Portfolio analysis delivers important insights

Is investing in sustainability worth it for office properties? That was the question addressed in a study carried out by the International Real Estate Business School (IREBS). An analysis was undertaken of a portfolio of some 200 office properties held by Union Investment. The findings provide initial insights into the economic pay-off of sustainable commercial properties.

Tougher regulation and higher energy efficiency requirements for new builds and existing properties

The Paris climate agreement signed by members of the United Nations in 2015 sets out ambitious goals. It aims to limit the rise in global temperatures to well below 2 °C above pre-industrial levels and to reduce emissions of harmful greenhouse gases to practically zero by 2070. The associated transition to a low-carbon economy is already under way in Germany.

In addition to this multilateral framework, the German targets are anchored in the EU climate action roadmap for 2030 and 2050, which seeks to cut greenhouse gas emissions to approximately 40% below 1990 levels by 2030 and to 80–95% by 2050. Breaking down these ambitious reduction targets by sector involved intense negotiations, which is why the German Climate Protection Plan 2050 was not agreed until the end of 2016. The construction and real estate industry plays a key role in achieving the defined sectoral objectives because the industry consumes a high proportion of total resources, at 30–40%.

In light of this, it is essential for long-term real estate investors to take proactive steps to align their portfolios accordingly. This is all the more urgent because investment decisions made today will continue to have an impact over many years and determine significant KPIs such as the risk and return of the future portfolio.

Measuring the impact of sustainability on economic performance

Against this backdrop, the team led by Prof. Bienert of the International Real Estate Business School (IREBS) at the University of Regensburg worked with Union Investment to scientifically examine the Hamburg-based real estate investment manager’s European office property portfolio of around 200 properties. The focus was on assessing the impact of sustainable design on major – and in particular measurable – performance factors such as rental income and market value.


The IREBS team analysed the portfolio with regard to sustainability, property features, location, market aspects and the resulting performance variables. Sustainability was defined multidimensionally: different elements were taken into account, ranging from the property’s links within its microlocation through green lease structures, existing certifications, energy efficiency upgrades, moderate consumption and optimised energy performance figures to tenant satisfaction. The various influencing factors were analysed in relation to each other in order to reveal relevant and quantifiable connections between individual drivers of value, thereby making it possible to isolate the effect of sustainability on rents and values. The regression analyses applied belong to the hedonic pricing models category.

Key message of the study: sustainable properties create added value

The findings obtained from the study support the main conclusions of other national and international analysis in this area, i.e. sustainability can create added value at property level and mitigate specific risks. However, it is also clear that it is not possible to make generalised statements about exact premiums or discounts because of the size of the data set used here, which comprised “only” 200 properties. The key analysis results – controlled for all other factors – included the following:

  • Poor energy performance figures led to significantly lower (net) rental income and market values. This indicates that the market regards energy efficiency as a driver of value. In such a scenario, the market value can fall by over EUR 300/m2.
  • The presence of sustainable lease structures (a green lease) had a positive effect on value in the data set.
  • Certification has a positive effect on rents and values. However, it is becoming increasingly important to achieve exceptionally good results (Platinum or Gold).
  • Local amenities and public transport links within walking distance have a significant positive impact on the achievable rent.

Certification alone is not enough

Particularly interesting is the finding that sustainability certification has now become standard in certain market segments. Simply having a sustainability label is no longer enough of a USP to positively influence rents and market value. Based on analysis of the data set, only outstanding ratings such as DGNB Platinum, LEED Platinum and BREEAM Very Good now offer genuine differentiation in the market. This finding runs contrary to earlier studies on added value, which identified more substantial increases in value even where buildings had only achieved average ratings. This also means that just having a “pretty” certificate is not enough – what really matters is the sum of the property’s sustainability features and their effectiveness in terms of delivering a measurable improvement in performance.

Empirical studies need to be interpreted for valuers

The working assumption that investment in sustainably designed office properties makes business sense for large investment managers like Union Investment was emphatically proven by the IREBS study. However, there is still a lack of reliable data to precisely quantify the sustainability dividend, ideally broken down according to individual aspects. There is also a need within the industry to translate empirical findings into practical tools.

Assessors can draw on guidelines from various industry bodies for assistance with appropriate wording in written reports in relation to the variables involved in valuation and any qualitative changes. Empirical studies are also available that indicate general ranges with regard to possible changes in value. What is still partly lacking is structured integration of these resources.

Valuers need guidelines that allow them to make objective judgements in specific cases. The level of sustainability must be reflected in the valuation in the context of the actual market situation, which means incorporating sustainability criteria into the valuation models used by property professionals. EU projects like ImmoValue and RenoValue have already gone some way towards providing corresponding scoring models and other solutions. Going forward, the scientific community can help to refine these approaches by contributing methodical and analytical expertise.

An article by:

Prof. Sven Bienert MRICS REV
Managing director of the IRE|BS Institute of Real Estate at the University of Regensburg

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