Pictet creates opportunities to do well by doing good in real estate.
The property industry is the largest consumer of energy. By making buildings more sustainable, we can help the environment and also boost returns for real estate investments.
Investors have now realised that sustainable investing is not just about doing what is good for the planet and humanity – it can be good for investment performance too. This is particularly true for real estate investment. Buildings account for 30% global energy use through construction and operation. They are also responsible for nearly 40% of energy related carbon dioxide emissions. The ecological footprint becomes even bigger when you consider how much water and raw materials are used up.
Yet, while the past year gave us a glimpse of life without daily commutes to shared office spaces and flights, it remains difficult to imagine life without the buildings that provide us with daily shelter. Indeed, we are now ever more focused on the spaces that we live and work in, as extreme weather events increase, and pandemic-imposed isolation has left us hungry for live interaction with colleagues and loved ones.
Indeed, rather than doing away with these buildings, we must find ways to make them more efficient and wellness-enhancing. The pandemic has accelerated certain existing underlying trends, and there will undoubtedly be many buildings that need to be revamped, and spaces that could serve a new function. These refurbishments will need to also focus on improving the energy and wellness footprints of these buildings.
Striving For Intensity Reduction
The United Nations estimates that, in order to limit the rise in global temperatures to less than two degrees centigrade by 2030, the property industry must reduce the average energy intensity of buildings by at least 30%. As is the case with most sectors, innovation and technology can help.
Things like sensors that optimise energy consumption through smart management of heating, ventilation and other building operation processes are already in use in some commercial buildings. 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 without any material waste.
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 incentives. 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 US$3.4 trillion of their capital into real estate over the past two years. And those that chose environmentally friendly investments are already doing better. Occupancy is, on average, 4.3% higher in green-certified buildings, while rents are about 4.6% higher, according to a review of data across the developed world. They also have lower operating costs and higher sales prices.
Crucially, progress needs to focus on existing buildings as over 40% of total carbon emissions for a building’s lifecycle happen when it is built. This, coupled with the fact that 70% of all buildings in the world are over 20 years old presents a tremendous opportunity to refurbish, enhance, and at times repurpose older buildings.
As investors, 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.
This article is brought to you by Zsolt Kohalmi, Global Head of Real Estate and Co-Chief Executive Officer at Pictet Alternative Advisors.