ESG real estate. How the new investment trend will affect the future

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Businessmen all over the world are seriously interested in such a recent phenomenon as ESG. For example, real estate investors are increasingly focusing on sustainable development. ESG real estate is not only a trend today, but also a necessity that the time requires. Let’s look at what investors need to know about ESG. And how it will help strengthen your position in the market in the future.

ESG real estate stands for: 

  • environment;
  • social effect. Sometimes S is sustainability, that is, ‘sustainable development’, something between ecology and ethics. The word sustainable is most often used as a synonym for ESG;
  • governance management, meaning the quality of corporate governance.

ESG real estate 

Once upon a time, real estate was the embodiment of capitalism. However, the current trend is in the opposite direction. The application of ESG standards to real estate (particularly by governments and developers) has shown that this asset class remains relevant when sustainable development guidelines are applied.

There is a growing awareness that real estate can have a significant social impact. Either through the restoration of public spaces (indirectly focusing on the merits of existing real estate), affordable housing, social housing and care centers. Or through investment in new buildings with an environmental focus, in particular in green buildings.

ESG infrastructure 

Obviously, real estate and infrastructure are closely related. In particular, the real estate sector is the main consumer of energy. Therefore, building more sustainable real estate, such as using cleaner materials or using smart heating or ventilation technologies. That is not only helps the environment, but also enhances the value of the respective property investment.

Today, ESG is not only the prerogative of corporations, but part of the policy of many states. Now this is a practice that business introduces not voluntarily, as before, but under pressure from the state. The authorities become a conductor of ESG ideas at various levels. It is likely that in the near future it will become extremely difficult or impossible to conduct business without looking at these criteria.

Thus, the administration of President Joe Biden plans to radically upgrade the country’s infrastructure and allocate $1 trillion for this purpose. And this is not just a replacement of the old with a new one, but systemic changes. The infrastructure will be updated taking into account the introduction of green technologies and standards. This is changing the approach to choosing contractors and the market for companies providing infrastructure solutions.

ESG standards are no longer a hobby or icing on the cake of institutional investment strategies — they are a complete and vital toolkit, the implementation of which increases business sustainability. The influence of this factor is already great now, and there is no reason why it will not grow. Businesses that ignore this trend risk becoming part of the past, not the future.

Zoomers or millennials: who buys ESG real estate 

The main consumer demand for an eco-agenda is spurred on by zoomers and millennials. 90% of them plan to increase their investments in the next five years, taking into account how responsible the investment object is.

The generation of 25-year-olds is gradually entering the target audience of real estate buyers. This is typical not only in the comfort class segment, but also in higher price categories. For example, business class, luxury real estate.

At the same time, it is necessary to take into account the planning horizon. Projects that are currently at the initial stages of construction will be put into operation at the moment when the main consumer group will be today’s adherents of an ecological lifestyle and support for socially responsible producers.

Features of ESG construction

Eco-construction is more expensive than usual by 10% on average. Therefore, government regulation, the introduction of preferential terms for market participants and the support of relevant projects can become a real incentive for the development and support of green building. And the transition of the development sector to ESG standards.

In the meantime, the incentive for the construction of green new buildings is that such real estate belongs to the category of effective investments in the long term. Savings are achieved through reduced resource consumption.

If we are talking about new buildings, then ESG-reality promises to enter the core of development products. From the definition of engineering solutions and the choice of building materials to the technological filling of objects at the operational stage.

The projects will compete on the progressiveness of mechanisms for saving natural resources, the use of related green technologies. Energy supply from renewable sources, restoration of the territory of the company’s activities). An additional factor will be the prospect of an increase in the cost of electricity in the future. And, consequently, projects with efficient energy generation systems will be in the greatest demand. Solar panels, generator panels, and own autonomous boilers that can bring the building closer to the level of maximum energy passivity.

5 things investors should know about ESG real estate: 

Energy saving/net-zero is the new normal

While property certifications such as LEED will remain important measurements of the environmental performance of buildings, the focus is shifting to initiatives such as the World Green Building Council (WGBC) Net Zero Carbon Commitment. Which calls for all buildings to have clean zero carbon emissions by 2050.

Gap between green and conventional rent widens

There is significant evidence that green buildings have higher rents than comparable non-green properties. Indicating significant brownback potential for properties with relatively poorer environmental performance.

Rents for LEED-certified office buildings in the U.S. are 5.6% higher than non-certified office buildings. Rents are particularly high for LEED Platinum-certified office buildings, which are forecast to grow by 0.51% on average more per year than non-certified facilities.

Green building materials are affordable 

The cost of building with wood varies depending on the type of property, but on average can match or reduce costs compared to conventional materials. Timber also provides greater cost certainty and can significantly reduce construction time due to prefabrication. American developer Hines reports that while building office buildings using wood can cost 5-10% more than concrete/steel. The reduction in construction time makes the net cost equivalent.

Effective risk and cost management can improve resilience

Many of the biggest risks faced by the construction environment are climate-related, with extreme weather often resulting in significant property damage. For example, fires in California have destroyed more than 15,000 homes in recent years.

Investors looking to improve risk and cost management and build resilience must assess their portfolio’s exposure to climate risks and take action to address vulnerabilities in each asset.

Technology and supervision are critical to achieving ESG goals

As the focus on ESG increases, technology will play a key role in creating significant and long-term change in investor practices and portfolios by improving ESG data collection and reporting.

Platforms that can measure and improve social performance are primarily focused on occupant health and include building level ratings such as Fitwel, which optimizes buildings to maintain health. Fitwel provides an overall ranking of buildings based on specific features. Such as open space, workspaces, common spaces, water and food.

Conclusion 

Green building is a trend, no matter how much the supporters of more conservative approaches would like it to be the opposite. And this sector is just entering the main stage of development. Which means that right now is the best time for long-term investment in the industry.

ESG is a new factor in real estate investment quality. Therefore, contribution in ‘efficient’ and ‘green’ facilities will allow better management of potential risks in connection with the gradual transition to the concept of sustainable development and a low-carbon economy. 

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