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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. 

Asset owners should be implementing clear decarbonization and resilience strategies, despite economic headwinds, JLL says.

The broker’s The commercial case for making buildings more sustainable report argues that climate risk, occupier and investor demand and regulation make sustainability investments “the smart decision for longer-term performance”.

The report highlights three reasons for making sustainability investments. Firstly, mounting costs from climate risks, including heatwaves, flooding, storms and droughts, are increasingly impacting urban areas, with significant implications for building owners.

Events such storms, wildfires, hurricanes, flooding, droughts and freezes, have cost $612 billion in the last five years in the US alone. Meanwhile, more than 350 cities have peak summer temperatures above 35°C. An estimated 970 cities will suffer such heatwaves by 2050.

Research by JLL and Munich Re shows that cities in Asia and the US sunbelt have the highest climate risk at present (see above). 

Secondly, sustainability measures are also supported by demand from occupiers and their employees. JLL points to a rental premium for green certified office stock of 11.6% in London, 9.9% across Asia and 7.1% in North America.

JLL also points to a global undersupply of green buildings, with an estimated 75% of demand for such properties unmet in the US, for example. In Europe and Asia, less than half of demand for green office space is met with supply.

Finally, asset owners are at risk of difficulties with financing, regulation and insurance if their buildings fail to meet appropriate standards. Both Europe and the US have released major corporate climate disclosure regulations in the past 18 months and the regulatory burden is set to increase.

An increasing weight of regulation is also coming at city level, with cities such as New York and London introducing their own measures to reduce emissions from the built environment. 

The JLL report suggests a number of measures, including energy-efficiency retrofitting, adapting building design and on-site clean energy generation, to make portfolios more resilient. 

Property-linked finance could enable billions of pounds worth of investment into improving the energy efficiency of the UK’s homes and commercial buildings, a new report claims.

The Green Finance Institute report argues that property-linked finance, where loans are linked to the asset rather than the owner, could contribute to the estimated £360 billion ($455 billion) of investment required to upgrade the UK’s inefficient buildings by 2050.

An asset owner using property-linked finance would be able to fully fund energy efficiency upgrades and then transfer payment obligation to a new owner if the property is sold.

The Green Finance Institute said the US Property Assessed Clean Energy (PACE) model of property-linked finance has enabled the investment of over $13 billion in making homes and commercial buildings greener and more resilient.

Emma Harvey-Smith, programme director, Green Finance Institute, said: “Introducing property-linked finance to the UK market could channel billions into improving the energy efficiency of the UK’s homes and buildings. The GFI first identified PLF as a solution in 2020 and looks forward to working with the finance and retrofit sectors to bring forward a scalable and customer-centric model for PLF that will support the UK’s net-zero ambitions.”

The Asia Pacific region is making progress on ESG, however this is largely limited to a small number of large companies, interviewees for the 2024 Emerging Trends in Real Estate® Asia Pacific report said. 

Progress on ESG matters is being hampered by two factors, professionals interviewed for the report produced by PwC and the Urban Land Institute, said. Rising costs are making ESG improvements harder to swallow and only a small slice of the real estate industry in the region has embraced ESG.

The report said asset owners are “dialling down carbon efficiency agendas as they focus for the time being on ensuring they are able to get assets refinanced while also delivering targeted returns”.

One respondent said: “There is a small group of Asian property companies who sing the song and are bona fide interested in driving down their carbon. But a lot of them, 90%, I think, don’t find it all that important.” 

While more and more asset owners are collecting data on energy use, few are using it to drive efficiencies or sharing it at C-suite level. 

Interviewees suggested the Asian real estate industry needed more basic messaging on ESG, focusing on: “incremental improvements and looking to educate how ESG-compliant buildings can attract better-paying tenants, improve asset values in the eyes of global investors, and eliminate risk of stranding”.

However, the report found an increased focus on transition risk amongst those surveyed, as well as companies seeking to blend green infrastructure, such as solar PV, with real estate. 

Furthermore, the proportion of respondents declaring they have at net zero policy in place jumped sharply, to more than 50%, up from just over 30% two years ago. 

The full 2024 Emerging Trends in Real Estate® Asia Pacific report can be found here.

The focus on ESG principles will increase at family offices in Asia over the next three years, a survey by investment services company Ocorian found.

Nearly nine out of 10 family office professionals in Asia said there would be an increased focus on ESG principles from a fiduciary perspective over the next three years.

The research, which covered family offices with $15 billion in assets, showed almost all (97%) believed ESG was part of a family office’s fiduciary duty and 87% predicted an increasing focus on ESG principles from a fiduciary perspective over the next three years. Almost half (45%) predicted a dramatic increase.

Novia Lu, business development director, APAC at Ocorian, said: “There is growing interest in ESG as well as private markets and digital assets but overwhelmingly younger family members in Asia want to ensure the long-term growth of the office.”

