Transparency is key to a more sustainable real estate portfolio
Sustainable real estate is a success factor and highly sought-after. Through transparency and a focus on ESG factors, investors with large real estate portfolios can generate additional returns.
Sustainability is a key factor for real estate investments
Sustainability has gone mainstream and this is also reflected in investors' behavior, with the market for sustainable investments growing at a rapid, double-digit annual rate. Demands for transparency and clear criteria for measuring sustainability are consequently becoming louder.
This is particularly relevant to real estate and real estate investments, which account for a high proportion of the global consumption of energy, CO2, and other resources. Three key drivers are ratcheting up the pressure:
- Institutional and private investors are demanding greater transparency for sustainable real estate investments.
- Regulators, governments, and supervisory authorities are systematically promoting sustainable investment in the financial sector and at the same time prescribing greater transparency in the form of sustainability criteria. In this way, they are actively involving the financial sector in the financing of measures to combat climate change.
- Portfolio managers are increasingly focused on the integration of ESG criteria right across the value chain, as they recognize the growing demand for sustainable real estate investments.
Rules aimed at increasing sustainability are increasing worldwide
Last data point: 2019
Source: UN Principles for Responsible Investment (PRI)
New benchmarks for sustainable real estate are emerging
The moves toward greater transparency are accompanied by professionalization of the real estate sector in terms of ESG and sustainability. The integration of ESG criteria across the real estate value chain and indeed the entire real estate life cycle is key to a successful sustainability strategy. Uniform sustainability standards and benchmarks improve comparability and transparency on sustainability issues and enable ultra-high net worth investors and portfolio managers to assess the sustainability performance of their portfolios on a structured basis.
No conflict between sustainability and returns in real estate portfolios
The integration of sustainability criteria in real estate portfolios does not conflict with the generation of target returns; on the contrary, it offers a number of advantages. Indeed investments with a positive, transparent track record in this area can achieve higher rental and transaction prices. In addition, various studies show that capital invested in accordance with ecological and social principles exhibits lower risk while simultaneously generating a superior return versus unsustainable investments.
The integration of ESG factors in risk management is becoming increasingly important for successful real estate investments. On the one hand, this is due to measurement and evaluation of specific metrics that arise from the operation and use of a property, such as energy efficiency and carbon emissions. On the other, it stems from the observation of external factors that can influence the valuation and value retention of a property. This includes physical risks brought about by climate change, such as flood risk. Last but not least, regulatory risks play an important role in terms of holistic ESG risk assessment.
Transparency is essential for the sustainability of real estate investments
For ultra-high net worth investors and portfolio managers, the transparent, systematic measurement and disclosure of sustainability criteria are a must if they are to achieve their sustainable investment goals. Though a major challenge, it should help in terms of dealing with the growing pressure from regulators and competitors. If the correct conclusions are drawn, portfolio managers can benefit from the exciting opportunities and advantages offered by sustainable real estate.
