On a preparation call for next week’s EXPO Real conference in Munich, PERE was reminded of how institutional real estate managers are still in voluntary mode when it comes to their sustainability and social impact work.
One German manager detailed how its lenders still do not make loan issuances based on whether there are carbon-reduction targets or societal contributions tied to those assets. “There’s no enforcement,” he told us.
A US firm, meanwhile, added that managers, investors and lenders alike all need to address sizeable immediate issues in their portfolios given they face the worst inflationary conditions in decades. With costs across the board spiraling and not expected to peak until next year – hopefully – all stakeholders in private real estate’s capital marketplace are expected to foot bigger bills than before.
Against such a backdrop, concerns are rising that backing green or societal pledges with capital stands to be deprioritized in ways unimaginable even six months ago.
Such a predicament will be a major setback in a sector where exponentially growing numbers of practitioners have championed green tools, particularly organizations that have sought to prove their universal methodologies and campaigned to make them regulatory.
It also follows mounting sentiment from managers that have become more bearish in recent months about their ability to promote environmental, social and governance factors in their pursuit of capital. They blame such negative sentiment on complex implementation processes and regulation in addition to current global economic headwinds.
According to a study by accountancy firm Auxadi, 52 percent of 100 managers surveyed across the UK, Europe and North America believe real estate assets under management would fall as a result of the challenges firms face incorporating ESG into their processes. Auxadi demonstrated an uptick in negative sentiment compared with the 2021 iteration of its report, when just 40 percent felt this way.
One common challenge the industry has faced is the adoption of ESG standards across the entire workforce at an organization – not just within its ESG team. Indeed, one manager told PERE how upskilling investment and asset management professionals to incorporate requisite standards could make a large difference in the built environment’s battle to hit decarbonization targets. But reining in soaring costs owing to inflation, wage growth and staff retention must now take precedence over training.
More than $1.4 trillion of real estate changed hands around the world last year, according to broker CBRE, a record volume for the sector. Worryingly, the lion’s share of this volume was underwritten with little foresight of quickfire interest rate hikes chasing runaway inflation that has already blasted through 10 percent in major markets.
Common wisdom would be the institutional component of that volume would have at least a degree of carbon-neutralizing capital expenditure in the business plans of those investments. But while many managers are now re-configuring to shore up capital buffers before breaking funding structures, they are at greater risk of letting carbon-reducing capital expenditure fall by the wayside and in some cases, becoming susceptible to greenwashing.
Of course, moving assets toward net zero and social impact remains a long game that all commercial landlords should play. Energy efficient buildings able to attract the best workforces remain the best commercial play as well as environmental.
Undoubtedly, the best-capitalized managers with long-term or permanent equity are best positioned to continue to back rhetoric with action in the production of ESG-friendly properties. But it is what the rest do that determines how the sector fares in the fight against global warming. Financial market clocks reset eventually but there is no restart button on carbon-cutting targets.