Going green: What's behind the rise of sustainability in real estate?
The sustainable real estate movement is often viewed as a nascent or fringe alternative investment choice mainly focused in Europe, but as our research shows, the reality is quite different.
2 minutes to read
In fact, investors already manage $120 trillion of financial assets (including real estate) under voluntary climate change disclosures, and there are now more than 120,000 green-rated real estate assets in clusters spread around the world. Investing sustainably in real estate can take many forms, from improving existing buildings to developing (or investing in) newer certified or certifiable assets.
But the myriad global, regional, and national green building certifications present a confusing mix to those seeking to invest in these sustainable assets. LEED and BREEAM are two of the most widely-used standards internationally, but there are many other ratings around the world, as detailed in the previous section.
Overlaid with this are investor-led sustainability ratings, such as GRESB. Key challenges for cross-border real estate investors are knowing how to match and compare criteria across different standards and deciding which matter most in which areas around the world.
Although it can be challenging to assess these different ratings, what their prevalence demonstrates is a vast pool of green-rated real estate assets globally. Gaining exposure to these assets will become increasingly important for those targeting resilient returns, for three main reasons.
Firstly, the legislative tide is turning; it increasingly favours sustainable assets. Given that the built environment contributes an estimated 40%1 of global carbon emissions, multiple governments are targeting carbon reduction. Future regulatory and tax changes are likely to favour green real estate investment and disadvantage assets that cannot demonstrate compliance.
Indeed, this is already happening in some countries; new buildings in locations such as Singapore and Abu Dhabi require minimum green ratings to be granted approval. Likewise, countries such as the Netherlands will require minimum energy performance certificate (EPC) ratings from 2023. Secondly, sustainable buildings will drive greater tenant retention and income resilience.
As we discuss extensively in (Y)OUR SPACE, businesses increasingly see real estate as a strategic device for furthering corporate goals. Buildings need to reflect the ethos of brands that operate within them and as these brands – along with their workforces and their customers – increase their focus on sustainability, the occupation of green buildings becomes a very visible way to demonstrate a commitment to this cause.
Thirdly, a broader range of financing options will be available to developers of and investors in sustainable buildings in the future. Consequently, these assets will enjoy a deeper potential demand-base compared to others, and will ultimately benefit from more resilient pricing.
1UN Environment Programme 2019 Global Status Report for Buildings and Construction