Heimstaden has appointed Eva Bienias as group director of environmental sustainability. 

In this new role Bienias will be responsible for the formulation and implementation of environmental policies at the Swedish residential investor and manager, which operates in 10 European markets.

She was previously sustainability manager at Heimstaden Netherlands, which she joined in 2020, and has more than 12 years of experience in the real estate industry.

Chief sustainability officer Katarina Skalare said: "We are thrilled to have recruited Eva into this new role at Heimstaden. Her extensive expertise in real estate, paired with her proven track record of conducting sustainability projects during her four years as the sustainability manager at Heimstaden Netherlands, positions her ideally to drive our environmental initiatives forward."

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)

Sustainability-driven refurbishments are driving office development in London, according to Deloitte.

The professional services firm’s latest London office crane survey found there are 124 office schemes under construction, totalling 15 million sq ft of space. The UK capital has seen the highest volume of new office starts on record, with 5.1 million sq ft of new construction starting across 43 schemes since the spring. Refurbishment projects account for 3.3 million sq ft in 34 schemes.

The increase in refurbishments has been driven by the anticipated tightening of Minimum Energy Efficiency Standard (MEES) regulations and occupier demands for space which matches their own sustainability commitments and aspirations, said Deloitte. 

The UK government intends that all commercial buildings must have an energy performance certificate rating of C or better by 2027 and B by 2030. Owners will not be able to lease out buildings which do not meet the standards or do not have an exemption.

Philip Parnell, partner and real estate valuation lead at Deloitte, said: “Occupier focus on premium space, coupled with addressing the anticipated MEES deadline and drive to net zero, is continuing to provide a strong stimulus to refurbishment activity. This is a trend that is countering the backdrop of an otherwise challenging macro-economic environment.”

London developers told the survey they expect achieve operational net zero across their portfolios by 2040. However, they highlighted the cost of construction as the biggest obstacle to achieving net zero. 

A UK real estate investment trust is proposing to amend its investment objectives in order to focus on a sustainability improvement and decarbonisation strategy.

The Schroder REIT, which manages a £466 million ($585 million) diversified portfolio of 40 properties across the UK, today published a circular proposing amendments to its investment objective and policy, and to the company's investment management agreement.

The new strategy will focus on adapting existing buildings to make them “modern and fit for purpose, to achieve a green premium and capitalise on mispricing”, REIT manager Schroder Real Estate Investment Management said in a statement accompanying its interim results.

Alastair Hughes, chair of the REIT’s board, said: “As sustainability considerations become even more important for investors and occupiers, we have a strong conviction that it will clearly help to differentiate the company and drive more sustainable, risk-adjusted returns.”

Schroder REIT said there is: “an opportunity to offer investors a genuinely differentiated proposition, whilst also attracting new investors who have specific sustainability objectives which are aligned to the real estate sector’s decarbonisation targets, and improve the liquidity and rating of the company’s shares”.

The REIT announced net asset value (NAV) down 1.6% to £296 million in the six months to 30 September and a 1.1% NAV total return. It also announced the completion of Stanley Green Trading Estate, 80,000 sq ft operational net zero warehouse scheme in Manchester (pictured above). 

A whole life cycle approach to buildings is needed for real estate to hit Paris Agreement targets, a new report argues.

Investment manager DWS's Decoding Carbon in Real Estate: Strategic implications of taking a whole lifecycle approach report says refurbishment of existing assets and greater use of low carbon materials will give real estate a better chance of reducing its emissions. 

The report notes that embodied carbon in construction accounts for 11% of global emissions. As a consequence, refurbishment is increasingly targeted over development in some markets, such as the UK, where refurbishment is now more common than new development in the London office sector. 

However, regulations and voluntary standards remain behind the curve on embodied carbon, the report says. Neither CRREM nor GRESB have integrated embodied carbon into their assessments, although both are considering this for 2024. And while green building certification regimes LEED and BREEAM both include assessments of carbon on a whole lifecycle basis, the main weighting of scoring is on minimising energy use at the operational stage.

Many nations lack databases detailing the embodied carbon of construction materials, says DWS and existing databases use different materials, assumptions, units of measurement, and standards of data verification, “making the data difficult to compare”. 

The industry needs to balance embodied and operational carbon considerations, DWS says. For example, triple-glazing creates more embodied carbon than double glazing but is 40% more thermally efficient. 

The picture is complicated because whole life carbon assessments can vary widely in their outcomes, depending on methodology. DWS gives the example of the proposed Marks & Spencer store redevelopment on Oxford Street, London, where the carbon lifecycle assessment included in the store’s planning submission was challenged by heritage groups on the basis that flawed assumptions were used to portray a new building as the lower carbon option.

However, a 2021 study by Arup, while demonstrating that refurbishing existing buildings is the lowest carbon option using a whole lifecycle approach, a new building constructed to the highest environmental standards is not significantly worse.