Robert-Christian Gierth and Alexander Happ could hardly have chosen a tougher time to set up their own company. Together, the two senior real estate industry managers have a wealth of experience (one previously worked for Colliers International, the other for Buwog), and almost exactly at the start of the coronavirus outbreak in Europe they founded Assiduus Development, a company specialising in sustainable mixed-use projects anchored by offices. “Like other sectors, the real estate industry needs to deliver on its ecological responsibilities,” says co-founder Gierth, explaining this focus.
But is this conviction shared by other industry players, given the challenges posed by the pandemic? Experience shows that in times of economic crisis there’s a risk of supposed “luxuries” such as ecological and social responsibility dropping down the agenda. Even the Fridays for Future movement has hardly had a mention in the media lately, with Covid-19 dominating the headlines. Nevertheless, topics around ESG (Environmental, Social and Governance) clearly remain important within the property industry. That assessment is supported by the trend barometer published by real estate finance specialists Berlin Hyp in mid-2020. Just 18 percent of the property companies surveyed agreed with the proposition that sustainability issues are taking a back seat due to the economic fallout from the coronavirus crisis. An asset management report by EY Real Estate paints a similar picture, based on a survey conducted in the first quarter of 2020. It found that 85 percent of asset managers active in the German market expect the proportion of investment in sustainable buildings to increase significantly.
Despite the coronavirus restrictions, we mustn’t lose sight of climate policy objectives.
The real estate industry is embracing ESG
“The issue of sustainability is on the agenda of many real estate companies,” says Natalie Wehrmann, associate partner at EY Real Estate, discussing the results of the survey. “But it’s only really being fully implemented by a small number of them.” In fact, experts believe that now is exactly the right time to get serious about ESG. “Despite the coronavirus restrictions, we mustn’t lose sight of climate policy objectives,” says Maria Hill, Chair of the Energy & Building Technologies Committee of the German Property Federation (ZIA). “Taking action on this front could fuel an economic upturn across many parts of the economy.” Sophie Chick, Director of World Research at real estate consultancy Savills, also calls on the industry to act: “The innovative approaches taken by the real estate sector during the pandemic now need to be adapted to make properties more climate-friendly in every phase of their lifecycle.” Susanne Eickermann-Riepe, Chair of the German branch of the Royal Institution of Chartered Surveyors (RICS), believes that “the coronavirus pandemic has acted as a catalyst, it means that sustainability has gained in importance again.” In tough times in particular, the resilience of properties against crises becomes more vital. Proof that ESG is no longer a niche issue came in the spectacular announcement by the chairman and CEO of investment management corporation BlackRock, Larry Fink, that the company would be focusing more on sustainable investments going forward. Another giant of the international finance world, KKR, launched a Global Impact Fund in early 2020 that attracted $1.3 billion and is intended to have a positive impact on both the environment and society.
Regulatory pressure plays a major role in implementation
This focus on ecological and social sustainability is not happening on an entirely voluntary basis, however – policymakers are ramping up the pressure. “The EU’s Green Deal has given sustainability an additional boost,” says Susanne Eickermann-Riepe. The reference is to the sustainable finance initiative which the European Commission is using to steer financial institutions in the transition to a climate-neutral economy. Part of the plan is a taxonomy, i.e. a classification system that defines criteria for climate-friendly investment. The results are already being felt: “Institutional investors and listed companies must – and increasingly want to – demonstrate their sustainability,” says Simon Szpyrka, managing director of Argentus, a consultancy firm specialising in the optimisation of operating costs. Alongside the policy environment, commercial considerations play a not insignificant role. “Even though sustainability is an important issue, profitability and return on investment remain paramount,” says Natalie Wehrmann of EY Real Estate.
According to Wehrmann, sustainable products have the ability to deliver higher returns, “because investments can be managed more efficiently and operational costs reduced, and because a higher sale price is achievable thanks to lower risk discounts.” By contrast, property owners who ignore sustainability aspects need to brace themselves for lower selling prices, argues Susanne Eickermann-Riepe of RICS. But it’s about more than just a hit to asset values: “The cost of financing and insuring non-sustainable buildings is set to rise.” Accordingly, sustainability pays off for investors who take a long-term view, adds Alexander Happ, co-founder of development company Assiduus. “Non-sustainable properties face growing risks and will thus lose in value,” he points out.
of German asset managers believe that investment in sustainable properties will increase significantly.
believe that sustainability is taking a back seat due to the coronavirus crisis.
Reliable figures that provide proof of superior returns are still lacking
There is a problem, however. Although the arguments set out above are compelling, there’s a lack of reliable figures to prove long-term superior returns. That applies in particular to the social aspects of sustainability, which have only taken centre stage quite recently. There is simply no hard data available here. “Social issues and good governance are harder to measure than the ecological dimension of sustainability,” concedes Happ. Even when it comes to energy efficiency, measurability is one of the great challenges, according to EY expert Natalie Wehrmann. “Hardly any asset managers have an overview of the CO2 emissions produced by their individual properties or their overall portfolio,” she notes. She advocates using digital tools as an efficient means of determining “which measures are being implemented with what effect. In the long run, it’s the only way of driving forward portfolio sustainability.”
Industry pioneers are already tackling this challenge. In 2019, Union Investment introduced its “atmosphere” sustainability label. This already takes account of the taxonomy underpinning the EU’s Action Plan on Sustainable Finance. Building on this, in 2020 the real estate investment manager initiated the ESG Circle of Real Estate in conjunction with Bell Management Consultants. The aim is to create an industry standard for measuring the sustainability performance of properties and portfolios. “Our new initiative is closing a gap here because the taxonomy lays down criteria for properties, but doesn’t specify any concrete target values,” says Jan von Mallinckrodt, Head of Sustainability at Union Investment Real Estate GmbH.
By Christian Hunziker