Credit: 3000ad | Adobe StockThe Future of Real Estate: ESG, Technology & Data
Leading RE market players share insights on the industry’s future, and the gains and pains of implementing technology and ESG
January 8, 2024Real Estate
Written by Helen Richards
During GRI Club’s annual European conference, leading decision makers in the European real estate market gathered to discuss the future of the industry.
ESG, technology and data are all proving vital to keep up with both tenant and lender demands, but implementation comes at a cost.
Read the full GRI report here: The Future of Real Estate: ESG, Technology & Data
Although there is no overwhelming premium for ESG assets, the threat of illiquidity or obsolescence cannot be ignored, and fundraising is proving increasingly more difficult when ESG is not involved.
The implementation of ESG in real estate assets is more complex. With rising construction and energy costs, a lack of data, varying regulations, and the dynamism of the “green” market, underwriting green CapEx is extremely complex.
Another major challenge involves measuring ESG. There is a lack of accurate and consistent data, and the demand for robust data collection mechanisms is urgent. The environmental realm is more advanced in terms of measuring, thanks to regulations such as the BREEAM standards. In the case of social and governance, however, the industry has a long way to go.
Despite this momentary diversion, it was reported that there are numerous opportunities to come within the realm of decarbonisation. The surge of capital flowing into decarbonisation solutions from a multi-assets perspective indicates a profound shift in investment strategies.
Rather than focusing solely on direct decarbonised assets, investors are recognising the value in backing technology and companies positioned to drive the implementation of sustainable solutions across physical assets. This broader strategy not only diversifies investment portfolios but also acknowledges the potential for scalable impact beyond individual zero carbon assets.
Redevelopment of assets in the pursuit of zero carbon was highlighted as a pain point. This is due to the difficulty of adapting pre-existing assets, and more specifically the lack of knowledge around energy efficiency measures that can be taken during this redevelopment process. Using existing installations in these assets, for example, would be a good step to reduce emissions, however a lack of knowledge around this is apparent.
Banks are challenged with assessing the credibility of the net zero plan and structuring financing accordingly. This area is uncharted for banks, making it complex to assess. It involves navigating entirely new terrain, translating pathways into practical and achievable goals while distinguishing between what's realistic and what isn't.
Banks recognise a distinct difference between standard loans and green loans. Participants predicted that regulations will increasingly incentivise banks towards green financing. One example was highlighted where banks can obtain 25% in their RWA for green loans. Regulation is evolving and unclear, however, thus lenders’ approaches to ESG vary and are yet to be standardised.
There is certainly an eagerness within the banking sector to align with these regulations, particularly in commercial real estate. Banks are actively recalibrating their risk models, acutely aware of the necessity to understand the implications of these regulatory changes.
Specifically, there's a concentrated effort to assess the impact on transitional rates, especially in scenarios where assets possess lower energy efficiency - a critical factor that may lead to potential stranding scenarios.
Asset managers have the challenge of providing data-based answers to lenders’ questions. The key, as participants reported, is effectively connecting stakeholders so all parties involved thoroughly understand the impacts, the risks, and the evolving dynamics of green assets.
While the EU taxonomy and SFDR (Sustainable Finance Disclosure Regulation) are being assimilated within the industry, their application allows for asset value preservation rather than an exclusive focus on increasing asset value.
Viewing ESG through a financial lens is imperative, as neglecting it may lead to higher costs in insurance and energy consumption, accentuating its non-negotiable relevance for investors.
Buildings are for people, and there is a lot of social value to be discovered across all asset classes. Discovery of social value is not assuming that you know the needs of the end user but instead understanding their actual needs and directing the assets towards fulfilling them.
If the needs of people are kept in mind and there is active participation of the tenants in improving the asset, social value discovery is easier.
If tenants are engaged, assets have seen higher involvement, lower vacancy risk, and lower maintenance costs. Therefore, assets delivering higher social value are inherently likely to be more successful.
The social value chain within real estate is fragmented, but in cases of vertical integration, social value creation is more advanced and all stakeholders can simultaneously prioritise the end user during decision-making.
While there is no standardised way of measuring social value, results can be seen through the length a tenant remains in an asset. Therefore, social washing is less of a risk than greenwashing. Participants agreed that social taxonomy is in sight, and it is expected to offer a “guiding light” for the industry’s move towards recognising social benefits.
Regulation and legislation is already encouraging real estate’s shift towards environmental consciousness, but social value remains more niche, making it a real differentiator of value for those socially conscious assets.
Innovative strategies, such as using AI to select tenants, are emerging in residential real estate, while monitoring occupancy and other data-driven strategies are being implemented throughout other asset classes.
