Market rewards green efforts

Against the backdrop of a lacklustre investment market, there is growing interest in upgrading existing properties. And the evidence shows that investing in such properties today will pay dividends tomorrow. By Christine Mattauch

Energy self-sufficient, circular and climate neutral in operation – when it comes to green objectives, the Behrens-Ufer project is hard to beat. DIEAG is creating around 235,000 square metres of commercial rental space on this former industrial site in Berlin’s Oberschöneweide district, based on a holistic ESG concept that is proving highly popular with prospective tenants. 

“Commercial success and sustainability go hand in hand in this project,” says Managing Director Felix Gold. The €1.1 billion development was originally conceived as a conventional office location, but DIEAG made a number of changes after acquiring the project, partly at the request of investors.

A new emphasis on investment in existing properties

Despite the current difficult situation in the real estate market, the prospects are bright for investment in existing properties with compelling sustainability concepts. “The issues of carbon emissions and circularity are becoming increasingly important for the real estate industry,” says Pamela Villanueva, Head of ESG Germany at CBRE. Large, creditworthy tenants in particular are looking for environmentally friendly, energy efficient properties because they are an important factor in attracting talented employees. Similarly, many investors are looking to boost the resilience of their portfolios in anticipation of future regulatory requirements. 

“Minimising risk is a key concern for the industry,” says Hermann Horster, Head of Sustainability at BNP Paribas Real Estate. Union Investment, meanwhile, has adopted a holistic approach: “It is part of our fiduciary duty to ensure that sustainability and investment in the portfolio pay off for our investors. If we get the transformation process right, all sides will see a positive impact, both with regard to sustainability and also in terms of returns. And it can also deliver benefits for the urban environment,” says Henrike Waldburg, a member of the Management Board at Union Investment Real Estate GmbH. Going forward, asset manager Pimco anticipates a three-way split in the office sector: “Well-let properties with low carbon footprints, appealing amenities and attractive locations will survive. We also see opportunities around ‘brown-to-green’ investments. However, the lowest quality assets will become obsolete, leaving owners facing big losses.”

If we get the transformation process right, all sides will see a positive impact. Sustainability, returns and the urban environment all benefit.
Henrike Waldburg Management Board member at Union Investment Real Estate GmbH

Back to Behrens-Ufer, or BE-U for short. The existing buildings that comprise a third of the rental space are being extensively upgraded to meet the DGNB Gold standard, while new builds on the site are set to achieve Platinum certification. The concept includes deep geothermal energy, solar panels, rainwater storage and vertical farming systems. Restaurants, cafés, publicly accessible green spaces, nurseries and schools contribute towards the social element of ESG. Felix Gold: “Our aim is to create a vibrant green neighbourhood where people are the focus.” Monthly rents at Behrens-Ufer are up to €23 per square metre in existing buildings and upwards of €24 per square metre in the new builds, which is around the average for Berlin, says Felix Gold: “We’re developing the spaces to meet the specific requirements of our customers, particularly those in the life sciences sector.” 

A big-name anchor tenant has already taken more than 12,500 square metres. The developer can envisage rolling out BE-U internationally as a brand: “This concept has the potential to gain real traction in the market.”

Higher returns and better valuations instead of stranded assets

The ever-rising demand for certified office properties illustrates how the market has come to value sustainability. A study published by CBRE in July found that certified office buildings generate rents that are 6 to 8 percent higher than conventional properties and achieve 14 to 16 percent higher valuations in transactions. A third of the European investors surveyed said they were willing to accept a premium of up to 20 percent for ESG compliance. Pressure on asset management teams has been increasing since the Netherlands introduced a ban on letting office buildings that are not energy efficient and France adopted a phased approach towards implementing changes to such buildings. “Try and get an appointment for an energy audit,” says sustainability expert Horster. “It’s the same story everywhere.” But the situation also offers opportunities for value-add specialists, notes his colleague Pamela Villanueva: “They can pick up properties at an affordable price.”

Sustainability and economic efficiency are not mutually exclusive

WestendCarré in Frankfurt am Main, an office ensemble completed in 1989, is an example of how a property can be successfully upgraded in accordance with ESG criteria. French investment company Ardian acquired around 31,000 square metres of the complex two years ago. “Demolition followed by a new build was never an option,” says Bernd Haggenmüller, Senior Managing Director for Real Estate. The ensemble is being refurbished in a way that fulfils tenants’ requirements with regard to sustainability and also meets investors’ demands in terms of profitability. “We have the expertise to identify properties where we can make environmental improvements that enable us to contribute towards the Paris climate targets while at the same time generating excess returns,” says Haggenmüller.

Green value creation – additional effort but increased income

At WestendCarré, energy needs will be more than halved and the carbon footprint improved by fully updating the building services and connecting the property to a district heating network. A roof terrace and green courtyards enhance the user experience. What is also clear is that the measures implemented must be economically viable. For example, replacing the façade to increase efficiency would be disproportionate, Haggenmüller says. He estimates that green investments have the potential to boost rental income by 10 to 15 percent. “We’re expecting a similar phenomenon in the investment markets. The end product we create will be highly sought after because property holders are rejigging their portfolios.” Ardian has calculated the ratio of additional effort to increased income for a sustainably refurbished office building in Milan, coming up with a green value creation effect of €2,250 per square metre.

The carbon footprint of existing properties is also increasingly being included when evaluating portfolios. Canadian investor Ivanhoé Cambridge, which manages a property portfolio worth nearly US$60 billion, has announced the introduction of a “Green IRR”. From this autumn onwards, existing properties and potential new investments will be valued with a “green premium” or “brown discount” dependent on their carbon performance. 

Robert-Christian Gierth spotted the trend early on and founded development company assiduus³ in 2019, a specialist in sustainable projects. It is currently developing the Zillecampus complex in central Berlin, which comprises nearly 14,000 square metres of office space. It will be energy self-sufficient thanks to geothermal power and solar panels, while ceiling panels will regulate the temperature. Refurbished existing buildings account for a third of the space. The new build will feature circular construction materials, with walls made of wood or straw and carpet made from recycled fibres.

Resonance among users with a clearly defined sustainability strategy

Gierth calls the concept “ESG brought to life”, which, he says, attracts users with a clearly defined sustainability strategy, while investors like the fact that Zillecampus exceeds the requirements of the taxonomy. Thanks to a specialist team, there is hardly any additional effort compared to a conventional project: “We invested more money in planning, but the construction work itself isn’t more expensive.” assiduus³ is marketing the space at between €34.50 and €38 per square metre, which is consistent with the location. “It doesn’t make sense not to build in a sustainable manner,” says Gierth.

.By Christine Mattauch

Title image: DIEfabrik GmbH & Peter Rüssmann for DIEAG

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