Real estate opportunities and risks of climate change

Extreme weather conditions, new regulations and high energy prices: there are plenty of reasons why it makes sense for players in the real estate industry to implement a sustainability policy. The rewards are better risk management and satisfied tenants which, in turn, help generate stronger financial returns. In a recent article by Financial Investigator, Bouwinvest’s Head of Sustainability and Innovation Bernardo Korenberg breaks down the climate risks that real estate investments face.

In summary:

• The real estate sector can, and should, contribute significantly to tackling climate change and other social themes such as inclusive and liveable cities
• Investing in sustainability can generate significant financial returns in the long run
• Approaching sustainability on a portfolio-wide rather than an individual property level can lead to missed opportunities and additional risks
• Bouwinvest conducts sustainability analyses on each of its properties

What are the risks of a building sinking deeper into the ground due to drought or water damage caused by a flood? Companies that are only now looking at opportunities to weigh sustainability factors in their investment strategy have missed the boat. While the above-mentioned physical risks may only become manifest in the long term, sustainability transition risk is already in the spotlight now. Under the Paris Climate Agreement (2015), almost all countries have agreed to limit global warming to well below 2 degrees Celsius compared with pre-industrial levels. If that goal is to be met, CO2 emissions must already be reduced significantly in the immediate future.

The real estate sector has a big role to play in the climate transition: as much as 38%¹ of global CO2 emissions come from buildings. Huge rises in energy prices due to the Russian war in Ukraine. among others, mean that companies that were already investing in energy-saving measures and renewable energy, such as solar panel installations, already have a big cost advantage.

“We consider it our responsibility to take a proactive role on the climate transition the sector needs to make.”

Bouwinvest’s focus on sustainability is not only driven by financial and risk factors, according to Bernardo Korenberg, Head of Sustainaibility and Innovation at Bouwinvest Real Estate Investors: "We see it as our responsibility to play a proactive role in the climate transition the sector needs to make. Real estate is an important part of the Dutch economy. Not only because people live and work in buildings, but also because a large chunk of pension capital is invested in them. Pension funds are not only interested in financial returns; they also seek to create a liveable environment where their members can grow old happily. Effective property management has a similar starting point to some extent. Companies that focus on more than direct returns, for example on building or transforming properties where people like to live or work, have a brighter future than those that look solely at the financial incentives."

The evidence is piling up that a green premium - and a brown discount - do exist. ING Bank and Tilburg University, among others, have demonstrated in recent reports that investing in sustainable buildings also yields higher financial returns. In practice, however, many real estate parties struggle to make the return on sustainable investments transparent in a business case. That raises the question of how global concepts such as sustainability and climate risk should be translated in a property portfolio.

Outsourcing? Start with yourself!
Companies can, of course, hire a consultancy firm to help chart the physical climate change risks of a portfolio. Korenberg: “We believe, however, that you gain the most valuable insights by actively doing this yourself. That’s why we chose to complete our initial analysis ourselves drawing on publicly available data such as climate models and scenarios. That gave us insights into the broader physical risks in the vicinity of our properties. The next step was to translate that information into the net risks a building faces. A property with a green roof, for example, is much more resistant to heatwaves and heavy rainfall than one with a bare dark rooftop. We also look, of course, at the type of property and the users. For example, a more stringent classification is used to quantify climate risks in care facilities since the users of these buildings are very vulnerable. Extreme heat conditions carry a higher risk, after all, for seniors and people whose health is fragile.”

By gradually zooming in from country level to the neighbourhood and direct vicinity of an individual building, it is possible to obtain a detailed overview of all the properties in a portfolio which in turn provides a clear map of where the risks as well as the opportunities lie, Korenberg continued: "This provides a lot of insight on how we should act. For each property, we check whether measures need to be taken in the short term, or whether we can wait until the occupier leaves and make the necessary improvements then. In addition to our strong motivation to improve the sustainability of our portfolio, another important consideration for us is that we don't want to be caught off-guard by new regulations. If you are forced to take measures, you often pay a very high price for labour and materials because many other players in the sector are implementing similar programmes at the same time. It is therefore very important for us to maintain control ourselves."

