Sustainable real estate: The transition to net zero

Real estate has proven resilient throughout the Covid-19 pandemic so far. Over the course of 2020, global direct property funds saw their net assets grow, despite ripples of market turbulence felt across the investment industry. 

Data from Morningstar shows total net assets in ‘bricks and mortar’ funds reached nearly €247 billion in 2020 compared to around €243.5 billion in 2019.  

Meanwhile, assets invested in European ‘sustainable landscape’ direct property funds have increased from €2.5 billion in 2015 to nearly €12 billion by the end of last year. 

ESG is becoming an increasingly core focus in the real estate industry, with sustainability set to be a megatrend.

There is a lot of space for improvement in the sector in terms of aligning structures with sustainability targets, however.

A report by the Buildings Performance Institute Europe found that 97% of buildings in the EU need to be upgraded if they are to meet energy targets.

Earlier in January, Aviva Investors announced plans to reach net zero emissions across its £47.3 billion real estate platform over the next 20 years, bringing green real estate goals further into the mainstream. 

According to Stanley Kwong, who leads ESG origination and impact investment strategy for the firm’s real assets business, it’s not just a case of buying buildings that already meet decarbonisation criteria, but also of seeking to improve existing buildings that aren’t up to standard. 

“If you only use a risk-based approach, internal due diligence may start to exclude a lot of these buildings, but these buildings are not going to go away,” says Kwong. “That’s not a very holistic approach as it doesn’t balance the ESG risk with the potential positive impact we could bring to it.”

Ideally, fund managers need to be buying up existing property and improving the ESG credentials. This, in turn, has a positive impact on the performance of the underlying asset and the wider environment. “If we’re going to take the climate change transition seriously, we need to focus on how we can improve buildings,” Kwong tells Funds Europe

There is a reasonable incentive to do so, he adds. “Further down the line there may not only be climate change risk to contend with, but regulation as well.”

Transitioning assets so they meet sustainability standards is where the real add-value can be found, and where investors can play an important role, he explains. 

“You need to have the in-house capability to know what buildings can be transitioned, and what is eventually going to become stranded at some point if nobody does anything about it.”

According to Axa IM Alts’ John O’ Driscoll, European head of transactions, although people have been talking about sustainability for years, words are only recently turning into actions. 

“You are seeing it more in investment behaviour, you can really start seeing the differential emerge, which makes it possible for people like us who are very experienced developers and creators of space actually make those investments profitable,” he says.

O’Driscoll says the process is becoming virtuous as corporate intent can now be matched with the economics as well – “that’s what makes it exciting, that will be the accelerator”.

“You can look at a building and understand that you will get a better return if you upgrade it. If I spend the money, it’s going to translate to higher rents, or higher end value because of that.”

© 2021 funds europe



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