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ESG Overview

ESG – environmental, social and governance – is central to investor decision making in the residential market. With 40 per cent of global carbon emissions attributable to buildings, investors are beginning to diversify their portfolios and move away from traditional asset classes. Focus has therefore shifted from pure ROI to two related but separate issues: 1) efficiency, leading to stable returns and 2) benefits to occupant health, wider society, and the environment.

One effect of this perspective shift has been to encourage investment activity in Multifamily or Build to Rent accommodation, especially on continental Europe where the costs of home ownership remain prohibitively high. According to Savills, investment volumes in Multifamily increased 58 per cent between 2014 and 2019 compared to 21 per cent for real estate in general. More recent research tells us that during the economic uncertainty of the last year, this sector has remained robust: churn rate is low, rent payments are prompt, and demand remains high.

Investors are also attracted to the sector by the availability of data. Operational performance is typically enhanced using sensors to gather data, machine learning to look for patterns in that data, and automated building processes to reduce energy consumption, operational costs, and so on. But data can also – just as significantly – be used to certify green building credentials. It validates the argument that sensor-enhanced assets will not only cost less to operate but also hold their value more, shielding operators and investors from the threat of new legislation and changes to carbon tax regimes. (The consensus view is that most governments will follow the Netherlands in setting out strict legislation around every stage of the building lifecycle to meet carbon reduction targets.)

Demand for greener buildings comes not only from governments and investors but from occupants, shareholders, employees, and debt providers. A recent UN Environment enquiry found that 80 per cent of banks surveyed offer green lending for commercial real estate. Lloyd’s has established a £1bn lending initiative that will encourage borrowers to implement green infrastructure, with 20 basis points on purchases over £10million. Arguably, as Natixis’s Emmanuel Verhoosel says, “the wider financial industry is evolving more rapidly than the real estate sector on ESG.”[1]

But in commercial real estate, Multifamily continues to lead the way. As an asset class it has the potential to deliver social and environmental benefits not only to the (mostly younger) occupants who constitute its primary demographic, but to the wider community. The Social Value Portal (an online tool for benchmarking the social value of projects) estimates that the UK construction industry could be capturing an additional £20bn of social value each year.[2] From the provision of more affordable housing to enhanced occupant wellness through monitoring and control, this sector is expected to pioneer ESG in real estate.

[1] “ESG in Real Estate Finance, Part 1: How a Loan Can Be Good for the Environment”

[2] https://www.propertyweek.com/comment/social-value-is-a-need-to-have-not-nice-to-have/5099862.article

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