A growing number of real estate investors are integrating ESG considerations into their strategies, new research from Colliers reveals.
The broker’s 2024 Global Investor Outlook found that, while Europe may be leading the way on regulation to embed ESG in the built environment, the global nature of investment means standards are being raised across the board.
“Our survey of investors shows an expanding acceptance that ESG is a key strategic element of investment decision-making, particularly in the EMEA and APAC regions,” the report says.
"The proportion of investors moving to the phase of ESG-based disposal and acquisition strategies has reached 25%, compared to just 10% two years ago. As a result, a wave of disposals and value-add opportunities are coming to market."
Colliers predicts that the “brown discount” for non-compliant assets will grow to make repositioning them a worthwhile endeavour. Damian Harrington, head of research, global & EMEA capital markets, says: ““The view is that many of these brown assets that are not fit for purpose won’t be cheap enough for a profitable exit after repositioning. But once we see the brown discount reflected, investment volumes will pick up considerably as there is plenty of stock to green up.”
Investors expect the value premiums for ESG-compliant assets to range from 8% for retail properties to 22% for industrial and logistics assets over the next three years.
Singaporean sovereign fund GIC has anchored a new sustainable real estate fund, which will focus on retrofit and redevelopment.
Italian real estate investment manager COIMA SGR announced a first close for its Opportunity Fund III, with an initial €200 million ($218 million) committed by an Asian sovereign wealth fund, understood to be GIC, as anchor investor.
The new vehicle will focus on decarbonising office and residential real estate across Italian cities, with a “brown to green” strategy and plans to raise €500 million by 2024, with potential to invest €1 billion with leverage. The target return rate (levered IRR) is 14%.
COIMA will particularly target central areas of Milan and Rome, where corporate demand for sustainable real estate is strong. The portfolio will be fully aligned with European taxonomy on decarbonisation, and all buildings will be LEED certified.
Separately, COIMA announced that its ESG City Impact Fund (COIMA Impact), which has so far has raised over €800m from Italian institutional investors and is set to reach €1bn in investment by year end, has also approved an increase in its target size from to €1bn to €2bn.
Manfredi Catella, founder and CEO of COIMA, said: “The first close of COF III and the expansion of our COIMA Impact Fund underline Italy’s continued importance as a strategic market for national and international capital focused on sustainable urban regeneration.”
(pictured above, Pirelli 35, a COIMA project in Milan)
Asia Pacific CBDs are substantially undersupplied with low carbon office buildings, new JLL research claims.
Large multinationals have net zero carbon commitments which are driving their occupational decisions, however Asian cities are not ready to meet this demand.
JLL’s Sustainable Offices City Index evaluates 20 cities in Asia Pacific on four metrics: green stock, physical risk to buildings, city competitiveness and city administrations’ proactiveness with NZC targets.
The index shows that not even Sydney, the region’s top-ranked city, has green building standards which can achieve a net zero carbon built environment. Sydney is expected to face an 84% undersupply of net zero carbon-ready office space by 2027.
Meanwhile, Hong Kong and Mumbai - which are placed in the bottom half of the JLL index - are expected to see a 68% and 62% supply deficit of top-quality sustainable workplaces respectively. Singapore, Melbourne and Delhi are also expected to be 56%, 43% and 44% undersupplied, respectively.
JLL argues occupiers will look beyond green certifications and make decisions based on building-level sustainability metrics, including energy efficiency and green energy procurement.
“Leasing office space in green-certified office buildings is becoming a non-negotiable for occupiers, but currently there is very little correlation between these certifications and a building’s energy performance,” says Kamya Miglani, head of ESG research, Asia Pacific, JLL.
“Even buildings with platinum grade green certifications may not be NZC-ready, partly because current regulations are not stringent enough to demand NZC-ready assets.”
JLL says the region must accelerate the rate of retrofitting to meet future regulations to meet the growing demand of sustainable workplaces. The broker says investors and owners should start incremental upgrades now or risk a “brown discount” as climate-related regulations become more stringent.
