Sustainability in the real estate industry: Investing responsibly pays off
Investors are taking an increasing interest in sustainable real estate, as investing in these properties can reduce a portfolio’s operational risk. This trend is a response to the growing demand for buildings that conserve resources, operate with a neutral impact on the climate and make it possible to work and live healthily. The innovation drivers here are proving to be digital technology and networking.
The real estate industry has read the signs of the times and is changing course
Battles for the availability of food, water and living space, natural disasters as a precursor to dramatic climate change, and unprecedented floods of refugees have raised people’s awareness: acting more sustainably for the sake of our future has become the order of the day. But the concept of sustainability has long been associated more with a moral or ideological imperative. Activity in this sector has often been scoffed at, and investments assessed primarily from a cost viewpoint.
The real estate sector also had a hard time initially reconciling its economic objectives with responsibility for the environment and society. But attitudes have changed, prompted not just by legal requirements but also by stakeholder expectations that have risen worldwide – among investors and also among stakeholders, tenants and clients. In Europe in particular, real estate investors are increasingly considering ethical, ecological and social criteria in their investment decisions.
‘Green’ buildings offer substantially more potential for investors
When investors follow what are known as ESG (Environmental, Social, Governance) Investment Practices in the context of medium- to long-term return expectations, they are motivated not so much by altruism but by the entrepreneurial perspective. A green property may also offer potential for development in terms of a value-add strategy. At times, project developers are also driven to increase their activity in this sector by their investors’ philosophy. Whatever is motivating them, these investments ultimately benefit everyone.
In their sustainability whitepaper, published in 2017, the authors at LaSalle Investment Management concluded that investors in green properties were even prepared to accept a return of as much as 0.65 percentage points less in return for greater security. They often escaped the cost of modernisation and repositioning because the buildings had already been built and finished to the latest standards, or else construction work had been partially state-subsidised to meet green standards. They also found that the demand for green buildings, in addition to their marketability, reduced market risk and therefore vacancies. Finally, potential tenants in these buildings tended to be more solvent. Ultimately, sustainably operated properties performed better in the long term at both the asset and portfolio levels.
“Anyone who wants to keep operating successfully in the market in the future needs to act responsibly today – toward society and the environment, employees and clients.”
Dr Marcelo Cajias, Associate Director Sustainability, PATRIZIA Immobilien AG
As a result, sellers no longer treat sustainability as a mere fig leaf or PR line; they’ve made it a workable component of corporate culture. “Anyone who wants to keep operating successfully in the market in the future needs to act responsibly today – toward society and the environment, employees and clients,” says Dr Marcelo Cajias, Associate Director Sustainability at PATRIZIA Immobilien AG. “Our commitment to sustainability supports our ability to stay in business over the long term.”
Doing business sustainably addresses markets, tenants and employees
There are multiple target audiences for those doing business sustainably. One of them is the market, which, in the real estate industry, means both investors and the tenants of properties. As already mentioned, investors are increasingly taking a building’s sustainability features into account in their investment decisions. As a result, whether for themselves or as representatives of their financial clients, they expect project developers to inform them proactively about advances in setting and meeting environment and sustainability goals.
The same also applies to resource-efficient methods that are technically feasible throughout a building’s lifecycle. Bionics – the translation of natural phenomena into technology – is becoming increasingly important. Internationally, the term ‘biomimetics’ is becoming established. Tenants of a property are primarily interested in structural soundness and materials, the building environment and efficiency. This is demonstrated by the appeal of recognised certification systems like DGNB, LEED, and BREEAM.
Another important target audience for doing business sustainably are building users who, aside from regulatory requirements for occupational safety and health protection, want modern forms of work organisation tailored to their needs.
Sustainability needs standardised definitions and explicit target values
Sellers and investors in the real estate business still lack explicit target values for sustainability as well as a clear definition of what constitutes a sustainable investment. It’s true that building certification allows buildings to be evaluated to a certain degree, but uniform standards for assessing green properties are still in the early stages of development. Until they are available, initiatives like Deneff in Germany, the European Transparency Code and regulations at the national and international level in particular furnish the tools and targets for climate protection and energy savings.
Sustainability may be a hot topic in the real estate business, but it’s not entirely a matter of choice. In Germany, for example, it’s required by a sustainability reporting system anchored in regulations. Regulations and statutes like the Energy Savings Regulation, the Renewable Energy Sources Act and the Act on Renewable Energy Sources in Heating provide mandatory guidelines. In the Paris Climate Agreement, the EU states also agreed at the end of 2015 to reduce CO2 emissions by four fifths by 2050 from their 1990 levels, and in Germany by a full 90%.
This ambitious goal presents the building sector with serious challenges, because that sector represents one-third of Germany’s CO2 emissions. By 2030 alone, building-generated greenhouse gases must be reduced from the current 119 tonnes to no more than 72 million tonnes. In theory, by 2050, every building will only be allowed to emit 14 kilogrammes of CO2 and consume just 100 kilowatt-hours of final energy per square metre per year, a Herculean task in light of today’s figures (94 kg/196 kWh).
Digitalisation as an innovation driver for the real estate industry
In addition to efficient building systems for cooling, heating/air conditioning and lighting, the greatest sustainability potential lies in intelligently connecting these systems. For example, temperature and air quality can be adjusted to a room’s current occupancy. Digital networking is also part of the real estate industry’s future. The use of ‘smart’ real estate technologies and property technology (PropTech) can cut property management costs, with the welcome by-product of also being more sustainable.
Energy efficiency is the key factor. It can already be optimised on a small scale by digitally collecting consumption data (‘smart metering’) and on a larger scale by sensor-controlled elevator, lighting and heating systems (the ‘smart home’) that can even automatically emit their own warnings of potential disruptions. Appliances connected to the internet are continuously exchanging data with each other (the Internet of Things). Experts estimate that digital networking will reduce buildings’ energy consumption by about 10%.
Thinking still further along these lines, the eventual result will be ‘smart buildings’ that connect users with their properties and that can be, for example, networked with data from other sources that can forecast, amongst other things, a building’s occupancy.
PATRIZIA has intelligent self-learning heater thermostats at its office building in Augsburg that have the potential to reduce energy consumption by up to 30% by detecting when the user of a given office begins and ends the work day and adjusting the heat accordingly. Fostering these responsible and future-oriented job and home environments will require that investors don’t view the current challenges as a threat but rather as a realistic opportunity to advance innovation in the real estate industry.
Replacing today’s construction methods with sustainability in mind
“Even ten years ago, we were still concentrating almost exclusively on construction methods,” says Dr Cajias. “Today we’re also looking at employee health and productivity and choosing properties to meet our clients’ expectations.” One example is the Astro Tower in Brussels, which PATRIZIA acquired for a Korean consortium in 2016. The previous owner had extensively renovated the building’s energy capabilities so that it’s now classed as a passive building in the highest energy-efficiency category.
In the autumn of 2017, another PATRIZIA property, the Itämerenkatu 5 in Helsinki, received LEED certification for sustainable construction, design and operation. And PATRIZIA recently converted its entire real estate portfolio in Germany to renewable energy sources. In addition to saving tenants about one million euros in energy costs per year, this change is expected to prevent about 26,000 tonnes of environmentally harmful CO2 emissions annually.
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