Five steps to reach net zero through sustainable real estate investing

Most real estate owners are currently adding ESG strategies to their daily investment decision-making. However, there is reluctance and still a lack of measurement standardisation which needs to be tackled in order for countries to achieve 2050 targets. The following five steps are a call for sustainable real estate investing.

Act now

Real estate owners need to act quickly but carefully to decrease greenhouse gas emissions. It is not only about achieving the minimum reporting requirements set by the European Union and national legislation, but also about taking action and making an impact with real estate investments. This then adds value for owners, tenants and the community. Several studies (e.g. Fuerst and van de Wetering, Bienert, Cajias) show that incorporating sustainable management can add significant value to rent and sales prices.

Waiting for investments can cause ‘brown discounts’, harming the property portfolio value. In a recent survey by the World Built Environment Forum (2021), around one third of respondents expected brown discounts when comparing green to non-green buildings. Moreover, real estate companies are increasingly incorporating sustainability criteria into their acquisition process.

• Respond to consultation on Sustainability and ESG in Commercial Property Valuation and Strategic Advice

This observation is underlined by the RICS Sustainable Building Index, stating that investor demand has increased by a net balance reading of +55 within the last year on green properties (World Built Environment Forum, 2021). Long-term portfolio resilience, risk stability and higher sales prices should convince investors to act now.

Manage data

Knowing the overarching properties’ energy data is key for taking action. The easiest and most time-efficient method of receiving real data is through smart meters which can be installed in rental premises with relatively low effort. However, the legislative application of those meters varies between countries in Europe.

The second option is consumption data disclosure agreements stipulated in green leases. Energy disclosures need standardised processes and reliability which real estate investors alone can often not manage. A data management program can help to gather a comprehensive data set and assist to evaluate and aggregate data. Furthermore, data management programs can help making statements about, for example, CRREM conformity and stranded asset risks. The resulting findings should be translated in action points underlined with sustainable measures.

Create comparability

The basis for calculating carbon emissions is measurement standards. The real estate industry and the European Union are currently aiming to unify the various calculation methods. However, currently missing standards are leading to non-comparability among real estate portfolios. Even though the European Union has set up energy and carbon emission benchmarks, there are currently too many parties, which has created a hotchpotch in the real estate industry.

Standardised calculation methodologies provide a basis for every sustainable investment and are therefore highly important to make precise statements about energy and carbon emission performance. Furthermore, they bring certainty among real estate owners making it easier to identify possible stranded assets and action points.

Engage tenants

Tenants account for nearly 80% of the total energy consumptions in buildings [Better Buildings Initiative (2021) Engaging Tenants in Energy Efficiency]. The integration of tenants into the sustainable management of the rental area is therefore crucial in order to fulfil ambitious climate targets set by legislation.

Green leases, designed to ensure compliance with climate targets, are considered an important driver in achieving those goals. They are mostly tackling energy, waste and water criteria and are a contractual agreement between both landlords and tenants. They can help to decrease energy consumption and carbon emissions, and hence stabilise and decrease the portfolios’ risk profile. Furthermore, regular dialogue with tenants about sustainable management within the rental premises are key for engagement. Tenant workshops and guidelines help to facilitate treating the areas in a more sustainable way.

The World Built Environment Forum Sustainability Report 2021, it was found that around 50% of the survey respondents recognise increasing popularity of such leases. This development is also observed by Stefanie Stetter, Asset Management Associate:

“To achieve the goal of net zero, it is essential to involve the tenants within the entire process. Without tenants’ awareness and cooperation, net zero will not be workable. Therefore, green leases are considered as an important driver in decreasing energy consumption and greenhouse gas emissions."

Be open to new solutions

A lot of companies are currently creating comprehensive tools for mitigating buildings’ impact on climate change. Measures that intervene directly into the buildings’ operation, such as predictive building automation providers or data management programs, which help to aggregate and evaluate the data, are considered a promising approach in the lifecycle management.

However, it is also important to consider sustainability at the very beginning of the lifecycle. Digital solutions such as BIM need to be already integrated in the development phase. The importance is underlined by the observation that companies include digitised sustainability tools such as climate risk assessments or EU Taxonomy comparability apps in their acquisition process. Being open to new solutions offers new perspectives, faster and more precise evaluations and creates the mindset for future-proofed real estate portfolios.