ESG factors are rapidly becoming a norm among real estate investors, but how are these factors influencing different types of investors’ strategy and allocations? Based on the answers of private equity, listed property companies/REITS and investment managers, Knight Frank is delving into the different ways each of this investor category responds to sustainability commitments.
While there may be a prevailing assumption that private equity (PE) investors are more prone to take risks, the real estate consultancy indicates that this does not preclude an enhanced ESG lens on investments and assessment. In-line with the broader market, three-quarters of the PE investors surveyed have a minimum environmental certification (e.g., minimum EPC, HQE, DGNB or BREEAM rating), when assessing an asset for acquisition. Additionally, three quarters of PE investors use CRREM analysis on their existing portfolios and require the same for any new buildings they might be interested in acquiring.
PE investors are also implementing the use of green/sustainability lease clauses. Akin to the wider market, all investors surveyed by Knight Frank, including PE, state they use these clauses as a means to realise their own ESG targets.
When asked what factor they consider important in these clauses, all four PE respondents replied that these should include energy, water/ and waste data sharing. Three-quarters would include restrictions on alterations which may adversely impact energy efficiency ratings, stricter than the wider market response of 65% restricting alterations.
When it comes to net zero goals across all participating investors’ categories, one participant has already reached their net zero goal, 41% have set a target to accomplish till 2030, 15% are looking towards 2040, while the rest of the respondents are aiming for 2050.
But if we focus on listed property companies, these seem to be closer to achieving their net zero goals. Indeed, these companies demonstrate a greater urgency, with almost 90% of those surveyed hoping to achieve net zero by 2030 – just over six years away. This may be due to the public nature and external stakeholder pressure being greater and more accountable in public markets.
Yet, there performance might not be attuned to their aspirations. With a shorter decarbonisation period, some might assume that these investors would attempt to dispose of poor ESG-performing assets, particularly if they don’t have the capacity to upgrade these assets. However, this doesn’t seem to be the case with the participating companies, since, around 70% of the listed companies surveyed aim to acquire poor ESG-performing assets to upgrade/reposition them, while almost 60% look to improve the quality of their existing portfolio.
This compares to 58% and 76% of the total sample, respectively. The same does not apply to newly acquired assets, in which case listed companies apply a minimum environmental certification requirement, indicating new assets should preferably be in-line with net zero goals.
Heading on to investment managers, this investor category is also prone to improving their existing portfolio, while purchasing compliant assets.
In terms of strategies relating to ESG, 83% of investment managers surveyed are looking to improve the quality of existing portfolios through refurbishing and repurposing and 66% of those surveyed look to acquire ESG-compliant assets. This compares to 76% and 51% of all respondents, respectively.
They are also more likely (81% of those surveyed) to be utilising CRREM analysis, in order to understand the stranding risks on existing assets. This may, in part, be due to their stricter regulatory requirements. Of those surveyed, 57% assess assets under review for their alignment with SFDR Article 6, 8 or 9 and EU Taxonomy compliance, which defines what constitutes a sustainable investment.
On the whole, ESG criteria are increasingly commonplace across all investor types, whether during new asset acquisitions or in order to identify and manage existing portfolio risks. In any case, there is an obvious demand for high efficiency assets moving beyond just EPCs. Whether due to the increase in disclosure requirements, financial pressures from lenders, a company's own net zero targets or the need to meet the ever-increasing demand for sustainable buildings that would add to tenant well-being and truly futureproof assets, ESG factors are here to stay.
Interestingly, based on the international consultancy’s conclusions, looking into different investor types indicates that private equity tends to act as a leader, by creating product that complies with sustainability standards. According to Knight Frank, it is the private equity’s increasing focus on ESG, that could promote the adoption of ESG practices and lead to ESG criteria becoming globally embedded in investors’ decisions.
Source: ESG Property Investor Survey, Knight Frank
