Residential investors trade profit for emissions cuts

Investors would sacrifice returns in exchange for environmental benefits when investing in multi-family property, where opportunities to repurpose buildings, rather than build from scratch, can drastically reduce their carbon footprint, according to a real estate expert.

“For redevelopment, in the short-term, you may give up some return, but you have the ability [to absorb that] as longer-term investor,” Robert-Jan Foortse, APG’s head of European real estate, told AsianInvestor.

He said it was worth spending in this way to extend the life of a building or prevent it from becoming a stranded asset, adding that the fund employed the Carbon Risk Real Estate Monitor, an EU-funded research project supporting retrofits of existing buildings, to enhance energy efficiency and the building lifespan.

“We are looking to expand our [multi-family rental] offering in Asia,” APG’s head of private real estate for Asia Graeme Torre told AsianInvestor, citing its existing allocations in China and Australia. Alongside logistics, multi-family is APG’s largest sector allocation in Asia.

Foortse said that APG saw considerable opportunities to improve the environmental impact of buildings in this sector and that the fund had played a pioneering role among investors in favouring redevelopment over demolition in the Netherlands.

“In our Dutch residential portfolio, we do a lot of retrofitting, upgrading houses to make them more energy-efficient, and renovating apartment buildings. It makes much more sense than destroying them,” he said, adding that the fund was seeking to do the same across Europe’s major cities.

“In those gateway cities you have existing infrastructure and built environment, so you try to upgrade rather than demolish,” he said. In areas where more widescale regeneration was required, carrying out the renovation was harder, he added.

“In the case of obsolete office buildings, it may be difficult to transform them into residential buildings or hotels,” he said.

ASIA FUNDAMENTALS

He noted that APG's Asian strategy mirrored the strategy it had pursued in its early investments in emerging multi-family rental markets in Europe – notably the UK and Spain.

“In all cases, the investment case is similar – driven by urbanisation, social changes, people’s greater comfort with renting and the flexibility [valued by] millennials and Gen Z,” he said.

Toby Selman, head of property at the New Zealand Superannuation Fund (NZ Super) told AsianInvestor that the fund was converting surplus commercial buildings to residential, a move which drastically cuts the embedded carbon entailed by building from scratch.

“We are very focussed on the property [portfolio] achieving net-zero carbon buildings. There is much less [emitted] to repurpose or redevelop a building rather than stick up a new one and pour in a load of concrete,” he said.

He said NZ Super had invested €150 million ($158 million) last year in a fund managed by DFI, the European private equity property fund manager. The fund owns buildings in Denmark, Germany and the UK, a number of which have been repurposed to serve residential and student accommodation.

The efforts to repurpose buildings are aligned with good environmental, social and governance practices. Research has shown that ESG-integrated funds can produce returns as good as or better than their peers.

MEASUREMENT LIMITATIONS

On Monday, Ed Dixon, head of ESG for Aviva Investors’ real assets business, emphasised the growing green premium associated with well-constructed and managed buildings but criticised some measurement standards.

“The focus on net-zero targets has resulted in a lot of money chasing sustainable assets with attractive decarbonisation pathways, as investors try to lock in short-term reductions in the carbon footprint of their portfolios," he said.

"There's an overreliance on energy performance certificates and green building certifications, neither of which are correlated to energy and carbon intensity,” he added.

Dixon was speaking on the publication of a report on the progress made towards net-zero by the company’s £47 billion ($58 billion) real assets business, which showed it had made £1.04 billion of climate-transition focussed loans in its real estate and infrastructure business since 2020.

Peter Hobbs, managing director of private markets at consultancy bfinance in London, told AsianInvestor that the environmental impact was one of several factors behind the multi-family sector's appeal to investors. But he emphasised the specialist skills required to succeed and the social risk to be expected in a sector where rising rents have seen waning housing affordability in many major global cities.

“Residential has that reputational concern. Big investors typically seek to partner with an operating company. You need the maintenance vans, the technology to support [management] and it's complicated – with a lot of small assets to manage. It’s a lot to do in-house,” he said.