Real estate is inherently unscalable and demands innovative solutions to achieve scalability. Comparing portfolios remains elusive due to varying asset management strategies, but data can bridge this gap.
Ultimately, it is about understanding buildings through technology to aid decision making, and thus achieve optimisation of space, contributing to reduced energy consumption, intelligent investment, enhanced revenue streams, and more.
Each building is distinct, making plug-and-play technology integration difficult. Combined with real estate's slow pace, the adoption of tech-driven measures is lagging far behind other sectors. Furthermore, seasoned real estate professionals have historically proven resistant to change.
The path to innovation is riddled with costs and discomfort with many companies struggling to undergo digital transformation successfully. Technology is maturing, but the real challenge is fostering a culture that embraces it. Investments must align with intentions, breaking down silos within organisations and starting from the top.
The application of technology, rather than the technology itself, often proves the stumbling block. Innovation in real estate is categorised as incremental, radical, or disruptive. The industry is often slow to adopt disruptive changes, and breakthroughs may come from other sectors.
However, with market dynamics shifting, margins shrinking, and legislation changing, many real estate companies have been forced to venture into the realms of real estate technology. Not to mention the challenges posed by COVID-19 accelerating this process.
Real estate must get the basics right before chasing the next big innovation. Sorting data, addressing technical debt, and refining the quality of buildings are foundational steps.
Data management consumes a significant chunk of time but is essential for informed decision-making. Human intervention, however, remains crucial for quality control.
Read the full GRI report here: The Future of Real Estate: ESG, Technology & Data
Join Europe’s leading real estate market voices once again at the upcoming GRI UK & Europe Reunion 2024 at Four Seasons London on 21-22 February 2024.
Read more and register here.
During GRI Club’s annual European conference, leading decision makers in the European real estate market gathered to discuss the future of the industry.
ESG, technology and data are all proving vital to keep up with both tenant and lender demands, but implementation comes at a cost.
Read the full GRI report here: The Future of Real Estate: ESG, Technology & Data
Environment & Sustainability
There is a growing awareness of ESG in the real estate industry, as well as an increasing recognition among stakeholders of the risk of illiquidity for non-ESG-compliant assets.Although there is no overwhelming premium for ESG assets, the threat of illiquidity or obsolescence cannot be ignored, and fundraising is proving increasingly more difficult when ESG is not involved.
The implementation of ESG in real estate assets is more complex. With rising construction and energy costs, a lack of data, varying regulations, and the dynamism of the “green” market, underwriting green CapEx is extremely complex.
Another major challenge involves measuring ESG. There is a lack of accurate and consistent data, and the demand for robust data collection mechanisms is urgent. The environmental realm is more advanced in terms of measuring, thanks to regulations such as the BREEAM standards. In the case of social and governance, however, the industry has a long way to go.
Net Zero Carbon
Participants at the net-zero carbon panel noted a recent lapse in focus on zero carbon initiatives, and it was suggested that this is attributed to the scepticism surrounding inflation and rate cycles. Inflationary pressures and uncertain rate trajectories tend to draw attention away from longer-term sustainability goals, steering investors towards more immediate concerns.Despite this momentary diversion, it was reported that there are numerous opportunities to come within the realm of decarbonisation. The surge of capital flowing into decarbonisation solutions from a multi-assets perspective indicates a profound shift in investment strategies.
Rather than focusing solely on direct decarbonised assets, investors are recognising the value in backing technology and companies positioned to drive the implementation of sustainable solutions across physical assets. This broader strategy not only diversifies investment portfolios but also acknowledges the potential for scalable impact beyond individual zero carbon assets.
Redevelopment of assets in the pursuit of zero carbon was highlighted as a pain point. This is due to the difficulty of adapting pre-existing assets, and more specifically the lack of knowledge around energy efficiency measures that can be taken during this redevelopment process. Using existing installations in these assets, for example, would be a good step to reduce emissions, however a lack of knowledge around this is apparent.
Economic turbulence may have drawn attention away from longer-term sustainability goals. (Image: radub85 | Adobe Stock)
Financing
A lack of financing for these redevelopment projects presents itself as a hurdle, although the narrative for the banking community around zero carbon is compelling. There is willingness from banks to take time to understand the business and the projects, and it is certainly not impossible to engage banks and “seduce” them with the “carbon story”.Banks are challenged with assessing the credibility of the net zero plan and structuring financing accordingly. This area is uncharted for banks, making it complex to assess. It involves navigating entirely new terrain, translating pathways into practical and achievable goals while distinguishing between what's realistic and what isn't.
Banks recognise a distinct difference between standard loans and green loans. Participants predicted that regulations will increasingly incentivise banks towards green financing. One example was highlighted where banks can obtain 25% in their RWA for green loans. Regulation is evolving and unclear, however, thus lenders’ approaches to ESG vary and are yet to be standardised.
