for it on, projects like Stanley Green Trading Estate [in Manchester, where the REIT runs an operational net zero warehouse scheme], or where we have been spending that extra 10% on an office refurbishment, we could see that it was genuinely leading to a growth in net income,” Montgomery said. “So it was very obvious that in a market where there were a number of companies doing the same or similar things, that we could try to leverage that, weaponise that, to create a more interesting story, to be more differentiated, but also put in place really robust governance around the whole process.” The REIT trades at a share price discount to NAV of about 32%. That narrowed from 38% a year ago – and the share price has fallen – but the team acknowledges that there is more work to do. Pitching the stock around the benefits of a growing green focus, hope Montgomery and colleagues, will bring new investors on board, lift liquidity and bring that discount down further. Other costs are tired to the initiative’s success. The compensation of the investment manager, Schroder Real Estate Investment Management, will be brought into line with sustainability objectives, with a five basis points increase or decrease in the management fee depending on whether sustainability and income-related KPIs are hit. “We pride ourselves on being a very active manager,” Montgomery said. “Now fully integrated within our active management process is sustainability in the widest sense – with every asset having an impact and sustainability action plan, modelling our decarbonisation pathways at asset level, net zero audits. “We are boosting our resourcing in this, both in the real estate team where we now have five subject matter specialists on climate, net zero and social value, but also the wider Schroders private assets business. An increasing part of what we do is focused in this area.” To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews