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ESG investing in real estate

October 2019

Building a sustainable portfolio

The property industry is a major consumer of energy. By making buildings more sustainable, we can  help the environment and also boost returns from real estate investments.

Written by
Zsol Kohalmi
Zsolt Kohalmi, Global Head of Real Estate and Co-Chief Executive Officer

Investors are waking up to the fact that sustainable investing isn’t just good for the planet – it can be good for investment performance too. This is particularly true for real estate investment.

Buildings account for 36 per cent of global energy use through their construction and operation. They are also responsible for nearly 40 per cent of energy-related carbon dioxide emissions1. The ecological footprint becomes even bigger when you consider how much water and raw materials they use up.

Yet, while some climate activists want society to give up flying or eating meat, buildings are more difficult to do without. It’s impossible to imagine a world without houses, offices, factories, warehouses and data centres. The onus, therefore, is on making buildings more efficient.

The United Nations estimates that, in order to limit the rise in global temperatures to less than 2 degrees centigrade by 2030, the property industry needs to reduce the average energy intensity of buildings by at least 30 per cent. 

fig. 1 big footprint
Building and construction sector: estimated contribution to economy and environment, %
Building sector impact chart

Source: UN Environment Programme

Technology can help. Latest innovations include sensors that optimise energy consumption through smart management of heating, ventilation and other building operation processes. New materials, meanwhile, can make construction and development more sustainable as well as reducing building waste and noise pollution. So too can streamlined processes such as modular construction, where parts of the building are constructed in a controlled factory environment and designed to be easily reused and replaced.

Better for all

Environmentally-friendly buildings make for better real estate investments, too.  Research shows that buildings with stronger environmental credentials generate higher rents, lower rates of obsolescence, improved tenant satisfaction, lower voids and lower incentives2. With the environment becoming a priority for those who construct, manage and live and work in buildings, the performance gap between green buildings and their less efficient peers should widen further over the coming years. This has important implications – not least for the millions of investors who, together have poured USD3.4 trillion of their capital into real estate over the past two years3.

As active managers of real assets, we have made sustainability criteria a key part of our investment and asset management processes.

Crucially, progress needs to be made not just on new buildings, but on existing ones as well. Given that more than 70 per cent of all buildings in the world are 20 years old or more4, we believe that all types of property assets offer opportunities for significant environmental improvements. Such initiatives can add substantial value to the assets’ bottom line, and thus are an integral component of our active asset management strategy.

Concrete targets

When it comes to sustainable investment, real estate is arguably ahead of other asset classes.

Listed and private companies, for instance, struggle to provide accurate data on their environmental, social and governance (ESG) impact. That’s partly down to a lack of universally-accepted standards for measuring and reporting ESG.

The real estate industry doesn’t have this problem. The Building Research Establishment Environmental Assessment Method (BREEAM) certification – first created in 1990 – is one of the globally acknowledged ways of assessing and certifying the sustainability of the most technically advanced buildings.

Additionally, the WELL certification – based on seven years of rigorous research by doctors, scientists and property industry professionals – offers guidelines to create a healthy environment in buildings.

This system extends the concept of sustainability beyond the best environmental practices to consider people’s health and wellbeing. After all the air we breathe, and how we feel in a workplace are increasingly linked to productivity levels.

fig. 2 room for improvement
Average energy use intensity by property type, kWh/m2
Energy use by property sector chart

Source: GRESB, 2019

As investors, our goal is to make every building we own as environmentally efficient as possible.  In our newly-acquired multi-use building in the heart of Madrid, for example, we are looking to install reduced flow water taps that decrease water consumption by up to 40 percent, provide bicycle parking for employees, and put in a circadian lighting system.

The rise of the Internet of Things – fuelled by faster 5G internet connections – will open up even more possibilities to control building environments for optimal efficiency and wellbeing.

We believe that investing in making buildings sustainable is not only the responsible thing to do for our planet but also a way to add value for investors.

[1] UN Environment, "Global status report 2018"
[2] "Decomposing the Value Effects of Sustainable Real Estate Investment: International Evidence", A. Devine, E. Yonder, 2017 
[3] Data for 2017-8. Cushman & Wakefield, "Global Investment Atlas 2019-20”
[4] IFMA, Propmodo

About

Zsolt Kohalmi

Zsol Kohalmi

About

Zsolt Kohalmi

Zsolt Kohalmi is Global Head of Real Estate and Co-CEO of Pictet Alternative Advisors. Mr. Kohalmi brings over two decades of pan-European investment experience, and has invested in excess of USD20 billion into all real estate asset classes in more than 20 European countries throughout several investment cycles.
Previously he was Managing Director and Head of European Acquisitions at Starwood Capital Group, one of the top 3 firms in global private equity real estate. At Starwood, he was instrumental in sourcing and executing a number of successful investments for Starwood Capital’s commercial, hospitality and debt platforms. Prior to joining Starwood Capital in 2013, Mr. Kohalmi was Chief Investment Officer at Meyer Bergman for 8 years, a European real estate investment firm that he co-founded. Before that he was a Director at GE Capital, and also worked in investment banking with ABN AMRO Hoare Govett.
Mr. Kohalmi, who is fluent in nine languages, holds an M.S. degree in economics from the University of Budapest and an MBA from INSEAD.

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