The concepts of ESG and sustainability long outdate the pandemic – but there’s no doubt that the pandemic experience has accelerated thinking and its application in the real estate space. As part of our ‘Real Estate from a New Perspective’ series, Michael Charmer, Head of Corporate Services – IoM at Suntera Global, looks at how investors, asset managers and all segments of the supply chain are adapting to the growing influence of sustainability as part of real estate investment strategies…
Q: How is sustainability perceived in the real estate space?
The reality is that sustainability and ESG issues are no longer considered in isolation in the real estate investment space. Sustainability is absolutely integral when it comes to key decision making and is driving movement in the sector.
Asset owners and investors appreciate that property is responsible for around 40% of UK carbon emissions, according to the World Green Building Council. Investment in property can therefore have a profound impact on progress in meeting net zero targets – it’s something that is increasingly appreciated by the next generation of investors in particular.
In fact, the links between returns and sustainability are now very strong, and it therefore stands to reason that investors are looking more and more at sustainability metrics when it comes to investment decisions – whether that’s investing to improve buildings they already own or when buying new assets. For that reason, having access to data such as energy use, EPC Plus/Pathway reports, and CRREM analysis, is really important. Sustainability is no longer a challenge – it’s an opportunity.
Q: What are the key challenges when it comes to sustainability in the real estate space?
One of the most significant challenges for the sector lies in improving energy efficiency in existing buildings – retro-fitting. The sort of regulations we are seeing being introduced are aimed at providing benchmarks to make properties more efficient – but Knight Frank estimates that 70% of commercial space in the UK will not meet the proposed Minimum Energy Efficiency Standards of EPC B rating by 2030.
We have seen this a lot within London, with freeholders speaking increasingly to leaseholders to try to get their properties in line with regulations. That might mean something fairly simple like fire doors or windows being changed to support their energy efficient targets but sometimes the issues can be quite wide ranging and complex. There can be time constraints and larger costs involved, for instance, where there are specific planning permissions, or where an asset is a listed building.
In addition, particularly in the cities, many leaseholders can be foreign owners and there can often be a communication issue here, whereby they don't understand the requirements for these changes and the large costs involved.
Q: How are these challengers being met by investors?
It’s very much the case that challenges also present opportunity, and investors are actually looking actively at poor-EPC performing assets with a view to enhancing the credentials of those assets as part of their long-term strategy (Knight Frank ESG Property Investor Survey).
Q: How does sustainability filter through to the structuring level?
There are a number of considerations at a structuring level. First, it’s about making sure that the vehicles involved are robust and suitable for the sort of time horizons investors are working to. The structuring has to align with the long-term purpose of the investment.
Then there’s also the more ‘background’ financial instruments aspect. For example, how to integrate any specific green loans, bonds or mortgages. In certain circumstances, the investor has to meet certain requirements to benefit from the incentives of that instrument. The structuring has to acknowledge that need.
Q: How are service providers able to support investors in marry their real estate and sustainability ambitions?
The sustainability aspect of real estate investment really brings together a number of very different and highly specialist disciplines and skills – such as understanding energy efficiency requirements and being able to interpret reporting requirements, as well as the construction and finance side of things too. And it’s a fragmented and constantly moving landscape – requirements can vary considerably according to country or region.
So where service providers like Suntera Global really add value is in identifying where the needs are and bringing the necessary specialists to the table, to coordinate with the investors and make an investment as seamless and smooth as possible. In some cases, that might mean drawing on the expertise through our own global team to make sure we are able to deliver the specific advice needed, depending on the market or region around the world. In other cases, it might mean bringing third parties in who are experts in, for instance, environmental construction and who can provide the guidance and advice needed.
All properties are different and being flexible and alive to the bespoke nature of those assets is key. That’s why being able to connect people in this way is a big part of the concierge service we offer and we know it’s hugely appreciated by clients who are operating in what can often feel like a complex, confusing and shifting environment. But it’s also an exciting opportunity for investors and the direction of travel is clear.
For more information about this topic, please get in touch with Michael using the details below.
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Key Contact:
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Michael Charmer
HEAD OF CORPORATE SERVICES - ISLE OF MAN
