Investor interest in environmentally sustainable real estate assets is soaring. According to one source at a large global property consultancy, his business has recently witnessed an 800% uptick in enquiries for ESG real estate investment opportunities.
The problem is that as things stand there are not many real estate funds that are being marketed as environmentally sustainable. Given the pent-up investor appetite for this type of product, why is there such a disconnect between supply and demand?
In Europe, funds are classified using EU Sustainable Finance Disclosure Regulation (SFDR), which was introduced in 2021 to improve transparency in the sustainable investment market. Article 9 funds – also known as ‘dark green’ funds – have sustainable investment or a reduction in carbon emissions as an objective. Article 9 funds also have to assess their portfolio against the principle of ‘do no significant harm’ by considering principal adverse impact (PAI) indicators. These indicators are defined as “negative, material or likely to be material effects on sustainability factors”.
As things stand, there are only a handful of real estate funds in Europe that qualify as Article 9. Bridges Fund Management recently raised £350m – £50m more than its original target – for an Article 9 fund focused on assets in alternative and needs-driven sectors, such as low-carbon logistics, healthcare and lower-cost housing. There is also an Article 9 fund set up by a global investment manager focused purely on the living sector in Germany.
The latest fund badged environmentally sustainable was launched by Fiera Real Estate in June. Although the fund does not technically qualify under Article 9 because its structure was created before the SFDR legislation came into being, its criteria is aligned with Article 9.
“In our recently launched logistics sector-focused fund, we will be targeting net-zero construction for all projects,as well as market-leading ESG credentials within the design,” says Charles Allen, head of UK real estate at Fiera. “This not only satisfies growing expectations from the investment community and our internal net-zero carbon ambitions, but it also serves as an indication as to where we believe the market is headed.”
The market may well be heading in that direction, but the problem is that while the SFDR system was introduced to give greater clarity and transparency to investors seeking sustainable investment opportunities, it only appears to have muddied the water.
“In attempting to clarify matters, more confusion has actually been created over the definition of a ‘sustainable private real estate fund’ as it is open to interpretation,” says Jane Boyle, sustainability director at JLL. “Article 8 funds are those that have an E or S characteristic. Whilst this is quite vague, it could include things like a year-on-year energy or carbon target, that is not aligned to SBTis [Science Based Targets initiative], or non- specific targets.
“In contrast, article 9 funds have sustainable investment objectives (SIO), which could include aligning with the Paris Agreement, such as net zero carbon funds with a social objective. It’s open to interpretation whether some funds being marketed as Article 9 adhere to the definitions.” Another issue is that to qualify as an Article 9 fund, undercthe wording of the regulatory technical standard 100% of the fund’s assets must be sustainable from the outset.
“That means that those funds that are transition funds and aren’t sustainable at the moment, but their purpose is to transition assets to be sustainable, don’t qualify as Article 9, which given the vast majority of assets in places like the European Union, and obviously the UK, are old and energy inefficient, is problematic,” says Robbie Epsom, EMEA head of ESG at CBRE Investment Management.
Ali Ingram, head of sustainability, capital markets, EMEA, at JLL, agrees with Epsom’s assessment that better definitions are needed globally that can be understood by everyone as this will encourage asset owners – and particularly those who own existing assets – to improve the sustainability of their portfolios and at the same time eradicate any possibility of greenwashing.
“Ultimately, we need a clear and defined global and legal definition of a transition fund/brown-to- green if we are going to help LPs and therefore capital flows identify the real players in the space and encourage more of these types of funds,” says Ingram. “I believe that the greenest fund out there is in fact a transition fund looking to acquire assets not yet on net-zero carbon pathway and implement net-zero carbon strategies, versus a fund which invests in existing green assets.”
The industry is collectively trying to address the challenges highlighted by Epsom and Ingram, with property investors and investment bodies such as INREV meeting with organisations including the FCA and the Task Force on Climate-Related Financial Disclosures to discuss what environmental metrics and regulatory framework the real estate sector should work towards.
