ESG-minded investors don’t have to settle for lower returns

Attention to the social impact of an investment creates a better portfolio and increases returns, experts told Real Asset Insight.

“It is absolutely not the case that an ESG-minded investor has to settle for lower returns, quite the opposite,” said Paul Oremus, fund manager, Dutch & European residential funds, CBRE. “If you create a good environment, the well-being of your tenants will increase and that will lead to lower vacancy levels and lower maintenance costs. We already see that in our portfolio.”

CBRE decided to focus on social impact in a big project in Amsterdam by employing community managers, organising affordable events and creating a happy environment.

“The idea was to combat loneliness, which is a big problem in big cities,” said Oremus. “We measure tenant satisfaction in every asset we have and the average score is 6, but the Amsterdam asset scored 9.5 and the turnover rate is 5 compared to a city average of 20. So we can measure the benefit: it’s helped our tenants but also increased our returns.”

Colliers also has put in place a social valuation metric, trying to quantify the social impact of their investments with measures such as requiring their suppliers to have an apprenticeship programme or employing people close to the assets.

“It’s not perfect or precise, of course, but it gets the message across”, said Andy Hay, managing director EMEA property management, Colliers.  

Measuring the value of an ESG-compliant building is another issue. There is a debate about how long the wait has to be for the social impact investment to be reflected in the valuation of an asset.

Some say the difference is already apparent.

“There’s already a clear negative impact on non-green buildings when it comes to valuation and it will increase over the next few years,” said Thomas Veith, partner, leader real estate/real assets, PwC. “People who don’t invest in ESG will end up with stranded assets. Every player has to decide what is their level of ambition and where they want to position themselves, but doing nothing is no longer an option.”

ESG premium apparent in the US but not yet in Europe

In the US there’s already a premium on the valuation side for ESG-compliant buildings, but in Europe the answer is less clear.

“As a developer we don’t see that change yet,” said Arkadiusz Rudzki, executive vice-president leasing and sales, Skanska office development CEE. “It is easier to sell the project if it’s green, but people don’t like to pay more because of it.”

It might just be a matter of time before valuations adjust to companies’ choices. As more capital shows an interest in what is inevitably a smaller market, green buildings will inevitably become more expensive to buy.

“What we see in the market is that the big corporates, including tech companies, prefer to send a signal and lease sustainable buildings, so at some point this will have an impact on market prices,” said said Rutger Schuur, chief investment officer, ParkBee.