Private Assets

The opportunity to do well by doing good in real estate

Zsolt Kohalmi, Global Head of Real Estate and Co-Chief Executive Officer, Pictet Alternative Advisors

The opportunity to do well by doing good in real estate

The property industry is the largest consumer of energy. By making buildings more sustainable, we can help the environment and also boost returns for real estate investments.

Investors have now realised that sustainable investing is not just about doing what is good for the planet and humanity – it can be good for invest­ment performance too. This is particu­larly true for real estate investment.

Buildings account for 30% global energy use through their construction and operation. They are also respon­sible for nearly 40% of energy-related carbon dioxide emissions[1]. The ecologi­cal footprint becomes even bigger when you consider how much water and raw materials they use up.

Yet, while the past year gave us a glimpse of life without daily commutes to shared office spaces and flights, it remains difficult to imagine life with­out the buildings that provide us with daily shelter. Indeed, we are now ever more focused on the spaces that we live and work in, as extreme weather events increase, and pandemic-imposed isola­tion has left us hungry for live interac­tion with colleagues and loved ones. Indeed, rather than doing away with these buildings, we must find ways of making them more efficient and well­ness enhancing. The pandemic has accelerated certain existing underlying trends, and there will undoubtedly be many buildings requiring updates, and change of use for the available spaces. These refurbishments will need to also focus on improving the energy and wellness footprints of these buildings.

Striving for intensity reduction

The United Nations estimates that, in order to limit the rise in global temper­atures to less than two degrees centi­grade by 2030, the property industry must reduce the average energy inten­sity of buildings by at least 30%.

As is the case with most sectors, innovation and technology can help.

Things like sensors that optimise energy consumption through smart management of heating, ventilation and other building operation processes are already in use in some commercial buildings. New materials, meanwhile, can make construction and develop­ment more sustainable as well as reduc­ing building waste and noise pollution. So too can streamlined processes such as modular construction, where parts of the building are constructed in a controlled factory environment with­out any material waste.

Better for all

Environmentally-friendly buildings make for better real estate investments, too. Research shows that buildings with stronger environmental creden­tials generate higher rents, lower rates of obsolescence, improved tenant satis­faction, lower voids and lower incen­tives[2]. With the environment becoming a priority for those who construct, manage and live and work in buildings, the performance gap between green buildings and their less efficient peers should widen further over the coming years. This has important implications – not least for the millions of investors who, together have poured USD3.4 tril­lion of their capital into real estate over the past two years[3]. And those that chose environmentally friendly investments are already doing better. Occupancy is, on average, 4.3% higher in green-cer­tified buildings, while rents are about 4.6% higher, according to a review of data across the developed world. They also have lower operating costs and higher sales prices.[4]

Crucially, progress needs to focus on existing buildings as over 40% of total carbon emissions for a building’s lifecycle happen when it is built. This, coupled with the fact that 70% of all buildings in the world are over 20 years old[5] presents a tremendous opportu­nity to refurbish, enhance, and at times repurpose older buildings.

As investors, we believe that invest­ing in making buildings sustainable is not only the responsible thing to do for our planet but also a way to add value for investors.

[1] Sources: UN environment Carbon status report 2017.

[2] Source: ‘Decomposing the Value Effects of Sustainable Real Estate Investment: International Evidence’, A. Devine, E. Yonder, 2017

[3] Source : Data for 2017–8. Cushman & Wakefield, ‘Global Investment Atlas 2019–20’

[4] Source : Median values, Sustainability Review/ MDPI: A Review of the Impact of Green Building Certification on the Cash Flows and Values of Commercial Properties, N. Leskinen et al, 2020

[5] Source : Propmodo, 2019

[6] Source : UN Environment Program

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