Investing in sustainability to minimise risk
A building that is vacant, loses value and even becomes completely unsellable is a horror scenario for real estate investors. The reality is that properties which require significant updating or refurbishment are often difficult or impossible to market.
Today, traditional risks – such as a poor choice of location – are being joined by new ones. Changing social values and an increase in climate legislation need to be considered, as do rising expectations among building users. Sustainable investment can be an appropriate response to these trends.
The huge economic impact that changing attitudes can have was highlighted in June 2015. Norway's pension fund, the world’s largest sovereign wealth fund, sold off nearly all its coal and mining assets, citing climate change as the reason for this drastic step. While the real estate industry is not directly affected, the decision illustrates the profound significance of this process.
High expectations and strict legal requirements
As buildings are among the world's biggest consumers of energy, it is hardly surprising that the real estate sector is a key focus of environmental policy – with correspondingly major implications. The German Energy Saving Ordinance, which aims to make the nation's building stock climate neutral by 2050, is a prime example. The drastic reduction in carbon emissions to which many leading industrial nations have repeatedly committed themselves requires action from all stakeholders in the sector.
In future, it will only be possible to sell some non-sustainable buildings at a discount because they are unable to comply with the latest energy efficiency requirements or simply fail to meet people's expectations. In England and Wales, from 2018 it will actually be illegal to let a private property which does not achieve certain minimum standards for energy efficiency. Investing in sustainable buildings can significantly reduce the risks associated with regulatory change.
Tenants becoming more demanding
Quite apart from climate change and energy efficiency concerns, the wider demands on buildings continue to increase. Tenants now expect a high level of space flexibility and individual design options. State-of-the-art technology and connectivity to the digital world are also important criteria. Sustainably designed and managed buildings are typically best able to fulfil these requirements. They are thus particularly good at reducing risk in this regard as well.
Proactive asset management needed
Given the speed of change, it is no longer enough for building operators and investors to simply follow the latest trend. Active asset management is about thinking one step ahead to ensure long-term success.
Union Investment committed itself to responsible investment and sustainability early on. The company was one of the first major real estate holders in Germany to conduct and publish a comprehensive sustainability analysis of its entire global real estate fund portfolio. This exercise enabled transparent benchmarking for the first time.
Having a detailed overview of emissions and resource consumption across all properties allows Union Investment to respond appropriately to future developments (or even to anticipate them), supported by customised tools. Risks can thus be minimised and performance opportunities seized.