The real estate sector in Europe is undergoing significant shifts. From navigating transaction complexities, addressing valuation fluctuations, and grappling with the availability and cost of capital, today’s real estate market presents multifaceted challenges.
Our team has had the privilege to attend multiple industry events in the first half of the year, like the Bloomberg EPRA Real Estate Finance Summit and MIPIM, and hear from leading real estate professionals first-hand about how they are addressing new market realities. Here are our key takeaways and how they relate to sustainability initiatives:
1. Embracing Sustainability Initiatives:
Sustainability emerges as a focal point of discussion as tenants increasingly prioritize working and living in eco-friendly buildings. Tenant demand for greener, more sustainable spaces often surpasses regulatory pressure. High-quality data collection at the asset-level data collection is essential to drive impactful sustainability initiatives. From decarbonization efforts to tracking scope 3 emissions, real estate companies are increasingly prioritizing sustainability as a core component of their long-term strategies. Owners must address tenants’ demands for greener, more efficient buildings, as tenants are keenly aware of their own carbon footprints.
Prioritizing sustainability initiatives starts by ensuring you have the right data to drive meaningful efforts. Real estate companies must first focus on collecting material sustainability data—such as carbon and energy estimates at the asset level, green building certifications, exposure to local regulation, or physical climate risk data—and ensuring its quality. Only then will they be able to deeply integrate data into their strategies and see ROI from them. From pulling insights for decision-making, to staying compliant and proving commitment to sustainability, to taking real action to decarbonize, high quality data is the foundation upon which meaningful change and progress are built.
2. Addressing Net Zero Challenges:
Achieving net zero carbon emissions by 2050 presents a significant challenge for the real estate industry. McKinsey estimates that an annual investment of $1.7 trillion globally will be required between now and then. This effort will likely demand a comprehensive toolkit, including some tools (technologies) that aren’t yet widely available today.
Real estate companies can take diverse, proactive steps to ensure they make progress. Firstly, they should prioritize energy efficiency and climate due diligence as part of the investment process to ascertain the cost/benefit of decarbonization capex throughout their hold period (and exit strategy implications). This may involve upgrading building infrastructure, implementing renewable energy solutions, and adopting energy-efficient technologies. Secondly, they can collaborate with industry peers to establish standardized definitions and emissions tracking methodologies, facilitating consistent and comparable measurement and reporting of carbon emissions. Thirdly, they should invest in new technologies capable of going the last mile. Many real estate companies, like CBRE, Cushman & Wakefield, and British Land, have invested in proptech to future-proof their portfolios and businesses.
The industry is still in the early stages of measuring and achieving net zero emissions, but it’s challenging without standard rules. It’s important to understand the difference between market-based emissions, which are about the type of energy used, including renewable sources, and location-based emissions, which depend on where a building is and the local energy supply. There’s also a debate about using carbon offsets to reduce emissions from buildings, as they are widely regarded as a superficial quick fix. There’s a need for clear agreements on how they should be used. Setting clear standards will help accurately track progress towards net zero and improve environmental strategies.
3. Enhancing Operational Efficiencies:
To navigate these evolving dynamics in today’s market, publicly listed REITs should prioritize boosting earnings from their existing building portfolios rather than focusing solely on net asset value, which remains largely transactional. Enhancing earnings directly translates to increasing Net Operating Income (NOI), a metric driven by operational proficiency and strategic approaches to cost reduction and asset performance improvement.
According to PERE, green buildings “perform better, stay leased longer, command higher rents, and sell at higher prices.” One way to focus on operational efficiency is by leveraging technology to identify savings opportunities. This can include analyzing building performance to identify peaks in energy demand or usage and managing them efficiently to reduce costs.
In this climate, light retrofits carried out throughout the lease cycle offer a more practical approach than conducting a heavy, costly retrofit at the lease’s end. Operators can steadily improve sustainability and operational efficiency by implementing incremental upgrades over time while minimizing tenant disruption and financial burden. This gradual approach ensures buildings remain competitive and efficient without the shock of significant idle time or capital expenditure. The recently published report by the UK Green Building Council (UK GBC) emphasizes this strategy, highlighting the tangible benefits of light retrofitting office buildings to advance net-zero targets.
4. Shifting Investor Perspectives:
A recurring theme is the importance of expanding investor perspectives beyond sector specialization. Industry experts stress the need for listed real estate companies to broaden their appeal to generalist investors by utilizing more comparable, cross-sector key performance indicators (KPIs). This strategic shift is not merely about diversifying metrics but creating a common language bridging the gap between specialized real estate investors and generalist investors, ensuring a comprehensive understanding of asset value and risk mitigation strategies.
Whether financial or sustainability KPIs, it is the availability and quality of raw, underlying data that supports new and more flexible metric transformation. Regardless of the KPI du jour, e.g. net asset value (NAV) vs. earnings or climate risk vs. climate impact, streamlining and automating asset-level data collection and quality assurance in a centralized platform creates efficiencies and ensures the consistency and comparability of information across sectors.
Thus, the real estate industry’s move towards broader, more inclusive KPIs supported by robust data infrastructure is not just about adapting to investor preferences but about leading the way in transparent, accountable, and sustainable investment practices. This approach aligns with current investor expectations and sets a new standard for the industry, promoting long-term growth and stability in an increasingly complex and competitive market.
Conclusion
Despite the complexities and challenges facing the European real estate sector, industry leaders express confidence in their ability to navigate evolving market dynamics and seize opportunities for growth and innovation.
As we reflect on the insights gathered from industry leaders and our observations of market trends, it is clear that the path to thriving in the dynamic European real estate market hinges on several strategic imperatives. Below are key recommendations to drive innovation in sustainability and operational efficiency:
- Commit to data-driven sustainability: As the real estate market continues to evolve, the importance of robust, high-quality data cannot be overstressed. Real estate companies should intensify their efforts in gathering and analyzing asset-level data to inform their sustainability initiatives effectively.
- Advance through collaborative efforts: The challenges of achieving net zero emissions and enhancing operational efficiencies are best tackled through industry-wide collaboration. Partnerships to standardize definitions and methodologies for emissions tracking and sustainability practice are needed. These types of collaborations can lead to innovation and shared solutions that benefit the entire industry.
- Embrace technological investments: To future-proof their portfolios, companies must be willing to continuously invest in technologies that push the boundaries of operational efficiency. By adopting a proactive approach to tech investment, real estate firms can ensure they are financially viable and ready to adapt to new regulations and market demands as they arise.