“Only a handful of office buildings in Asia Pacific match the criteria of a zero-carbon building today,” says Miglani. “The involvement of governments, coupled with corporate demand and action, will fuel the momentum and ensure a steady pipeline of NZC-ready office stock in the future.”
One of the UK’s longest established real estate funds is working hard to continuously improve its sustainability performance with a top-down and bottom-up approach. Sustain talks to Eleanor Jukes, deputy fund manager at the Schroders Capital UK Real Estate Fund (SCREF), about the fund’s sustainability initiatives and challenges.
The Fund was launched in 1971, making it one of the oldest real estate investment vehicles in the world. An open-ended fund with a core/core-plus risk profile, SCREF has more than 180 institutional investors and owns UK real estate assets with a total value of around £2 billion ($2.5 billion).
Eleanor Jukes is deputy fund manager at the Schroders Capital UK Real Estate Fund
How big a challenge is improving sustainability in a portfolio with more than £2 billion in assets and 50 years of history?
There's a lot of legacy data, there's a lot of heritage and I think we have at least a couple of assets that have been with us since 1971. That has presented some interesting challenges for how to make these buildings appropriate for the sustainability demands of modern occupiers and investors. We have 51 buildings and around 665 tenants so it's a big job trying to keep on top of all those assets and customers. What this means for sustainability is that we must use both a top- down and bottom-up approach to reach our goals.
We have our Schroders sustainability objectives and guidelines, such as the net zero pathway, which flow down, but we must also engage from the bottom up, otherwise it would just be an impossible job. We have some outstanding external property management teams who do a huge amount of work alongside our in-house asset managers to make sure that we’re delivering best-in-class sustainable assets. That means getting service level agreements right, but also making sure they are empowered to use their initiative to deliver improvements on the ground.
Talk us through some of those bottom-up initiatives….
Our Mermaid Quay retail and leisure centre in Cardiff [pictured above] is close to a district which is high on the deprivation index. The team at the centre has started some great outreach initiatives to engage the local community, with food donation programmes or providing theatre and cinema tickets for children in that area. We also run wider-ranging community and sustainability initiatives like our water bottle refilling programme. Closer to London, managers at our town centre development in Bracknell work with woodlands and bees charities and recently they won an award for placemaking initiatives.
And what are the top-down initiatives from Schroders Capital?
We have a real estate with sustainable impact mantra, which is something we work hard to ensure is embedded across all our funds. We have four pillars of sustainability in real estate: people, planet, place and prosperity, derived from the UN Sustainable Development Goals.
SCREF is also a SFDR Article 8-equivalent fund, which means we need to consistently demonstrate improvement in our sustainability characteristics to be able to market ourselves as a fund that promotes sustainability. Ensuring that we hit or exceed our sustainability objectives is a huge part of my role as the deputy fund manager, an important one, and one which is constantly changing.
What are the accreditation and certification objectives for the fund and what are the obstacles to achieving them?
Recently, we have been checking our coverage of Energy Performance Certificates is aligned with the regulation that came in April, which states that all commercial rented properties must achieve an EPC rating of E or better for leasing deals. That was a huge effort across a portfolio of this size, because we've got a lot of assets and a lot of units that need certifying. The team has also worked on the coverage of Green Building Certificates this year. For example, 90% of the SCREF office portfolio is certified and we were proud to have been awarded a WiredScore portfolio award. This sits alongside our 4* GRESB rating.
Our fund, asset, property, and sustainability teams put a lot of work into hitting our sustainability aspirations, because it is very difficult to achieve accreditations across a large diverse portfolio. The industry needs accreditations that are rigorous, but also consider the challenges of managing a multi-asset portfolio with a huge number of tenants with different aspirations. So it would be great to see some progress within the wider sector to make sure sustainability accreditation is aligned with what the market and tenant base needs.
How do you use technology to boost sustainability in the portfolio?
We make effective use of technology to help us meet our goals. For example, we have a partnership with Deepki, who have built a bespoke product to be rolled out across Schroder Capital real estate funds that enables us to suck up data for all our sustainable data points: EPCs, certificates, net zero carbon audits, all our tenant data. This will provide us with a clear sustainability profile of the units, the assets, the buildings in the fund and how well we’re doing against our objectives.
