Doubts climb over ESG premium in APAC real estate
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Questions have arisen over the pace of environmental and social improvements in the traditional real estate sector in the Asia Pacific, with some industry experts doubting the assumption that investors enjoy the sustainability premium for better-performing buildings.
The head of private equity at KPMG Asia Pacific questioned both the existence of a sustainability premium for real estate, and investors’ propensity to be drawn to better ESG attributes without relevant regulatory requirements.
“There’s not much evidence of a substantial ESG premium in traditional real estate assets,” said Andrew Thompson, head of private equity at KPMG Asia Pacific in Singapore.
“You have regulatory requirements in some countries or at certain companies, in which case you don’t have a choice,” Thompson said.
Currently, Australia and Singapore lead the rest of Asia Pacific in green building adoption as authorities in these markets require all new buildings to be green-certified.
Compared to a year ago, Asia-Pacific investors are more willing to pay a premium to acquire a high-scoring ESG building, according to CBRE’s 2024 Asia Pacific Investor Intentions Survey published in January.
The proportion replying they would be prepared to pay more increased from 70% to 73% last year, the report showed.
But Thompson questioned such willingness.
“Alternatively, if there is a clear financial reason then you will do it. But I don’t think people are making major ESG-driven investment decisions around legacy assets with a hope this will provide a premium,” said Thompson.
“It’s different at a construction level. Energy-efficient building materials can be used without major changes in costs and there is some evidence that higher rated buildings have [greater value], so this is still very much a return on capital decision,” he said.
TENANT DEMAND
Matthew Nortcliff, Singapore-based partner of law firm Goodwin’s private investment funds group, said that the growing adoption of ESG metrics in buildings was being driven increasingly by occupants as much as investors.
“In recent years, the larger Asian institutional investors have also focused on ESG factors, but the demand for top-performing ESG investments is now driven equally by tenant and customer demand – especially for offices but also more generally,” he said.
Research by CBRE in June 2023 also found that 64% of office building tenants in Asia Pacific have already moved to green buildings or are planning to do so.
Nortcliff pointed to the competitive edge enjoyed by sustainable office buildings in the face of challenges in the sector following the pandemic, including downward pressure on rents and changing usage patterns.
“The best buildings will prove the most [financially] resilient and those buildings will invariably be the ones that score highly from an ESG perspective,” he said.
More than 60% of investors surveyed by CBRE said they were seeking discounts on current pricing of core value-added office buildings, the highest proportion of any real estate sector, with Hong Kong and Australia singled out as markets where repricing was sought.
In keeping with the idea of a premium for more sustainable buildings, the CBRE survey found that more than 60% of investors were planning to retrofit existing buildings to be more sustainable and ESG-compliant in 2024 – a trend that reflected a wider move to pursue value-added strategies across real estate assets.
MULTIFAMILY RISKS
There was a strong uptick in interest in the residential sector according to the CBRE survey, with only 15% of investors seeking discounts for purchases in this sector.
“Australia and mainland China will be the primary markets of focus for build-to-rent development. Build-to-sell solutions will also be in demand, particularly from Hong Kong and Taiwanese investors,” the report authors noted.
But KPMG’s Thompson noted growing ESG risks investors needed to consider when it came to allocations to the multi-family sector.
“Residential markets are starting to see a significant backlash towards corporate landlords who have been buying up residential stock,” Thompson said.
He pointed to regulatory action in some countries in the face of the growing political sensitivity of housing affordability. “Private equity funds don’t have a vote. Individual [tenants] do,” he added.