Non-institutional assets are the real ESG challenge for property

One of the major challenges for the real estate industry is the “long brown tail of assets” that are not of institutional quality but require considerable investment to bring them within the criteria to meet net zero targets.

“The real estate sector has been a little bit of a sleeping giant,” said LaSalle Investment Management managing director, debt investments Richard Craddock. “It’s only really awoken over the three to five years.”

He said that while the built environment is the source of 40% of the world’s carbon emissions, to put that in perspective the aviation industry is responsible for less than 2%.

“The sector is on a journey so a lot of firms are grappling with how they decarbonise their existing product, what’s the right way to decarbonise, what’s the best return on investment from capex.”

He said that the solution is going to be a combination of data – which the industry currently lacks but is starting to harvest from its assets – and technology such as PV panels, and improvements to building management systems.

It is also a case of finding the right capital for assets to take them on a journey and decarbonise the existing built environment, not just ground-up new developments.

“A lot of the ESG agenda is being driven by large institutional managers who have the resources to be able to employ sustainability teams on a full-time basis,” Craddock said.

“Typically those market participants are buying large best-in-class real estate in gateway cities in core markets across Europe. That has a substantial part to play and that’s great,” he added.

“But there’s a big challenge in the long brown tail of assets which are not institutional but still require that capital investment.”

“It’s harder to justify that capital investment when ultimately the underlying value of the real estate is is not that great. Those are the types of assets that fall below the radar of the institutions.”

Please click on the video above to watch the full interview or listen to the podcast below.