Build or buy? Property investors split over ESG

Investors are wrestling with whether building or buying properties is better for the environment, as they consider the embedded carbon in a building’s construction, the emitted carbon from running it and the need to make a good investment.

Liza McDonald, head of responsible investments, at Aware Super in Melbourne told AsianInvestor she favoured building from scratch.

“In our property portfolio, particularly in industrial and affordable housing, we’re increasingly focusing on building rather than buying existing assets, and that’s partly for sustainability reasons. It’s much easier to build sustainability measures into assets during development than it is to retrofit them,” she said.  

“Of course, we have worked with managers of established properties we own to retrofit sustainability features, but it’s certainly more cost effective and easier to build these features in at the outset,” she said, adding that its approach to ESG was shared by its three major international property partners, Vivenio, Lendlease and City ID.

McDonald pointed to two of its new buildings with high sustainability ratings at Barangaroo and Two Melbourne Quarter, in inner Sydney and inner Melbourne respectively.

Dr Raphael Mertens, chief risk officer at Allianz Real Estate and head of ESG told AsianInvestor said the company was prepared to increase the number of assets it builds in order to ensure they score better for their environmental footprint. However, he added that the benefits had to be balanced against the commercial risks.

“A deal [to build] might provide a great ESG read out but it may be just too risky,” he said.

China and India

Allianz Real Estate has focused significant attention on China’s property sector, despite the fact that much of its building stock scores poorly on green measures.

China now accounts for €2bn of its €75.5 billion global portfolio, a figure which will increase. Its target is that fast-growing markets, in particular China and India, will comprise between 50% and 60% of its Asia Pacific allocation, up from 36% today. 

Mertens acknowledged that progress in China is at an early stage. “We are still in the phase of understanding what can be done,” he said, pointing to the benefits of sourcing renewable power contracts for the buildings it owns. 

He said Allianz owns two buildings in Beijing with the LEED Platinum certification (ZLink and Ronsin Technology Center), adding that few in China had achieved this level of green certification. Allianz was aiming to increase its share of the certified market. “Our [developer] partners see the benefits of getting green certification since it is important to investors,” he said.

Allianz Real Estate formed a partnership in India with Godrej BTC in 2017, a platform that targets the development of premium Grade-A offices in tier-one cities with whom it has invested €160m. “At the time it was more about commercial considerations. I met senior managers of [Godrej] to explain how important it was to improve energy efficiency for new buildings. Now our buildings compare well to the local market,” he said.

Data centres

In Asia’s fast-expanding data centre sector, demand for assets is outstripping supply and the majority of assets are new or young.

But the growing demands of the data economy will see emissions from this sector increase, with one model indicating it could comprise 8% of global power consumption by 2030.

Yves Meyer-Bülow, head of infrastructure funds and co-investments at Allianz Capital Partners (which owns investments in several Asian countries including China) told AsianInvestor the company was seeking to shift all centres and their tenants towards procuring renewable energy, offsetting their carbon emissions in the meantime.

In the case of co-investments, Allianz Capital Partners would also use board level representation, where available, to advance its ESG position.

Ensuring green power consumption for the “shell” of the data centre was easier than persuading individual tenants to procure green energy, he noted.

“We would hope they procured it sustainably but we would seek to work with offsets if this was not the case. For the operator there should be at least a pathway to procuring green energy,” he said, adding that the issue arose less for the major e-commerce and internet tenants of hyperscale data centres but was more common among smaller tenants.

Fiona Mann, responsible for ESG at LGIAsuper, which has small allocations to data centres both in Asia and Europe via external managers, told AsianInvestor that the fund would look closely at the power consumption of any data centre investments presented by managers.

“We’d want to see how much power was consumed by this type of investment and how it was generated. In addition, we’d expect that our external managers have done analyses on this and how opportunities to utilise more sustainable types of power consumption over time (if relevant) would impact on the investment’s IRR,” she said.

She pointed to the modernisation of lifts, rewiring and improvements in data storage as ways to cut a building’s carbon footprint. Maximising the proportion of power in a building that was generated from renewables also meant collecting information about large tenants who sourced their power independently, she said.