More property funds expected to buy woodland for carbon offsets

Standard Life Investments Property Income Trust last week announced it had acquired national park land as part of carbon strategy

The acquisition of national park land by Standard Life Investments (SLI) Property Income Trust to offset its carbon footprint could spark a trend for other property trusts to follow suit, according to investment company analysts.

Last week, the board of the SLI Property Income Trust announced it had purchased 1,447 hectares of upland rough grazing and open moorland in the Cairngorm national park for £7.5m. A statement explained the site supports 956 hectares for planting with natural broadleaf trees (about 1.5m trees in total) with around 115 hectares for peatland restoration, with the remainder open land to support biodiverse habitats.

Fund manager Jason Baggaley described the move as a “significant opportunity for reforestation as part of [the trust’s] carbon strategy”.

He added the investment company is not investing in commercial forestry, but is acquiring a gold standard carbon offset at a fixed price, and the purchase forms part of a wider strategy to achieve carbon net zero on the trust, based primarily on reducing operational carbon at the investment property assets with offsets for residual carbon that cannot be eliminated.

“Being an early mover will give the company an important advantage in future costs for offsetting as society moves to net zero by 2050,” Baggaley said. “We anticipate making a couple of further acquisitions, on a smaller scale, to complete this element of the carbon strategy. Although the focus is on carbon offsetting the opportunities for wider ecological and net biodiversity gain are also being explored, which is important given changing legislation around development in the UK.”

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Richard Williams, property analyst at QuotedData, said he could see this trend catching on: “SLI has a track record for being an early mover and is once again ahead of the curve with this acquisition. As carbon emission has risen up the agenda and consciousness of everyone, it is clear that more needs to be done to offset it. Property has a particular problem and we’re sure that others will have to follow.”

A note from Numis highlighted the trust’s manager Baggaley has sought to future-proof the portfolio by disposing of assets that do not meet the company’s ESG criteria, and added this acquisition of land for reforestation “reflects a conscious focus on the environmental impact of the portfolio”.

“This proactive approach to ESG impact sets SLI apart in our view and it will be interesting to see if this establishes a precedent with other property funds following suit,” the note added. “As society transitions to net zero by 2050, the constrained supply of suitable land for reforestation purposes in the UK provides the potential for SLI to benefit from being a first mover if more companies following a similar strategy for carbon offsetting leads to an increase in demand and an appreciation in value.

“Management therefore notes that in addition to demonstrating responsible practice, this strategy can provide value to shareholders and expects to undertake a couple of smaller acquisitions along similar lines. With many investors increasingly focused on ESG-factors we believe this explicit approach from SLI has the potential to be attractive.”

However, Numis flagged some investors will likely want to understand any potential impact on yield and dividend cover from these acquisitions with a small portion (Numis estimates c.2-2.5%) of the portfolio not generating rental income.

Annabel Brodie-Smith, communications director at the Association of Investment Companies and editorial panellist for ESG Clarity, commented: “It’s encouraging to see this property investment company acquire over 1,440 hectares in the Cairngorms as part of its wider strategy to reduce its carbon emissions through offsetting. It’s also heartening to hear this purchase is part of an ecological plan to restore this area of woodland and peatland to enhance the environment and support the local economy.  It’s a great initiative and I wish them every success.”