As John Forbes from John Forbes Consulting, which advises real estate investment managers, investors and others in the real estate industry, puts it: “I guess the big question for investors is does the future lie with specialist funds with an ESG focus building the swankiest, greenest, exemplar new buildings, or does it rest with the majority of the funds who will own the majority of the [existing] assets raising their ESG bar to cope with the pathway to net zero?”
The EU’s Sustainable Disclosure Regulation (SFDR) is so far the only regulatory regime to define different levels of sustainability within investment funds. The regulation aims to create a more transparent playing field, partly to prevent greenwashing – where some financial firms claim that their products are sustainable when they are not.
Patrizia has announced a first close for its €100 million ($105 million) venture capital fund targeting sustainable real estate technology.
The German real estate investment manager said the fund “will target investments in technology companies that enable a more sustainable built environment and will focus on late Seed to Series B technology companies globally, with a strong focus on Europe”.
So far, two investments have been made: GBuilder and Liftango. The first is a Finnish platform for customer management in the residential development sector and the second provides software to shared transport systems, for example public transport or carpooling.
Wolfgang Egger, CEO and founder of Patrizia, said: “We are delighted to see the successful first close of our new VC fund product which will play an important role in real asset’s journey to net-zero. Reducing our carbon footprint in construction and real estate is the biggest challenge of our time, so funding the companies who are at the cutting edge of sustainable innovation is absolutely essential.
“Besides real estate and infrastructure, venture capital as a product offers our clients the potential for attractive investment returns and strategic advantages, particularly for investors with real estate portfolios.”
Asoka Wöhrmann, chief executive of German investment manager DWS, has resigned after a raid by German police on the company's offices.
Around 50 police officers raided DWS's Frankfurt headquarters on Tuesday as part of an investigation into prospectus fraud.
The manager, which is 80% owned by Deutsche Bank, has been under investigation by the German regulator BaFin since last year, after former head of sustainability Desiree Fixler alleged the company had made misleading statements in its 2020 annual report, which claimed €459 billion of its $900 billion assets under management were invested using ESG criteria.
In 2021, DWS stated that it stood by its annual report disclosures and said: "We firmly reject the allegations being made by a former employee."
However, in its 2021 annual report, published in March, DWS claimed only €115 billion in ESG assets.
DWS has €131 billion of real assets under management, including real estate and infrastructure. It is not known if the investigation is targeting real assets investment products.
Wöhrmann, pictured above, has been replaced by DB executive Stefan Hoops.
Infinium Logistics has launched its first property fund, which will build low carbon, electrified facilities across Europe.
It has raised £200 million in initial equity commitments, giving £500 million of firepower with gearing. The capital will be used to develop a network of “FleetHubs” across Europe.
FleetHubs combine commercial real estate, electric vehicle infrastructure and Infinium’s services to boost efficiency and sustainability for last-mile logistics firms. Infinium describes the facilities as “a new sustainability-focused asset class”.
The fund has secured one site in Swindon, UK and has six more under offer. It is targeting brownfield sites across Europe.
Infinium CEO Phil Bayliss said: ““The last mile continues to come under growing scrutiny and pressure, producing a disproportionate volume of carbon emissions in the areas where people live.
“Our FleetHubs strategy supports our customers in responding to rapid e-commerce growth and climate change whilst retaining a happy, hyper-productive workforce. The future of transportation is zero emissions. We are repurposing existing real estate to enable zero carbon, technology enabled, modern logistics facilities that allow ecommerce operators to reach customers faster in a cleaner and greener, more efficient way.”
Separately, private equity group Greenpoint Partners has invested in Infinium’s platform. Infinium was launched in 2019 as a platform for “decarbonising, electrifying and optimising the last and middle mile logistics space”.
As well as FleetHubs, Infinium is investing in parking, Hyperlocal logistics hubs cargo bikes and parcel lockers.
