ESG top of investors’ agenda but valuation is a challenge

Investors are now driving the transition to ESG-compliant assets but valuation remains a challenge, experts agreed at Real Asset Media’s European Outlook H2 Investment Briefing, which took place online on REALX.Global recently.

Marcus Cieleback, chief urban economist, Patrizia Immobilien

“Interest in ESG is through the roof and the number of questions from investors has grown exponentially,” said Philip La Pierre, chief executive officer – Europe, LaSalle Investment Management. “Covid has really accelerated the trend.”

LaSalle has doubled the size of the team working on ESG in response to clients’ interest, he said.

“When speaking to investors it’s clear that ESG is at the top of their agenda,” said Iryna Pylypchuk, director of research and market information, Inrev. “If that box is not ticked then they’re not interested.”

The problem is quantifying the impact of ESG on the performance of an asset and on its valuation.“There’s a significant risk of obsolescence that we can’t put our finger on or quantify in valuations now,” she said.

Portfolio audit will provide idea of capex bill

Auditing all assets in a portfolio to get an idea of capex, and finding the right partner to do so, is another challenge.

“There’s a lot of information to take in and a lot of work to do,” said La Pierre. “The question is not whether to do ESG but what measure to adopt and how to tackle it. It will change the way we invest.”

Taking the long-term view, ESG is an opportunity to enhance and protect capital value simply because there is no alternative: not taking it on board will lead to loss of value.

“On the lender side we’re obliged by EU guidelines to assess ESG risk on the asset side and on the client side,” said Assem El Alami, head of international real estate finance, Berlin Hyp. “This will influence the rating of each transaction and the funding price, and even determine if we approve the deal or not.”

It might be difficult to factor in ESG fundamentals in the purchase price now, but that will become clearer over time.

 “Longevity is key,” said Jessica Hardman, head of European real estate portfolio management, DWS. “ESG is about selecting assets that are future proof and yield results over the long term”.

Some buildings are easier ‘to green’ than others

The 2050 target for net zero carbon is set and there is a clear pathway to that goal. But some buildings, most notably in the logistics sector, will be more difficult and more expensive to turn into green assets than others, she said.

“We need to work with what we have and upgrade existing assets in good locations,” Hardman said. “The question is if they can be upgraded at a reasonable cost that allows me to make a return. Technology is really helping in this, so I see a lot more retrofitting of building happening in the future.”

Experts agree that upgrading existing assets is the most environment-friendly approach, as demolition creates significant CO2 emissions.

“Refurbishing will be an increasingly large part of the story going forward,” said Marcus Cieleback, chief urban economist, Patrizia Immobilien. But it does not have to be an either/or choice: the optimal strategy is a dual one of funding sustainable new assets and upgrading existing buildings.