ESG Property
exit value is expected to be higher as well.” Montcerisier believes that returns for sustainable properties can earn investors a high premium of between 200 and 500 basis points above Euribor, depending on asset class and location. But Spafford adds that some innovations have a bigger impact on returns than others. “It does not mean sacrificing returns if what you implement is cost effective,” he says. “An invest- ment in solar panels may not pay for itself but changing the lights and windows might. “I am looking for technology that we can readily implement,” he adds. “The payback on an LED lighting investment, for example, is quick, improves operating costs and builds resil- ience into our portfolios.” However, he signals a note of caution that not all innovations are as quick and cost effective. To make solar installations profitable you probably need to own several properties. “It is tough for me to get a return on that, but Walmart could get that return,” Spafford says. The expertise involved in constructing carbon neutral build- ings is evolving and, as such, new innovations typically cost more. “The paybacks are long term with much of the carbon reduction achieved through carbon offsets, so it may not be cost effective for some investors,” Spafford says.
Safe as houses
The institutional property market has traditionally been weighted towards warehouses, shops and offices. But this is changing. Residential is becoming an institutional asset class and there is a strong ESG need here.
Allianz is one such player entering the market. It is looking to raise £500m for a residential property fund – Allianz Home Equity Income – which could create a portfolio of up to 1,200 properties when it starts investing early next year. The fund will buy 95% of a residential property, worth up to £500,000, with the occupier putting up the rest. This high loan-to-value product is for creditworthy people who cannot get a mortgage because they do not have a very large deposit. The number of privately rented households in this country has
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There are a lot of opportunities to make older proper- ties greener.
Christophe Montcerisier, BNP Paribas Asset Management
more than doubled to 5.5 million from 2.5 million during the past 10 to 15 years, Jones says. “That is largely not on a volun- tary basis, but because people cannot get onto the housing lad- der,” he adds. “This is the socially responsible investing and ESG angle.”
It means giving tenants certainty of tenure, so they know where they will be living one year to the next and that their re-payments will only rise with inflation.
This shows that investors are seeking to include sustainability in all areas of the property market and that ESG goes beyond renewable energy.
Smith concludes by saying that when it comes to ESG, inves- tors are getting savvier. “People are thinking about the embod- ied carbon, which is not just the emissions associated with operating the building, but all the emissions associated with the construction materials and manufacturing of the building.”
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