The New Decade
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Making the property industry sustainable

Frankfurt am Main

It has been a decade since developers started erecting sustainable buildings. They now account for an increasing share of the property market. Now it’s existing buildings that need to catch up. An important point of leverage in achieving this will be to instil sustainability as a fixed feature of the financial industry. There are reasons to be optimistic, however, thanks to initiatives like the European Green Deal and the increasing use of carbon pricing.

BLOG SERIES ON THE NEW DECADE (PART 4)
2020 is not just another year. Entering 2020 means there are only ten years to go before 2030 – the year associated with so many sustainability goals. To mark 2020, six members of the DGNB board look back at the last ten years in the building sector and cast their gaze forwards. One topic – examined from six angles. In the next post on this blog, Anett-Mud Joppien examines the role played by universities and professors for sustainable building.

 

Of the regular appointments I have advising major asset managers. Every week two or three of those appointments revolve around the following issues: “We need to achieve a zero carbon footprint by 2030. Can we do it? And if so, how?” A lot of things have changed in the property industry. So when I’m asked questions like this, people are no longer just thinking in terms of individual properties – but entire portfolios.

If you don’t trust this subjective impression of a sustainability consultant, which is after what I will offer, have a look at the following numbers. By the way, the fact that we even have this data is an important accomplishment of the last ten years. I’ll call that accomplishment certification – tangible evidence that buildings are sustainable.

Certification numbers – 2010 to now

I will sum this development up in a single sentence. The first certificates were issued ten years ago, then in the mid-2010s this topic gained momentum, and as a trend it became increasingly established in the second half of the last decade. Since then, approximately one in five property transactions in Germany have involved investments in sustainably certified properties – new or existing. With office buildings, the share of sustainably certified properties is at least 30 % of all investments. As such, compared to ‘the old days’, the 2010s were a decade of sustainability. So what triggered or kick-started this trend in the property industry?

Graph: investments in individual deals: share of green buildings

Investments in sustainable buildings have risen continuously year on year ©BNP Paribas Real Estate

Individual factors vs. the big picture

Before 2010, there was plenty of energy, efficiency and water legislation focusing on building envelopes, construction technology and energy use. But most regulations were individual measures with little influence on a broader scale, let alone any measurable impact. The real turning point came when all of the individual threads were woven into one to form an entire wall-to-wall carpet. When the DGNB was founded, you suddenly saw architects, engineers, sellers, university professors and many other parties engaging in frenzied discussion about the abundance of these topics. The outcome was an instrument that united the interests of environmental, social and economic stakeholders. And thus also laid a viable functional foundation for the property industry.

The collapse of Lehman Brothers: an entire industry opens up to new ideas

The second driver of these developments was the Lehman Brothers crash. What started in 2007 in the property area of the United Nations developed into a global financial crisis. It became a lot easier to sell or lease buildings if they were certified. Certification became an important add-on, like a hallmark. And even if there was ‘only’ the LEED scheme in the United States at that time, it paved the way for further developments. The crisis-ridden property industry started listening more and was open to new ideas. The answer came in the form of property that was sustainable and thus future-proof. There’s one important lesson worth highlighting in all this (especially at the moment): what began as a crisis developed into a huge opportunity.

Who is investing, how much and where?

The question is, how can we build on this foundation and accelerate the upward curve? To work that out, we need to look more closely at the last ten years. Who is investing in this area? And why the interest in sustainable buildings and making an impact?

Offices in the city – a stronghold of certification

green building certificates in the big 7 cities of Germany

Certification in the Big 7 cities in 2018 ©BNP Paribas Real Estate

There is also rising demand for certified buildings in the city – where the big deals happen and major properties are developed. In Germany, the Big 7 are Berlin, Dusseldorf, Frankfurt, Hamburg, Munich, Stuttgart and Cologne. Something we’ve also ascertained is that there’s an emphasis on office buildings situated as close as possible to the city centre. The motivation for major investors such as open-ended property funds and insurance companies to invest in the city centre is ultimately the client: tenants. Often, the ‘creditworthy’ tenants that hold the most appeal for these investors will only consider certified properties. These properties offer an important vehicle for signalling the importance they attach to environmental issues and social responsibility. They also allow clients to show that they are making a contribution to the sustainable development goals (SDGs). There is also an increasing tendency for investors to subscribe to the United Nations Principles for Responsible Investment (PRI) themselves. Thereby, they introduce their own SDG-compatible rules for sustainable investments.

Share of green building investments by selected investors (%)

Investors that place emphasis on value retention and sustainability tend to invest more in sustainable buildings ©BNP Paribas Real Estate

On top of this, there is also growing interest from smaller communities in sustainable buildings. The archetypal client in this area is a small or medium-sized company that’s keen to build for its own requirements and lays emphasis on quality.

Existing buildings: unfortunately still lagging behind

What is basically considered a matter of course for new buildings is unfortunately not even on the agenda for existing buildings. There was a rise in the number of old buildings certified in the mid-2010s, but in recent years the rate has ebbed compared to certifications of new buildings. The main problem lies in the ‘investor-user dilemma’. Basically, it’s not worth renovating some old buildings because even if tenants enjoy the benefits of a sustainable makeover while they’re using the building, they’re still not willing to invest in renovations themselves!

Graph: Certified buildings – existing vs. new

A reverse in trends: the relative share of certified new buildings has been rising since 2015 compared to existing buildings. ©BNP Paribas Real Estate

 

Looking to the horizon: climate-neutral buildings in all areas

Given these developments, three key issues will need to be addressed if we want to encourage the world of property to move further in the direction of sustainability.

  1. The investor-user dilemma can be solved – and must be!
  2. The EU’s Sustainable Finance action plan and the European Green Deal offer promising options for making investment products sustainable. Implemented properly, such approaches also work for existing buildings.
  3. Carbon pricing: the point of entry we chose was much too low. If we can quickly push pricing up and keep doing so, this will also provide us with important leverage.

If all of these things happen together, I have every confidence that the trickle of activity I am witnessing at the moment can develop into a wave of climate-friendly renovations. The client questions I mentioned at the beginning (regarding carbon-neutral portfolios) will then become much more commonplace. So all I can say for now is go for it – we’re ready and waiting. And to answer the second question: yes, we can do it. To find out how, ask the DGNB.

Graph: Market share of certification systems

Market leader in Germany for a good reason: The DGNB Certification System ©BNP Paribas Real Estate

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