Unlocking Value Through Sustainability in the Real Estate Sector
Introduction
A building isn’t just bricks, it’s a space in which people work, children play, where we take care of elders. It’s important to remember that homes buildings have an impact on the environment and on the social aspects of people's lives.
The Real Estate sector is responsible for 36% of greenhouse gas emissions and 40% of the energy consumed globally. When we talk about the environment, we think of flying, or other businesses that use fossil fuels, but Real Estate is playing a significant role as well.
In this interview, we speak to Patricia García de Ponga , to discuss sustainability in Real Estate, current trends, and the impact on profitability.
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Why Patricia?
Patricia has a perfectly balanced vision between the impact and financial value of sustainability in the Real Estate sector, thanks to her professional experience. She combines her experience of 26 years of leadership in financial and internal control functions, with her responsibilities as the Head of the ESG team at CBRE Spain, role that she took on two years ago. CBRE is one of the world's largest Real Estate services companies, specialized in providing services to investors and occupiers in the Real Estate sector, with more than 130,000 employees located in 100 countries around the world.?
The context of the Real Estate sector
Alberto: I’d love for you to start by giving us context of the Real Estate sector - the aspect, the geographical area you work in, and what’s happening in relation to sustainability.
Patricia: Perfect, I’ll firstly mention some of the key factors related to the Spanish Real Estate sector, and then we can speak in more detail about sustainability, which is a key trend impacting our market.
I would start by saying that the mood in the sector is improving.
We’ve had two years of difficult economic conditions in terms of interest rates that have affected transactions. In the end, the Real Estate sector is driven, for those who are not so familiar with it, by what are called investment volumes: the volume in euros of assets whose ownership changes hands.
?2024 began with a slight growth in volumes, and with the recent cut in interest rates by the European Central Bank in June, the context has improved even more, and the projections are forecasting movements to accelerate at the end of the year.
In Spain, the investment volume this year is expected to be approximately 10% higher than last year.
In short, the outlook for the Real Estate sector is positive.
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Going into a bit more of detail by sector:
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The increase in the purchasing power of the Spanish consumers, driven by a resilient labor market and the gradual inflation decrease, is positively impacting private consumption. So far this year, shopping centers have reported a 4% increase in sales compared to 2023.
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On the other hand, the Living sector, which encompasses everything related to residential spaces, also shows very positive investment forecasts after consecutive years representing the first asset class. This sector includes not only traditional housing in rental accommodation but also concepts such as senior living, student housing, and flex-living buildings. All these new housing models are booming. ?
Additionally, within the Living sector, the multifamily subsector (private rented sector and build to rent buildings constructed for rental purposes) stands out, where affordable housing plays a crucial role. This segment is particularly attractive to investors and presents a strong ESG component.
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The Hotel sector is also reaching record levels since the pandemic, driven by the recovery of tourism. This surge in tourist activity has placed the sector on the radar of investors, who see great growth potential.
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Lastly, there are emerging sectors capturing investors' interest. Among them is the sports sector, particularly investment in facilities like football stadiums. Additionally, the increasing digitalization has made data centers increasingly attractive to capital, as their importance in digital infrastructure and cloud computing continues to grow.
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Looking at sustainability trends in the sector
Alberto: Now that we know what the context of the sector is, I would like us to approach it from the sustainability challenges. What are the most important aspects that you identify?
Patricia: When it comes to sustainability, there are three great challenges that I see.
The first is the retrofit of the existing space; operating a building has a significant impact in terms of carbon and energy, but the existing Real Estate stock is quite old and will require rehabilitation in a sustainable way.
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The second big challenge, applicable to new buildings, it’s the embedded carbon related to construction. It is true that we are seeing sustainable materials like wood construction, but there is still a lot left to do before the sector is able to say that this industry has been transformed.
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And the third great challenge, which is very specific to Real Estate, is how to get investors and occupants to agree. In a building you have two components - the owner and the tenant who uses it. The owner is the one who undertakes the investment in say a solar panel, a type of lighting, an air facility, and so on. But the tenant is the one who really benefits from all that. So, aligning the interests between investors and occupants is one of the challenges we have in the sector. “Green leases” refer to those clauses within the lease contracts, which regulates the relationship between investor and occupier in sustainability matters.
Alberto: And what about the main value drivers? How is sustainability connecting with the value of the asset?
Patricia: In the end, value is impacted by a diversity of qualitative aspects, such as, the location or the occupant's experience.
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The experience of the end user of the asset is increasingly important, because the better quality of an occupier, the higher rent you can get for a building and this has a direct impact with the rent value of a property.
We spend 70-90% of our time in buildings. Buildings are not just bricks, they are places that house life’s experiences. I believe this transformation, that sets the user of the space in the center, to be an important trend.
It is no longer thinking only about the returns on investment, which is of course essential and will always be. But these returns are now influenced by other aspects such as energy efficiency, air quality, light, connectivity or social impact.
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Another key driver is regulation; Europe has currently a “regulatory tsunami” in place. At the same time, there is a need to change existing buildings, as the Real Estate stock is clearly inefficient. We need to decarbonize and eliminate the carbon emissions related to both operating and building, and regulation is pushing on that direction. For example, some banks have decided not to finance projects which are not aligned with the European taxonomy, for example.
