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ESG compliance pays: certified buildings perform better

Vanessa Muscara’, Director, Head of Research & Strategy, Europa Capital

If ESG compliance could be equated to strong returns, the transition would be much easier, delegates heard at Real Asset Media’s recent ESG-Effective Strategies for Real Estate briefing, organised in partnership with PwC.

The goal is to prove that certified buildings perform better and provide a more resilient income stream. Evidence from both the investor and the occupier side points to ESG-compliant buildings leading to better outcomes.

“On the investor side, research proves that certified buildings achieved a higher distribution income to the client even if costs were higher,” said Vanessa Muscarà, Director, head of research and strategy, Europa Capital. “Returns now are driven by income, so we must keep occupiers happy, and when we go back to the office we must be as productive as possible.”

A Harvard University study shows that tenants of certified buildings achieved cognitive scores that were 26% higher because they were more rested, alert and productive, she said: “The positive impact on employees is undeniable.”

There has been a shift in perception and tenants are now seen as customers. Another shift brought about by Covid-19 is that what used to be purely symbolic has become functional as well.

Green assets send a clear message and make employees feel safe

“A green asset has symbolic value because people like to be seen working in such a building, it sends a clear message,” said Muscarà. “Now, post-pandemic, that building has functional value as well, because it’s clean and healthy, it makes employees feel safe and so on.”

Current market weakness can be an incentive to act and get a certification.

“Each company will have to choose a level of certification that reflects the local price point,” said Muscarà. “Capital values for offices in London have fallen by 20% quarter-on-quarter, so there is an opportunity to buy assets, improve them and reposition them to core certified status.”

The US is far ahead of Europe. In Chicago, for example, 70% of office buildings are certified. The best-performing European city on this score is Warsaw, where 35% of buildings are certified, but it is a positive exception because it has a lot of new stock. Most cities in Europe rank lower and across the Continent 60% of offices are over 20 years old and need upgrading.

“There is a real opportunity for investors and current owners to refurbish and improve the asset to certification grade,” said Johannes von Richtofen, manager, real estate valuation, modelling and analytics, PwC. “Bringing ESG into the building will make it more attractive for investors and occupiers.”