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Rent and ESG

Contemporary design living houses. Modern luxury apartments buildings.

Investors are increasingly focused on ESG in real estate. Some of the reasons for this have been examined already: sustainability guards against obsolescence and against changes to legislation, thus adding asset value. There is also the moral case for taking action in line with COP 21 to reduce GHG emissions from buildings. But the financial case cannot be ignored: sustainable buildings command a premium on rent.

M&G Real Estate recently conducted a research project using their own European certified buildings and found that although the cost of implementing sophisticated building technologies had increased operating costs (+31bps), they were able to make up for this with significantly higher rental income (+53bps). Ultimately this meant higher cash flows for distribution (+19bps) and compensation for increased expenses.[1]

Occupant experience plays a significant role here. Building performance is not only measured in energy consumption and operating costs but in the more “soft FM” measures of staff attraction and retention, occupant feedback, and so on. Digitally enhanced buildings tend to offer insight into occupant experience in the form of biometric measurements: sensors gather information about air quality, lighting, temperature, and other parameters of occupant health and wellbeing. Building management systems alter conditions according to this data, maintaining a comfortable environment that can be personalized and improved over time.

For obvious reasons occupants are attracted to buildings that offer measurable advantages for themselves, the environment, and the wider community. Numerous studies in facilities management attest that digitally enhanced infrastructure not only achieves higher ESG scores but higher occupant satisfaction as well. The size and nature of Multifamily schemes means that building operators can encourage healthy living among residents, not only by providing fitness facilities but by creating a culture of sustainability through, for example, cycle storage facilities.

According to Prequin, there were more ESG funds targeting Europe in Q2 2020 than in all of 2019, and with investors like Catella, Swiss Life REIM and Coima all announcing funds targeting ESG-positive assets, the link between ESG and increased rental income seems to be firmly established. Moreover, the significance of Multifamily is no longer in doubt. Legal and General make the connection between ESG and Multifamily clear on their website:

Though a wide range of ESG benefits can be provided by the property sector, we recognise that the build to rent sector is unique in its ability to provide a broad range of benefits, ultimately helping our customers to safeguard their investments for the future.[2]

With the emergence of industry-certified accreditation schemes (BREEAM In Use Residential), we can expect to see an increase in Multifamily investing for the reasons outlined above: with higher ESG ratings, and all the attendant end user benefits, these developments are able to charge a premium for rent. As a recent blog post from Savills suggests, “marrying responsible investment with ongoing responsible management will be key” and we can therefore also expect to see the rise of more ESG-specific investment vehicles.

[1] “The M&G Secured Property Income Fund Annual Investment Report and audited Consolidated Financial Statements”

[2] https://www.legalandgeneral.com/institutional/real-assets/rebuild-new-abcxyz/insights/sector-insights/the-role-of-build-to-rent-in-driving-esg-outcomes-in-the-wake-of-covid-19/

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