There is certainly an eagerness within the banking sector to align with these regulations, particularly in commercial real estate. Banks are actively recalibrating their risk models, acutely aware of the necessity to understand the implications of these regulatory changes.
Specifically, there's a concentrated effort to assess the impact on transitional rates, especially in scenarios where assets possess lower energy efficiency - a critical factor that may lead to potential stranding scenarios.
Asset managers have the challenge of providing data-based answers to lenders’ questions. The key, as participants reported, is effectively connecting stakeholders so all parties involved thoroughly understand the impacts, the risks, and the evolving dynamics of green assets.
Taxonomy
Discussions saw a consensus on the importance of the implementation of taxonomy within the real estate industry, especially in the context of environmental considerations, serving as a tool to combat greenwashing.While the EU taxonomy and SFDR (Sustainable Finance Disclosure Regulation) are being assimilated within the industry, their application allows for asset value preservation rather than an exclusive focus on increasing asset value.
Viewing ESG through a financial lens is imperative, as neglecting it may lead to higher costs in insurance and energy consumption, accentuating its non-negotiable relevance for investors.
Social Value
The Environmental aspect of ESG has certainly developed further than the Social and Governance aspects. Social value in real estate remains underdeveloped and current measures are ambiguous and lack definition.Buildings are for people, and there is a lot of social value to be discovered across all asset classes. Discovery of social value is not assuming that you know the needs of the end user but instead understanding their actual needs and directing the assets towards fulfilling them.
If the needs of people are kept in mind and there is active participation of the tenants in improving the asset, social value discovery is easier.
If tenants are engaged, assets have seen higher involvement, lower vacancy risk, and lower maintenance costs. Therefore, assets delivering higher social value are inherently likely to be more successful.
Buildings are for people, and there is social value to be discovered across all asset classes. (Image: Pressmaster | Envato)
The social value chain within real estate is fragmented, but in cases of vertical integration, social value creation is more advanced and all stakeholders can simultaneously prioritise the end user during decision-making.
While there is no standardised way of measuring social value, results can be seen through the length a tenant remains in an asset. Therefore, social washing is less of a risk than greenwashing. Participants agreed that social taxonomy is in sight, and it is expected to offer a “guiding light” for the industry’s move towards recognising social benefits.
Regulation and legislation is already encouraging real estate’s shift towards environmental consciousness, but social value remains more niche, making it a real differentiator of value for those socially conscious assets.
Technology & Data
In the dynamic world of real estate, technology has become both a beacon of hope and a source of frustration. Technology provides precious insights and transparency into assets and their operations, revealing their intricacies and enabling the development of appropriate strategies.Innovative strategies, such as using AI to select tenants, are emerging in residential real estate, while monitoring occupancy and other data-driven strategies are being implemented throughout other asset classes.
Real estate is inherently unscalable and demands innovative solutions to achieve scalability. Comparing portfolios remains elusive due to varying asset management strategies, but data can bridge this gap.
Ultimately, it is about understanding buildings through technology to aid decision making, and thus achieve optimisation of space, contributing to reduced energy consumption, intelligent investment, enhanced revenue streams, and more.
Real estate demands innovative solutions to achieve scalability. (Image: leungchopan | Envato)
Each building is distinct, making plug-and-play technology integration difficult. Combined with real estate's slow pace, the adoption of tech-driven measures is lagging far behind other sectors. Furthermore, seasoned real estate professionals have historically proven resistant to change.
The path to innovation is riddled with costs and discomfort with many companies struggling to undergo digital transformation successfully. Technology is maturing, but the real challenge is fostering a culture that embraces it. Investments must align with intentions, breaking down silos within organisations and starting from the top.
The application of technology, rather than the technology itself, often proves the stumbling block. Innovation in real estate is categorised as incremental, radical, or disruptive. The industry is often slow to adopt disruptive changes, and breakthroughs may come from other sectors.
However, with market dynamics shifting, margins shrinking, and legislation changing, many real estate companies have been forced to venture into the realms of real estate technology. Not to mention the challenges posed by COVID-19 accelerating this process.
Real estate must get the basics right before chasing the next big innovation. Sorting data, addressing technical debt, and refining the quality of buildings are foundational steps.
Data management consumes a significant chunk of time but is essential for informed decision-making. Human intervention, however, remains crucial for quality control.
Read the full GRI report here: The Future of Real Estate: ESG, Technology & Data
Join Europe’s leading real estate market voices once again at the upcoming GRI UK & Europe Reunion 2024 at Four Seasons London on 21-22 February 2024.
Read more and register here.
