In recent years, there has been a rise in the prominence of Environmental, Social, and Governance (ESG) considerations, and this trend shows no signs of slowing down. With growing awareness of global challenges such as climate change, social inequality, and the need for responsible corporate behaviour, investors realise the importance of evaluating decision-making processes through a more holistic lens.
Why now?
The built environment significantly contributes to global carbon emissions and resource consumption; thus, public scrutiny of real estate investors and development projects is increasingly stringent. Additionally, the impact of real estate on communities and the people within it underscores the need for social and governance considerations. Therefore, investors in this sector are considering ESG factors more than ever to minimise risks and maximise the financial and non-financial benefits of investing in sustainable, socially responsible, and well-governed real estate assets.
In this blog, we will delve deeper into the shifting investor focus on ESG in 2023, exploring the key challenges and opportunities of this trend and their impacts on the real estate scene in the region.
Challenges: Transition Period
According to CBRE’s 2023 Asia Pacific Investor Intentions Survey, 63% of investors have adopted ESG-certified properties, and interest is expected to rise further in the coming years. However, investors in the Asia Pacific region are still unwilling to pay over a 5% markup for ESG-certified properties.
Experts such as Greg Hyland, the head of capital markets, Asia Pacific at CBRE, have theorised that this apparent dichotomy is due to a regional transition. While Europe counterparts may be further along in erecting infrastructure and allocating streams of funds towards sustainable investments, Asia is expected to catch up. This shift is driven by other factors, such as demand for ESG-compliant buildings, tighter government regulations, and more apparent private investor preferences.
The impact of this trend can already be seen in leading markets like Australia and Singapore, which are implementing strict building codes for ESG compliance.
Opportunities: Profitability and Relevance in the Long-run
With the surge in ESG-focused investments in the real estate sector, opportunities manifest in the emergence of two key valuation differentials – “brown discounts” and “green premiums.”
Brown Discounts
“Brown discount” refers to a discounted investor valuation on non-ESG-compliant real estate assets. These assets generally have higher operating costs, lower energy efficiency, and less appeal to ESG-focused investors.
However, ESG-focused real estate investors can capitalise on this opportunity by purchasing non-compliant assets at a lower price and implementing sustainable upgrades to increase the asset’s value. In the long run, these upgrades can lead to increased tenant satisfaction, lower operating costs, and potentially higher rental income.
Green Premiums
On the other hand, real estate with already established green credentials is identified as assets with “green premiums”. As these properties often possess energy-efficient features, sustainable design, and lower carbon footprint, they are typically more in demand. Hence, ESG-focused investors may find opportunities in green premium properties that are pricier at the time of purchase but possess a higher potential for long-term value growth due to the increasing demand for environmentally responsible buildings.
From a wider perspective, the rise of ESG considerations in real estate investing is not only a response to global challenges but also a chance for financial and non-financial gains.
Although the transition period presents challenges, the implementation of ESG regulations and preferences will eventually lead to sustainable investments and better outcomes. “Brown discounts” and “green premiums” offer unique opportunities for decisive investors to capitalise on undervalued assets and environmentally responsible buildings. As demand for sustainable real estate continues to grow, prioritising ESG can benefit both profits and the planet.
ESG investing is no longer a trend but a critical factor in today’s markets, and the real estate sector is poised to play a pivotal role in driving this shift towards a more sustainable future.
