Trend towards sustainability.
Real estate industry. Buildings are among the biggest emitters ofCO2."We will therefore not succeed in complying with the Paris climate agreement without a sustainable real estate industry," Thomas Wiegelmann of Schroder Real Estate is convinced. Because the pressure on this sector will continue to increase, investors will have to pay very close attention to the sustainability of real estate investments in the future.
With high energy consumption and heavy reliance on fossil fuels, real estate is the focus of any strategy that aims to combat climate change. "For investors, this is a major challenge. After all, only companies that strategically position themselves correctly at an early stage will prosper in the long term," Thomas Wiegelmann, Managing Director of Schroder Real Estate, is convinced.
According to an analysis by the World Economic Forum, the real estate sector accounts for around 40 percent of global energy consumption per year - more than industry or transport. Around 20 percent of global greenhouse gas emissions are attributable to the building sector. And it consumes around 40 percent of the raw materials available each year.
Bringing emissions there towards net zero is a Herculean task. It is made even greater by global population growth and the trend toward urbanization. According to United Nations calculations, around two thirds of the world's population will live in cities in 2050. The fact that this means that much more will have to be built in the future adds to the pressure on the real estate sector to become more sustainable.
An important factor here is, of course, politics. Sustainable building has now been declared a guiding principle everywhere in Europe. At the same time, more and more large companies are now demanding compliance with sustainability targets in new rental agreements. After all, many of them have to prepare environmental reports themselves.
The capital market will also play a decisive role. In March 2021, the EU defined the requirements for sustainable funds. "Regulators are thus knocking down the first pegs," Wiegelmann makes clear. However, the criteria that buildings must meet in order to be considered "sustainable" have not yet been conclusively regulated. However, numerous quality seals and certifications have been established in recent years that have now achieved broad market acceptance, including LEED, BREEAM and DGNB. In some cases, further criteria are used in the assessment in addition to the life cycle assessment and the use of resources.
For real estate investors, dealing with this topic is particularly important today for one simple reason. What is currently being planned and built has an economic life of around 25 to 80 years, depending on the type of use. It is important to anticipate now what tenants and investors will demand of a property tomorrow. "Potential tenants will not rent in the future if your property is not sustainable. And investors will then buy it, if necessary, only at sometimes considerable valuation discounts," Wiegelmann predicts.
Accurate assessment of the sustainability aspect is therefore an important task and skill for investment and asset managers. The fact that there are a large number of certifications today, but as yet no uniform standard, makes this particularly difficult. "That is why it is so important for us to carry out our own due diligence specifically geared to the issue of sustainability, which enables us to make a sound assessment regarding the future viability of a property," explains Wiegelmann. This examines the entire life cycle of a building - from development and construction to operation and demolition. For new construction, conducting such an audit is still comparatively straightforward. "We typically deal with projects at a very early design or planning stage and can then work with the project developer towards a lower environmental footprint," Wiegelmann explains. Energy efficiency can be increased through improved insulation measures, for example. It is more difficult with existing properties. The decisive factor here is how much energy and heat a building consumes and how this consumption can be optimized. In addition to energy-saving renovation measures, digital options for managing real estate can also help. The catch: the energy-related refurbishment and optimisation of an existing property is typically associated with high one-off investment costs.
For the investor, it is therefore always important to weigh up which measures appear necessary for optimisation in the short, medium and long term and what the implementation will cost. "Because these also benefit the tenants to a large extent in terms of optimised operating costs, it is important to think about partnership models for financing at an early stage," advises Thomas Wiegelmann.
In many cases, the refurbishment will then be worthwhile. This is because buildings that have been modernised with a view to sustainability achieve comparatively higher rents and also have lower vacancy rates on average. This ultimately leads to a higher valuation and better prices in the event of a potential resale. One of the reasons for this is that purchasers must expect energy standards for existing buildings to become more stringent in the future. Sustainable buildings are therefore considered more future-proof than their conventional counterparts.
Now, Wiegelmann is convinced, it's a matter of making investment strategies more resilient to climate change: "Only those who pay attention to the future viability of their property will be able to be successful in the long term."
Schroders' sustainability approach.
Investment house Schroders is a leading global asset manager with offices in 37 markets across Europe, the Americas, Asia and the Middle East, and Africa. Its global assets under management stand at €815.8 billion (as at 30 June 2021).
Founded in 1804, the company has long been guided by the principles of responsible investing. As early as 1998, it drew up its first corporate governance policy. The Principles for Responsible Investment followed in 2001. All Schroder management teams now incorporate ESG criteria into their investment process. They use five proprietary analysis tools that enable them to take sustainability aspects into account without being solely dependent on information from traditional rating agencies. This is also reflected in the classification of financial products. As of this year, the EU's Disclosure Regulation distinguishes between three types of funds:
Article 6 funds must disclose how they deal with sustainability criteria.
Article 8 funds promote environmental or social aspects. And Article 9 funds even pursue explicitly disclosable environmental or social objectives in the investment process.
All Schroders products comply with the requirements of Article 6. In addition, Schroders currently has a range of 75 Article 8 funds and nine Article 9 funds, which is constantly being expanded.
As a member of the Net Zero Asset Manager initiative, Schroders is also committed to supporting the goal of zero emissions by 2050 or earlier. And in the Better Building Partnership, Schroder Real Estate is working to improve the sustainability of real estate.
Dr. Thomas Wiegelmann
Managing Director Schroder Real Estate Asset Management GmbH