It’s taken a huge onboarding process: about six months to get everything onto this platform for SCREF alone. It's not been easy, but we have finally got there and it's been really illuminating where we do well and where the gaps are. For example, we need to do better in automating the collection of tenant information. We will be able to use it in a more proactive way and start building it into the business planning process, ensuring that we're tracking all those different objectives, particularly as we start to do more work on net zero carbon over the next couple years.
The other piece of technology we're proud of is called S:connect, a proprietary app built for us by CBRE that we use in nine of our assets. Anyone who uses one of these buildings can use it, and it enables us to have a two-way dialogue with users. We primarily use it as a social value initiative - there is a rolling calendar of initiatives, such reducing food waste, mental health or encouraging use of public transport.
Do you have any renewable energy initiatives?
Our self-storage portfolio has been a surprising leader in this regard. We have five self-storage units in London, where we have installed EV chargers and we are now rolling out the installation of solar PV and battery storage to power those chargers.
What’s the next sustainability challenge for the fund?
We have biodiversity net gain requirements for new developments coming up in November this year and we are working towards achieving that in a thoughtful and impactful way. However, I think biodiversity is something which hasn't received a huge amount of attention yet in the industry. So it'll be interesting to see how people tackle the challenge.
Taiwanese super-skyscraper Taipei 101 has become the tallest building to achieve platinum WELL core certification.
Platinum is the highest rating available under the International WELL Building Institute's healthy buildings certification system. The building is also LEED Platinum certified.
Taipei 101 achieved its certification through installing air purification systems, providing access to quality drinking water, increasing natural light exposure, promoting physical activity and promoting thermal comfort.
Completed in 2004, Taipei 101 was the world's tallest building until overtaken by the Burj Khalifa in 2010 and is now the 10th tallest building in the world.
Over half of UK warehouse space faces obsolescence by 2030, Knight Frank claims.
The real estate broker says around 18% of warehouse space in units exceeding 50,000 sq ft, a total of 128 million sq ft of logistics space, is set to fail to meet the minimum EPC grade C by 2027.
Almost 60% of UK warehouse space risks becoming unlettable by 2030, by which time it will be required to reach EPC Grade B. This means more than 400 million sq ft of logistics space is at risk of obsolescence within a decade.
The preponderance of older, underperforming stock and its potential for obsolescence could further exacerbate the ongoing undersupply of logistics space, with development activity slowing and large multinational occupiers increasingly seeking more modern, energy-efficient facilities, Knight Frank said.
Charles Binks, head of logistics and industrial at Knight Frank, said: “Occupier demand is becoming increasingly focused on high-quality facilities that can offer ESG credentials. Operators are increasingly discounting facilities that do not fit with their, or their customers’, sustainability strategies.
“While newly constructed warehouses generally meet top sustainability standards, 82% of the UK’s existing stock built before the year 2000, does not meet minimum EPC requirements. Significant capital expenditure is required to retrofit these warehouses and mitigate obsolescence risk.
“The prospects for rental growth should offer incentive. However, investors must accelerate the rate at which older facilities are upgraded or they will become unlettable.”
Asian office occupiers demanding green buildings but are unwilling to pay a premium for them, a new survey from CBRE found.
The broker’s 2023 Asia Pacific Office Occupier Sentiment Survey, which questioned 130 corporate real estate executives in 80 companies, found that 64% of office occupiers want to increase their use of ESG-certified buildings.
However, only 23% were prepared to pay a premium for environmentally sustainable space and, of these, only 10% were prepared to pay a premium of more than 10%. Nearly two-thirds said they would not pay more than 5%.
CBRE suggests the result is partially because so many Grade A offices in the region are already green certified, 43% in 2022. This means green certification is already becoming the norm for Grade A offices in some markets.
Consequently, the “green premium” is much stronger in markets where the stock of green certified buildings is lower. For example a rental premium of 15-25% might be achieved in Shenzhen or Guangzhou, says CBRE. In leading markets for green certification, such as Singapore and Australia, the premium might only be 2-8%.