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There is also clear focus on the physical risks and climate risks. Banks are making climate risk checks before giving a loan. Not only in general sustainability energy efficiency parameters, but on sophisticated topics such as sea-level rise, urban flooding or heat impact. Banks want to know what climate risk a building has before providing finance relating to it.
In summary, we are seeing that sustainability requirements have become a must: because occupiers are asking for it; because investors are realizing that it preserves the value; because when the insurance companies insure buildings, they are asking for it; because the banks are requesting it as part of their underwritings.
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Alberto: With sustainability there is a perception that surveys and studies talk about ‘buying preferences’ for sustainable products, but those do not materialize. Does it compensate for the additional cost incurred?
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Patricia: To simplify it for readers, the value of a building is calculated by discounting the expected cash flows, which come from the rents obtained from acquiring the property. If you can attract better tenants, you get better rents, as certain corporations will prefer your building over others. And those better rents directly influence the cash flow formula.
In addition to attracting better tenants, you also get better liquidity. This means that when you put the building up for sale, if it meets certain important parameters, you will sell it faster. Otherwise, you will have a harder time finding a buyer, which negatively affects the value. You will also have shorter vacancy periods, i.e., the building will not remain empty for long.
Alerto: Higher demand, higher value.
Patricia: Exactly. Demand is higher, which reduces vacancy times and has a direct impact on the cash flow model and the relative value of the building.
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You will also have access to better financing conditions: If the building has sustainability components, you will lower the risk in the lender's evaluation, which will also be reflected in the final value.
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All of this affects rents. CBRE has found that investments in sustainability can increase a building's rents. In good locations in Spain, sustainable office rents have increased by up to 15% (in Europe, this increase is of a single digit). CBRE has been a pioneer in this type of analysis and has conducted several studies on the subject.
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Sustainability as a business opportunity
Alberto: How does CBRE include sustainability in its services and how does this improve the business profitability?
?Patricia: We, as the world's leading Real Estate advisory services company, have a great responsibility in limiting the planet's temperature. We have two main areas of action: our own activity, performed by our 130,000 employees within 500 locations and, even more material, the solutions that we provide to our clients.
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We manage 12 million square meters only in the Iberian Peninsula. 700 million square meters globally. We help our clients focusing on energy audits, sustainability certifications, and with an entire decarbonization strategy.
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If you look at the materiality analysis of our company on a global level, one of the most relevant aspects that has the greatest impact from sustainability point of view is the buildings that we manage for our clients. And in the solutions that we provide to our clients, in the end, we advise on the entire life cycle of the asset in a comprehensive way.
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One of CBRE’s main value-added contributions in sustainability is our ability to combine strategy with implementation. Because we not only design what needs to be done, but also implement and accompany throughout the journey as we have in house architects, engineers, surveyors and technical experts who are very close to the real estate assets.
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With regard to business profitability, which in Real Estate it is linked with the value of the asset, we are seeing certain shifting from green premium to brown discount. A brown discount means that you have to make changes, not only to increase the value, but to preserve it.
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In other words, it is not only that buildings with sustainability components have greater value, but increasingly it is becoming something necessary: they must have it to “play the game”. For example, you cannot go on the market to sell a building that has disastrous energy efficiency or facilities that do not help ensure good energy performance or good connectivity, improving the user’s wellbeing.
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And finally, as a general trend in Real Estate, I would also highlight the transformation of assets. In the end, it is a response to new ways of working, living, and shopping.
It is like giving the assets the opportunity to reinvent themselves, to give new life, so to speak, to obsolete mature buildings. There might be office buildings changing to residential, hotels or to a mix of uses. This is an upward trend that we have been talking about at CBRE for some time.
To give you an idea, last year we already identified almost 30 changes of use in Spain, of which 80% were concentrated in Madrid and 65 % of conversions were initially office buildings, and this volume is double compared to last year.
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The market leads us to reinvent ourselves and all of this has a lot to do with sustainability. All those investments that are made in CapEx (funds used by a company to acquire, upgrade and maintain physical assets) to transform a building, must observe sustainability aspects.
Alberto: Finally, taking advantage of your “double hat” of CFO and CSO, I would like you to offer a tip on generating business value through the implementation of sustainability
Patricia: To manage sustainability effectively, it is key to maintain a clear focus. Sustainability encompasses many areas, components and regulations that are constantly changing, so it is critical to focus on the essentials. In Real Estate, it is important to remember that people must be at the center of all decisions; people come first, then spaces and buildings, not the other way around.
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In addition, collaboration between areas is crucial, something that applies to all sectors. The alignment between investors and occupiers discussed earlier is a good example of how cooperation is key to success.
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I also recommend that sustainability be integrated into the core areas of the company, reporting directly to the CEO. In the past, sustainability used to be a peripheral issue, but companies that have placed it in key areas, which influence decision making, have seen better results. It is not a matter of being “more or less important”, but of being involved in all the company processes and decision makings.
??Alberto: Thank you very much for your time, Patricia.
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Key Takeaways
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Additional Resources
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Head of Sustainability en Suma Capital
3 周Very interesting, congrats on the interview! How do you value the importance of construction waste management as one of the greening strategies on real state? Materials recovery, reuse and recycling properties are key to embedding on sustainable building as much as waste management technologies. Some are also developing sustainable certifications or engaging with labellings to satisfy the increasing needs for traceability and sustainable value chains. Any recommendations of where to start?