Munich, 10th October 2022 – The requirements of legislators, investors and occupiers relating to the sustainability of properties are continuing to increase. Compliance with ESG criteria, particularly regarding energy efficiency and reducing carbon emissions, has become a critical factor for the long-term value of a property. The majority of buildings in Germany are more than 20 years old: how great is the danger that values will fall? How can older properties be transformed? What proportion of a portfolio is made up of older properties? A trend survey of real estate asset managers has been carried out by RUECKERCONSULT on behalf of consultants AUREPA Advisors AG and PwC Deutschland.

Around 65% of respondents see a great risk that older buildings in a portfolio will fall into the energy efficiency category F or worse (and become stranded assets). This classification is so unsatisfactory from an energy perspective that refurbishment projects are no longer economically feasible. According to 38% of respondents, non-ESG-compliant properties are already more difficult to finance, whilst the other 62% believe that whilst there are no problems with financing at present, the situation will change in future.

Hannes Eckstein, Founding Partner of the AURELIUS real estate group and board member of AUREPA, says: “Many properties are in danger of becoming stranded assets because of a lack of an appropriate asset management strategy. A large proportion of older buildings across all asset classes can be transformed into energy efficient properties. Every property must be looked at individually to establish which refurbishment projects will contribute to their long-term value enhancement.”

Thorsten Schnieders, Partner of PwC Deutschland, continues: “The necessity to comply with ESG criteria has well and truly arrived in the real estate sector. There are many and varied ways for projects to satisfy ESG requirements, particularly in connection with portfolio optimisations. Sustainability affects both the ability to let and to finance a building, and therefore affects the overall potential of a property. The requirement to deal with this issue has become much more important, as the associated reporting requirements will soon be integrated into everyday property management activities.”

57% of respondents believe the greatest pressure to make properties ESG-compliant, and not to let them become stranded, comes from regulatory requirements. 36% perceive this mainly from within their own company, whilst only 7% hear it from investors.

Non-ESG-compliant properties make up a large proportion of many portfolios

Around 29% of asset managers surveyed have portfolios comprising 50% to 75% non-ESG-compliant properties, and a further 36% believe that the number is between 25% and 50%. Only about 36% of participants have portfolios in which a quarter of the properties (maximum) could be categorised as potentially stranded assets.

There are different strategies for dealing with these properties. 46% responded that they would transform the properties in their portfolio, 25% wanted to sell them and around 16% plan to hold them until the end of their economically useful lifespan. A further 13% believe the solution lies in demolition and redevelopment.

Jan Rehbock, founding partner of the AURELIUS real estate group and board member of AUREPA, says: “In order to hold properties in a portfolio over the long term, individual manage-to-ESG-compliance strategies are essential at both asset and portfolio level. In this way, the various energy efficiency classes and the associated CO2 values can be balanced out. Not every asset, for example a historic brickwork building, becomes an optimised ESG-compliant property with new insulation and the replacement of the heating plant. However, complete demolition should only ever be the last resort.”

Tenants must also take responsibility

There are various measures to prevent the occurrence of stranded assets across all real estate sectors. The replacement of heating and air-conditioning plant, the installation of photovoltaic panels on roofs and the use of ‘green electricity’ were each mentioned by around 17% of respondents. A further 12% mentioned the use of other renewable energies, roof refurbishments and insulation, as well as the replacement of façades and windows as essential measures to make properties ESG-compliant.

Schnieders continues: “It is not only asset management activities which are essential for the leverage of value creation potential. The occupiers must also take responsibility for conserving energy. Green leases are an effective tool for this but are unfortunately still something of a rarity. Tenants must also make their contribution to measures such as energy saving and waste separation.”

Around 43% of respondents said that they had still not concluded any green leases with their tenants and a further 50% had concluded these with around a quarter of tenants, whilst 7% said that up to half of their leases fit into this category.

Over half believe that prices will rise because of ESG requirements

The overall question about the impact of ESG requirements on property prices brought a mixed response: 57% of portfolio owners expect prices to rise and 29% expect prices to remain the same, whilst 14% expect prices to fall.

Rehbock explains: “The investment in ESG projects is also an investment in long-term property value and the extension of the useful lifespan. When properties consume less energy, are well-maintained and remain attractive for both occupiers and the investor, the prices of these properties will rise.”

Schnieders adds: “Falling prices because of ESG requirements are also understandable. In the event that significant investments are required to achieve an energy efficient classification of at least E, the current value of a property can be correspondingly lower. At the same time, this brings up value enhancement potential and investment opportunities which are worth a closer look.”

Finally, the property managers were asked about the importance of sustainability certification. Again, views were mixed: 50% see such certification as the yardstick for ESG compliance, whilst 50% are not of this opinion.

Rehbock continues: “The survey clearly shows than many properties run the risk of becoming stranded. However, in most cases this can be averted by the implementation of robust concepts. We have proven this many times in the case of mixed-use properties such as Zweiundzwanzig, located in Wolfsburg and RUBIQ in Munich. One thing is clear: there is no one-size-fits-all solution. Each property is individual and must be treated as such.”

Schnieders concludes: “Many portfolio owners remain uncertain when and how they will analyse and transform their properties in accordance with ESG criteria or whether it would be better to sell them. As consultants, we support this process by creating a basis for decision-making with clear recommendations for courses of action.”

The anonymous online survey of asset managers with a total combined assets under management of over EUR 100 billion was carried out by RUECKERCONSULT on behalf of AUREPA and PwC Deutschland in August and September 2022.

Picture credits: The use of these graphics is only permitted in the context of reporting on the AURELIUS real estate group and PwC Germany. Please always quote the source: AURELIUS/PwC. The graphics may only be edited as part of normal image processing.

Recent News