The report suggests that a “brown discount” for non-certified buildings will become more apparent as green certification becomes standard for Grade A office buildings.
Green office buildings in Japan demonstrate have quantifiable benefits for owners and tenants, new CBRE research shows.
The broker’s Japan Green Building Certification Trends 2023 report says growing numbers of office buildings have green certification, such as LEED Certification, WELL Building Standard Certification, CASBEE for Buildings, DBJ Green Building Certification or others.
CBRE found that environmentally certificated properties account for 44% of total office building floor space across Japan’s 13 major cities as of Q1 2023. Tokyo and Yokohama have more than half their total office floorspace green certified.
Larger and newer buildings are more likely to have certification. While Tokyo has 52% of its office floorspace certified, only 27% of buildings have achieved a green rating.
CBRE found green buildings in Japan commanded an average rent premium of 5.4% to 6.4% over uncertified office buildings. Furthermore, since 2010, average occupancy rates have been 0.9 to 3.3 percentage points higher for green buildings.
Green buildings were also shown to have lower utilities bills as they are have been less susceptible to recent spikes in energy prices. Data from Japan real estate investment trusts (J-REITs) shows that, while utilities bills have risen 38.3% for uncertified buildings, such expenses have only risen 24.5% for green buildings.
However, CBRE also reported considerable variance between buildings and that certification does not necessarily improve performance. The report says: “Environmental certification is simply the result of owners’ and/or tenants’ commitment to reducing their environmental footprint.
“Certification alone does not automatically lead to increases in rent levels or occupancy rates. Indeed, there are some buildings that have acquired certification but which have seen no such benefits.”
Cushman & Wakefield has appointed Mika Kania as director, sustainability & ESG, Asia Pacific.
She joins from JLL and has previously worked for WeWork in China and for the US Green Building Council (USGBC). In her role at the USGBC, Kania played a key role in expanding the presence of LEED within Asia Pacific.
Based in Hong Kong, Kania will report to Matt Clifford, head of sustainability & ESG, Asia Pacific.
She said: “Asia Pacific is a tremendously diverse region, and this diversity is reflected within the Net Zero aspirations of the different markets. I’m excited to partner with global and regional clients to help them develop cohesive, practical strategies for achieving carbon reduction improvements across their portfolios.”
A new study has mapped out global ESG regulations and reporting standards for real estate.
Mapping ESG: A Landscape Review of Certifications, Reporting Frameworks and Practices was led by the European Association for Investors in Non-Listed Real Estate Vehicles (INREV), the Principles for Responsible Investment (PRI) and the Urban Land Institute (ULI), and carried out by PwC with the support of a range of experts from leading real estate fund managers and investors.
The report is intended to provide the industry with a practical guide to navigating the myriad of ESG regulations, standards and certifications around the world.
PRI real estate specialist, Hani Legris said: “No single reporting standard, framework or certificate can cover all the wide-ranging regulatory and stakeholder requirements when it comes to ESG in real estate. Real estate investors face a dizzying array of options and obligations. Whilst the “right” choices will depend on the organisation’s ESG strategy and the jurisdictions they operate in, this report provides essential information to inform the process and is supplemented with case studies, which really helps to bring these topics to life.”
ULI Europe CEO Lisette van Doorn added: “We know that the variety of standards and regulations is bewildering, but it is possible to cut through the noise and accelerate real estate’s progress to net zero. Each organisation needs to choose the standards and metrics appropriate to their ESG strategy and their stakeholders. With this approach, there might well be an opportunity to reduce the ESG reporting burden.”
The report flags new challenges from regulations which are not harmonised and coordinated but which affect the entire industry. This lack of harmonisation and partly undefined legal terms pose a major challenge.
It also provides a number of case studies as well as a set of self-assessment questions to produce greater awareness of the core issues and areas that are anchored in the company’s ESG strategy.
The 14 standards mapped by the report, including ten with metrics specific to real estate, cover the EU, UK, USA, Canada, Hong Kong, Singapore, Japan and Australia.
The report can be downloaded here.