The greening of portfolios is going to be a key topic in the German market in 2022, delegates heard at Real Asset Media’s Germany Investment Briefing, which was held online recently on the REALX.Global platform.
“ESG is the big issue,” said Markus Beran, head of origination international investors, Berlin Hyp. “Conversions on a massive scale are on the cards as every asset is analysed and almost the entire stock needs to be upgraded.”
The flight to quality that is happening in the German market extends beyond core to ESG-compliant assets.
Investments in certified commercial assets have been on an upward trend and green buildings now represent over 25% of single deals in Germany, according to BNP Paribas Real Estate data.
“Institutional investors have a strong focus and the regulated green or dark green funds only want certified buildings,” said Thomas Veith, partner, leader real estate/real assets, PricewaterhouseCoopers. “My personal sentiment is that investors are willing to pay a bit more for green assets, but the problem is not the good buildings traded by institutions and financed by banks like Berlin Hyp.”
The problem is the existing stock that is not owned by institutional investors, and that is where the transformation effort has to focus.
“Private owners that own a few assets are not moving as fast as the institutions,” said Veith. “But I think that’s where the opportunities lie, especially in city centres. There’s enough stock for everyone.”
Financing the transition
The main focus is on commercial assets, especially offices being upgraded or converted to resi, but there is plenty of work to be done in the residential sector as well.
“A lot of core multifamily stock will have to be repositioned in the next five to ten years and this will provide big opportunities for developers and core-plus investors,” said Rainer Nonnengässer, executive chairman, International Campus. “You can’t go wrong.”
Few doubt the urgent need to upgrade buildings, but one important aspect is how the transformation will be financed.
“Investors have to follow the broader trend and make sure their assets are ready for the future,” said Christina Ofschonka, managing director, head of core strategies, AEW. “Occupiers have a choice whether to sign the deal or not, so assets must be compliant to secure occupation. It requires a constant effort to improve, but on the banking side there are great initiatives from Berlin Hyp and others.”
Banks are beginning to finance turnaround initiatives. Berlin Hyp, which was a pioneer in 2015 with the first green bond, is now working on creating special programmes for these situations.
“We’re preparing transformation loans for this transition,” said Beran. “It’s one of our main areas of focus at the moment. Discounts or premiums will be assessed in the next few years.”
At the moment it is still difficult to quantify the “brown haircut”, the discount applied to non-compliant assets.
“We see more green premiums at the moment, but in the next few years it will shift to brown discounts if it will be impossible to re-finance an asset,” said Veith. “It might take two or three years but it will come, and then we’ll talk about stranded assets. ESG is a long journey that we’ve just embarked on.”