Undivided Ventures has begun fund raising for a vehicle investing in proptech sustainability solutions.
The Hong Kong & UK based firm is targeting a $50 million close for its first fund, with a hard cap of $100m. The fund will invest in early-stage ESG-focused proptech companies and is in talks with a number of potential strategic investors, including global real estate developers and investors.
Undivided was launched earlier this year by Alex Bent, co-founder of boutique Hong Kong developer District15, and Dr Tim Forman, a senior research associate at the Cambridge Institute for Sustainability Leadership. It has invested in three companies: net zero solutions platform Audette, waste management firm CleanRobotics and energy manager Negawatt.
Bent said: “The real estate sector faces a substantial sustainability challenge and we believe a large part of this challenge can be met at scale through the application of technology solutions. We are looking for best-in-class early stage companies which we can invest in and add value to.”
With his Asia real estate experience, Bent hopes to identify companies globally and provide Undivided Ventures’ APAC expertise and network to help them move into Asia, as well as looking at possible Asian targets, which he says are lagging in terms of quality of offering today. “Europe is leading in terms of sustainability policy so that’s where you are seeing a lot of innovation, but we believe longer term the growth is in Asia,” he said.
Undivided Ventures will target companies seeking to solve sustainability challenges within the built environment, working in the areas of decarbonisation, climate adaptation, circularity, social value and nature positive. “There are a lot of real estate investors looking at decarbonisation within their operations and more recently at the issue of embodied carbon within construction, so this is one of a number of important themes,” says Bent.
Undivided invests in seed to Series A funding rounds and may also take part on follow-on Series B rounds. “Early stage companies are where we feel we can effect the most change and add the most value, and it is also where the market is today” said Bent.
The fund is targeting a first close by November this year and a final close by March 2023.
Legal & General Retirement Institutional has announced plans to invest a further £2 billion ($2.6 billion) into UK affordable housing over the next five years, helping to create more than 10,000 new homes.
The capital will be invested via parent company Legal & General’s wholly owned subsidiary, Legal & General Affordable Homes. The National Housing Federation and charity Crisis estimate that 145,000 new affordable homes need to be built every year to meet demand, however only 45,000 such homes were delivered in 2020/21.
The announcement follows an earlier pledge from the UK pensions group to invest £2.5 billion in build to rent housing, creating 7,000 homes over five years.
Andrew Kail, chief executive officer, Legal & General Retirement Institutional, said: “The UK has a huge shortage of affordable homes. Today’s announcement demonstrates how Legal & General Retirement Institutional, by putting inclusive capitalism at the centre of its investment focus, will help to address some of this problem.
“Legal & General is committed to building a better society for all by investing in useful and sustainable assets that will benefit both today’s society and future generations, whilst investing hard earned pension savings and securing the pensions of thousands of scheme members.”
In 2020 LGRI made its first £100m funding commitment to affordable homes. In 2021, a further £270 million was committed, to fund 1,400 new affordable homes across the UK, to be delivered by 2024.
Ben Denton, chief executive, Legal & General Affordable Homes, said: “We are also working to maximise the number of low carbon homes we build and we have committed that all new affordable homes we develop will be Net Zero Carbon by 2030.”
CBRE Investment Management has teamed up with Dutch pensions and financial services company NN Group to invest in sustainable and affordable housing in the Netherlands.
The Positive Impact Programmatic Venture (PIPV) has an initial equity commitment of €500 million. The venture will invest in Dutch sustainable and affordable residential real estate with the aim to improve energy efficiency and reduce carbon emissions.
The venture’s ambition is to achieve alignment with the environmental objectives of the EU Taxonomy for all investment properties, while also focusing on providing mid-priced rental for households who do not qualify for social housing. It aims to reduce “landlord-controlled” greenhouse gas emissions by 80% and to procure 100% renewable electricity by 2030. The portfolio will be net-zero operational emissions by 2035.
