Realisation grows that investment in real estate needs to include wider issues such as climate change, reports Nicol Dynes.
There is a widespread belief that real estate needs to improve its performance and demonstrate its credentials when it comes to ESG. In particular there is increased interest in, and understanding of, the social impact of real estate, experts told Real Asset Insight.
This is borne out in the latest CMS annual survey, Real Estate Reset, in which 99% of investors said they believe they have a corporate social purpose and that it’s a win-win, because it also adds to the company’s value.
“We see a growing interest on the part of investors for ESG-compliant funds,” says Sebastian Orthmann, partner, certified lawyer for commercial and corporate law and head of real estate, at CMS Germany.
“Pension funds and institutions now are more interested in investments that make a difference,” says Richard Hamilton-Grey, director, sustainability, real estate Europe & Asia-Pacific, at Nuveen Real Estate. “There’s a real opportunity to widen impact investing to bigger issues, and Covid-19 has accelerated the understanding that real estate can play a huge role in the social fabric.”
“ESG has gone mainstream and it’s not going to stop,” adds Hamilton-Grey. “There’s a good cocktail for the transition, the obvious carrot of doing the right thing and the stick of an increasingly stringent regulatory environment.”
Sacrifices need to be made
What’s needed is a healthy dose of realism and the realisation that sacrifices need to be made now for rewards in the future, according to Olivier Elamine, CEO of Alstria Office REIT.
“The main reason we can’t manage climate change is that money can’t be made from it,” he says. “We need a collective acknowledgement that there is a cost to it. We need to invest and that investment is not going to yield immediate results. Everyone – investors, landlords, tenants – needs to realise the scale of the challenge.”
‘I’m not optimistic that there will be much meaningful change on the S & G unless there is more regulation.’
Sebastian Orthmann, CMS Germany
The pandemic has accelerated concerns about health and wellbeing, but on the other hand there is a risk that ESG could end up on the back burner at this time of economic crisis.
“Our strategy doesn’t change in these difficult times,” says Natalie Orde, sustainability manager at Grosvenor Europe. “There may be capex constraints, but we need to be more creative about how we use our resources, continue to reduce our emissions and persuade others to do the same.”
Short-termism must be banished, she adds: “We agree with Mark Carney that we can’t self-isolate from climate change, so we cannot afford to ignore it. We’ve been around for 340 years as a company, so we take a long-term view.”
Saving the environment
There has been an understandable focus on the pandemic, but if we really want to think longer term and save the environment it might be necessary to stop building, says Elamine. “The pandemic will go away but not climate change, which is the biggest threat,” he says. “We need to stop building and start refurbishing existing buildings. Embedded carbon is 50% of the problem, so if you are still building greenfield developments then you’re not concerned with climate change.”
Alstria, the biggest owner of offices in Germany, was the first company to publish a sustainability report and to set emission reduction targets and it believes ESG should be a real commitment and not a marketing exercise.
“As a landlord we find there’s a real gap between words and actions,” Elamine says. “People say they want to reduce emissions, but then will insist on having air conditioning in their office. It is important to recognise that there is a contradiction there.”
Alstria started to procure green energy in 2014 and offering it to tenants when they sign the lease, as well as to employees. “It’s a service that we want to offer, it has no economic benefit for us,” says Elamine. “So far 25% of our tenants have signed up to the programme, which has helped us to reduce prices and emissions.”
Take-up has been good, but the fact remains that 75% of tenants have not taken up the offer.
Words and declarations of intent need to be matched by deeds and action. There are signs, however, that things will move in the right direction because of the generational shift that is taking place. The young tend to be more genuinely interested in and committed to the environment, to the point of being willing to make personal sacrifices for the cause. According to the CMS survey, a considerable number of occupiers would be willing to take a pay cut to work in an environmentally sustainable building.
The highest percentages are in the Netherlands, where 50% of tenants would be willing to give up part of their salary, and in the UK (34%). The percentage is considerably higher among younger occupiers. “The young are driving this shift, which makes me optimistic about the future,” says Clare Thomas, partner at CMS.
Pandemic prompts rethink over building use and social impacts
As the pandemic has accelerated change and highlighted the importance of the sector, real estate has become interesting again.
“The pandemic has speeded up trends and magnified the problems we face as a sector,” says Clare Thomas, partner at CMS. “It has also led us to think more deeply about how we use our buildings and about the environmental and social impact of real estate.”
For its 8th annual report, Real Estate Reset, published in November, CMS surveyed hundreds of real estate professionals and polled occupiers of all sizes, from SMEs to multinationals, to track and highlight the changes that are happening in the sector.
Rating asset classes on their level of appeal it becomes obvious there are winners and losers, with distribution and logistics way out in front (84%) and retail at rock bottom (3%), explains Thomas. “PRS and healthcare are up, while interestingly offices, which used to be at the very top, have dropped out of the top five for the first time since we’ve been doing the survey.”
‘The pandemic has reminded us of the buzz and energy we get from human connections. Integration with colleagues is best for creativity, productivity, innovation and motivation.’
Clare Thomas, CMS
It is important for investors to distinguish between long-term trends which have been accelerated by the pandemic and reactions to the crisis which are likely to be reversed as the health emergency recedes.
“Hotels, leisure and student housing have really suffered this year, but that is totally out of sync with what we have seen over the last few years so they are likely to bounce back,” says Thomas. “Logistics has been a favoured asset class for a long time, but retail has been declining for years.”
The jury is still out on offices and what their future is likely to be. People need buildings to work in, but not necessarily physical offices as such. The CMS survey shows that the blended approach is favoured, with half of respondents expecting to work more from home, but wanting to return to the office for some of the time.
“The pandemic has reminded us all of the buzz and energy we get from human connections,” says Thomas. “Integration with colleagues is best for creativity, productivity, innovation and motivation.”
People want to return to the office at least some of the time, but there are concerns about health and safety.
“The way we use offices will change, with more emphasis on health,” she adds. “The S in ESG is often overlooked, but in future there will be more attention paid to the social impact of offices.”