Investing in green real estate as megatrend: go climate-neutral with green buildings
Executive Education / 21 September 2021
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Senior Programm Managerin
Carmen Zotta ist als Senior Managerin des Bereichs Executive Education an Frankfurt School für die Themen Credit Financing und Real Estate zuständig. Sie verantwortet dabei Programmentwicklung, Konzeption und Umsetzung von Zertifikatsstudiengängen, Seminarreihen und Weiterbildungsprogramme im Online- und Blended Learning Format.

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The European Union aims to be climate-neutral by 2050. Yet in Germany alone, buildings generate some 30 percent of all greenhouse-gas emissions – a very good reason to take a much closer look at the real-estate sector and “green” buildings. While there is, as yet, no universally agreed definition of a “green building”, one thing is certain: sustainability or climate compatibility is becoming the major deciding factor in the real-estate industry.

Various certificates are issued in support of the EU’s climate goals, primarily to vouch for the energy efficiency and sustainability of a building’s resources and construction materials. But the certificates’ evidential value – not to mention their international comparability – is still unclear. This makes it essential to clearly define the key criteria for green buildings, despite the difficulties involved, because buyers of real estate – both residential and commercial – are increasingly prioritising sustainability certification. Unfortunately, the demand for sustainability certificates is higher than their evidential value.

In a recent study by Deutsche Hypo, green or sustainable real estate is defined as buildings “that are characterised by efficient use of resources, including energy, water and materials, thereby reducing their harmful impact on human health and the environment.” Proof of sustainability is supposed to cover both new builds and existing properties, and may include the entire lifecycle of a given building – from construction materials to service life right through to reusability after the building has been demolished.

Megatrend: investing in green real estate

Although investments in properties certified as green buildings declined in 2020 (down to EUR 8.4 billion from the EUR 11.6 billion record set in 2019), the upward trend continues. The reason for this may be that in, for example, A-listed cities (where Frankfurt leads Hamburg and Berlin), both tenants and investors are paying more attention to green labels.

The decline may be due to the fact that the pandemic has, in some cases, caused investments in construction projects in the commercial real-estate sector to fall sharply. According to the Deutsche Hypo study, green investment products tend to focus primarily on office buildings, followed by logistics facilities and hotel properties. It is entirely possible that in the future, non-green real estate will be downgraded.

As well as climate targets, demand for sustainable products and sustainable project finance is another major driver. As a proportion of investors’ portfolios (whether institutional investors, sovereign wealth funds or insurance companies), holdings in green real estate are steadily climbing. Green investment is now regarded as a megatrend that is rapidly gaining traction. In their efforts to manage this surge of interest, financial services providers who issue sustainable products are prioritising energy efficiency in particular. Here, new builds must meet significantly higher standards than older buildings. In the case of existing properties, the focus is on energy-efficient refurbishment. To ensure that green really does stay green, and to draw clearer boundaries between green and traditional buildings or funds, investment managers should regularly review their product portfolios and their transparency vis-à-vis investors.

Lending and green real estate

As well as bonds, banks are increasingly interested in green loans or mortgages, because they are now required to assess environmental, climatic and social risks when granting loans. Here too we can expect to see significant movement once the time comes to define the risk assessment criteria – no easy task in view of the sheer variety of real estate, not to mention the complexity of the relevant markets and trends. Similarly, borrowers seeking to minimise risk will also prefer to invest in green properties.

This strong trend brings with it a wealth of opportunities, albeit accompanied by daunting challenges with respect to property valuation and financing. The term “green” must be properly defined and verified against clear criteria. While the pressure to act is high, the resulting benefits for all stakeholders concerned – builders, developers, financiers, investors and above all, society as a whole – are equally high.