From green premium to brown discount as ESG is now a must

In difficult market conditions caution prevails and ESG-compliant assets are even more valuable, experts agreed at Real Asset Media’s European Real Estate: Outlook & Opportunities briefing, which was held recently at Nuveen’s offices in London and online.

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

“EU taxonomy-compliant assets are seen as low-risk and they will remain in demand, but there will be a shift in risk premium for everything else,” said Assem El Alami, head of international real estate finance, Berlin Hyp. “The direction of travel is in favour of defensive strategies and ESG is definitely part of that.”

The ESG topic has been building up since 2008 and now pressure is coming from above with stricter legislation and from below with occupier demand and lender requirements.

“As a senior lender, we have to be more cautious,” said El Alami. “Non-ESG compliance is a risk factor. Every time we assess a deal we look at green issues and if it’s a brown building with no potential to be turned into green then we simply won’t finance it.”

It is not just lenders: investors are also being more cautious too because they fear a drop in the value of their assets.

“Investors are not entertaining investments in Europe without some kind of ESG strategy because they know that assets will be devalued over time if they are not compliant,” said Audrey Klein, non-executive board member, chair of ESG committee, SFO Capital Partners. “Even in the US, the cities of New York and Boston have come up with laws imposing progressively strict criteria by 2024 and by 2030 and people there have to work out what it means to have an ESG strategy.”

There have been fears that given the economic challenges and energy crisis, ESG considerations would be put on the back burner, but that does not seem to be the case.

David Inskip, Head of UK Strategy & Research, CBRE Investment Management

“ESG will not go away as an issue, there’s too much momentum,” said El Alami. “Regardless of what inflation or interest rates do, it will remain important. An ESG strategy is more than a defensive play, it is also a positive value creation strategy.”

Around 60% of deals closed this year were for green buildings, and that percentage is set to grow.

“There’s no turning back on ESG,” said David Inskip, head of UK strategy and research, CBRE Investment Management. “The safe, best-in-class assets are ESG-compliant. That’s the direction the market is moving in.”

Investors are committed to their ESG strategies, but something is changing.

“Until now there used to be a green premium for the best assets,” said Stefan Wundrak, head of European research, real estate, Nuveen. “But now in these difficult economic times we are seeing more of a brown discount, which means there could be a lot more stranded assets out there.”