Outlook 2024: transition from brown to green is a key trend

Brown to green is the colour transition to watch this year and beyond, delegates heard at Real Asset Media’s Outlook 2024: Key Trends & Opportunities briefing, which took place recently at Schroders Capital’s offices in London.

“The theme of the future is conversions and upgrades, but rather than office to resi it will be brown to green,” said Rogier Bos, real estate finance Benelux, Berlin Hyp.

Across Europe and across asset classes, demand for ‘green’ product is growing.

“ESG is now integrated at all levels, from lenders to investors to occupiers, and compliance is now very much the norm,” said Nick Preston, head of investment management, Panattoni Investment Management.

As there is a shortage of new, shiny, ESG-compliant buildings, the obvious choice is to transform, renovate and upgrade existing stock to bring it up to the required standard.

“Brown to green strategies are needed across the board, because there is a huge lack of quality space in all sectors,” said Oliver Kummerfeldt, head of European real estate research, Schroders Capital.

Even in today’s tight market, senior lenders are willing to provide capital for upgrading assets and managing to green.

“There’s a lot of talk about a debt gap or a funding gap, but I call it an equity gap,” said Bos. “But if you invest in good quality, ESG-compliant assets then the funding is always available. If you want to upgrade an asset, financing for transformation is available too.”

The market is becoming ever more starkly divided between ‘good’ and ‘bad’ assets. The office sector is perhaps the most striking example of this trend.

“The office market is extremely polarised between the best and the rest,” said Kummerfeldt. “Offices still have a role to play, provided they are high quality and in the right place. Everyone wants ESG-compliant offices, so demand is set to grow, but the pipeline is very limited.”

The data on rental growth in places like the City of London, Copenhagen, Paris CBD and many other European cities point to high demand and limited supply. As construction activity has slowed down because of high costs and the economic downturn, that demand/supply gap is likely to widen further.

“We are very positive on London offices as rental growth has been stellar,” said Miles Skinner, head of investment management UK & Ireland, Union Investment Real Estate. “Our article 8 funds require us to invest in ESG-compliant assets and there’s not an abundance of stock to choose from, so we need to create it. We’re getting involved in forward funding and will build our own properties.”

Question marks over the sector – because of the economic slowdown, societal shifts and the impact of remote working – are less of a concern now in Europe. Unlike in the US, in Europe the vast majority of people – 70 to 90% – are back in the office.

“We continue to finance offices because we believe they will still be in demand in the future,” said Bos. “I don’t see that changing over the next 15-20 years. What is changing is the size of the market. Most of our clients’ tenants are reducing their space, but those fewer square metres are becoming more expensive. Prime rents are rising in London, Amsterdam and elsewhere.”