Good sustainability policy involves more than managing climate risks alone. It is also an effective tool for adding value to a real estate portfolio. 

Good sustainability policy involves more than managing climate risks alone. It is also an effective tool for adding value to a real estate portfolio. An energy-efficient building with a low CO2 footprint has lower operating costs. The term ‘sustainability’ also has another connotation, Korenberg added: “A building must be an attractive place to live or work. Several different factors play a role: a healthy and stable indoor climate that isn’t too hot or cold is an important condition. Services are also a factor, such as sufficient recreational space and a good office canteen. For big companies, sustainable factors are increasingly becoming a priority in selecting a new office. A green office is turning into a tool to show that a company pursue a responsible policy.”

The area surrounding the Olympic Stadium in Amsterdam is a case study for a wide range of sustainable factors. Built in 1928 for the Olympic Games, the stadium has retained its iconic significance for the city. Although the field is still suitable for various sporting activities, the complex has been re-purposed as a location for events and gatherings. The same applies to other buildings in the area. The famous Citroën car showroom has been converted into a multi-functional sustainable office with a roof garden, while new apartment complexes were built on the adjacent terrain. Korenberg: “The transformation has created a trendy, liveable area that has rejuvenated the entire neighbourhood. But we are also making a difference in terms of sustainability with new projects such as our smart apartments in the Next complex in Eindhoven: the washing machines and dryers in those homes switch on when energy prices are lowest. For example, at times when a lot of renewable solar power is being generated, like on a sunny afternoon. The living rooms have been fitted with sensors, so that the lights turn on and off automatically. In addition to generating energy savings, the technology used in these buildings makes its users more aware of the possibilities. A sustainable building only makes a difference after all if it is used smartly."

Long-term partnership
On the climate front, good cooperation is key to long-term success, Korenberg said: "It is important, for us as a company to get a much broader insight than we would if we only looked at climate developments from our own perspective. Also, given the climate issues at hand, we really need to act together. A single party cannot, after all, solve climate change on its own. One thing that sustainability alliances are now focusing on is developing a methodology to identify climate risks. It would be great if, in a few years’ time, if all of us in the sector used the same language to discuss sustainability matters. That applies not only to tackling climate challenges; there could also be a financial benefit: for example, in the form of lower insurance premiums for sustainable, future-proof buildings."

Bouwinvest is affiliated with various research programmes, such as RED & BLUE and the Dutch Green Building Council where it sits at the table with a wide range of players including governments, market parties, educational institutions and other parties. Korenberg: "The diversity of these stakeholders is precisely what makes this cooperation so effective. You see exactly the same thing at companies with a diverse workforce: they are better able to adapt to a changing world and move with the times."

Three reasons to focus on sustainability

The importance of sustainability is embedded in Bouwinvest’s corporate strategy. Firstly, a sustainable property has a better risk-return profile, and the long-term climate sensitivity of a property has a major impact on investment returns. Korenberg: "Large institutional investors also see this and increasingly we notice that our sustainable approach helps us find new investors while tying existing investors to us for longer. Our growing focus on sustainability factors provides a new dimension in our discussions with investors. For instance, large pension funds are putting a lot of energy into improving how they monitor the impact of their investments. As a real estate institution, it’s not enough anymore to have a nice quote and statement about sustainability in an annual report. Real estate is also an interesting investment category because you can have a tangible impact. In addition to contributing to the energy transition, real estate can also contribute to an inclusive and liveable city by offering people affordable, high-quality housing and stable living conditions. Finally, our sustainable focus also pays off in terms of Bouwinvest's future. The labour market has become very tight in recent years and younger generations have many options when it comes to finding a job. Young people are keen to work for a company that shares the same values and goals as they do. It is very rewarding to see our sustainability focus paying off when it comes to attracting new employees. A lot has changed within our company over the past decade. Sustainability is embedded in the way employees think and work, and is a shared responsibility. There was only me when I started but I now have a team of five ESG specialists who set the strategic frameworks and support the rest of the organisation in implementation with a direct reporting line to the CEO. That demonstrates how hard Bouwinvest is working on its sustainable policy."

_{1 - Source: Spotlight: Property and Carbon – Savills, 2021}