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Transition risk under scrutiny as ESG awareness grows

Assem El Alami, Head of Real Estate Finance, Berlin Hyp

Transition risk and portfolio performance are becoming more of a focus for companies, experts agreed at Real Asset Media’ ESG-Effective Strategies for Real Estate briefing, organised in partnership with PwC and held online this week.

As awareness of ESG requirements grows, companies need more than abstract indicators to make informed investment decisions and evaluate the transition risk correctly, balancing capital investment plans against obsolescence risk.

It is easier for new buildings to make the grade, but the next big challenge is to transform and improve existing buildings, making them ESG-compliant.

“We were the first mover among German lenders, giving loans for new green assets,” said Assem El Alami, head of real estate finance, Berlin Hyp. “Now we incentivise buildings that have a transitional risk, grey assets that need to be turned green and need a significant reduction in CO2 emissions. Our aim is for our portfolio to be 30% green by 2025, which is an ambitious target. It was easier with new assets but transforming old buildings is more of a challenge.”

It is a worthwhile investment because the impact on value will increase in time.

“The market will react and at some point companies won’t buy assets that can’t be transformed into green buildings,” he said. “As an industry we’ll have to price that in.”

Re-purposing old buildings and bringing them up to scratch requires a clear plan and long-term vision.

Smart solutions required for existing stock

“You need to have a good understanding of your asset and to have a 10-20 year horizon,” said Jens Böhnlein, global head of asset management, Commerz Real. “You must have some smart solutions to improve existing stock. We’re in the process of identifying the worst buildings we have so we can focus on them.”

Investing in transformation is a challenge but also a huge opportunity for real estate to add value for the long term.

“Core and core plus investors can identify ESG as the main value driver and it’s not so difficult to get an article 9 certification,” said Thomas Veith, partner, real estate, PwC. “In Germany there are many opportunities to make old buildings ESG compliant, or to finance the transformation if you are a lender.”

Companies are developing strategies based on transition risk. Market expectations vary in different countries, with Europe and particularly Northern Europe far ahead.

Regional speeds vary, but the direction of travel is the same.

“Time horizons are the main difference, but it is a trend that is growing everywhere,” said Richard Hamilton-Grey, director sustainability real estate, Europe & Asia-Pacific, Nuveen Real Estate. Even in Asia-Pacific in the last six months Japan, China and South Korea have made explicit commitments on carbon reduction.”