PIPV will also promote water conservation, biodiversity protection, pollution prevention and the circular economy in its portfolio and will also seek to reduce the embodied carbon of new developments.
Jelle van der Giessen, chief investment officer of NN Group, said: “Contributing to the well-being of people and planet is a key element of our strategy. NN has set clear targets towards net-zero emissions and we have pledged to more than double our investments in renewable infrastructure investments, green bonds and energy efficient real estate in the coming years. The PIPV project is clearly contributing to that target.”
PIPV’s first acquisition is the forward funding of Lighthouse (pictured), a 333 unit residential asset in Eindhoven, which is being developed by Rockfield Real Estate.
Sustainable infrastructure investor Actis has raised $700 million for its latest Asia real estate fund.
With co-investment commitments, the capital raise for Actis Asia Real Estate 2 will grow to $1 billion during the life of the fund. The fund, which is 50% committed to logistics, data centre, specialised office and industrial projects, will invest in “real estate that enables the New Economy, with sustainability at the core of our approach,” the firm said. Its geographical focus will be on China, Korea, India and Southeast Asia, predominantly in Vietnam.
Brian Chinappi, partner and head of Actis’ real estate business, said: “We believe values drive value; by instilling sustainability leadership in our investment approach we ensure our assets are leading-edge and future proofed.”
Partners Group has led a CHF600 million ($643 million) fundraising round for Climeworks, a builder and operator of carbon direct air capture plants. The Swiss tech company’s facilities remove carbon dioxide from the air to be locked away.
Singapore sovereign investor GIC co-led the funding with Partners and other new investors in the round included Baillie Gifford, Carbon Removal Partners, Global Founders Capital, M&G, and Swiss Re.
Climeworks sells carbon dioxide removal services to businesses and individuals. It has built 15 DAC plants, including the world's largest direct air capture and storage plant, which began operations in September in Iceland. The new capital will be used for capacity increase and geographical expansion – pilot projects have started in the US, the Nordics, and the Middle East.
Alfred Gantner, co-founder and executive member of the board of directors, Partners Group, said: "The scalability of Climeworks' technology makes it ideally suited to our transformational investing strategy and positions the company to make a significant contribution to global carbon removal efforts. We are also attracted to Climeworks due to its close fit with our commitment to achieving lasting, positive stakeholder impact."
Carbon capture may become a partial solution to the billions of tons of carbon dioxide emitted annually, however the process is energy-intensive and current capacity is dwarfed by emissions.
Deepki has announced €150 million ($166 million) of Series C funding from a number of European venture capital sources. The company said this was the largest ever fund-raising for a climate tech software as a service (SaaS) platform.
Founded in 2014, Deepki’s platform is designed to help real estate investors, owners and managers improve the ESG performance of their assets. The firm has five offices in Europe and 150 staff. Clients include AEW, Generali Real Estate, Allianz Real Estate and Warburg HIH.
Deepki said the new funding would help secure over 200 new hires in 2022, establish and grow the business in the US within the next 12 months and carry out strategic acquisitions. Lead funding came from UK growth equity firms One Peak and Highland Europe, while other investors included France's Bpifrance and Revaia, as well as existing investors Hi Inov and Statkraft Ventures.
Vincent Bryant, CEO and co-founder, said: “The global real estate sector needs to act now if it is to halve its emissions by 2030 and meet the net zero target by 2050. This represents a huge market opportunity for Deepki. Today’s new funding announcement means that Deepki can make a greater impact and support even more asset owners in taking on the climate change challenge.”
Emmanuel Blanchet, COO and co-founder, said: “Commercial real estate with poor ESG performance is already being affected by brown discounting and greater focus is being placed on properties which can adapt to more stringent requirements in terms of carbon emissions. As a result, we are seeing rapidly growing demand for our technology. The new investment means that we can take it to new markets and support the real estate sector as it plays its part in tackling climate change.”