Sustainability in real estate portfolios: The financial imperative.

What do investors consider when investing in real estate? Location? Yes. Market conditions? Surely. Cash flow? Perhaps. There’s another key consideration that savvy investors are catching on to – sustainability. And no, it’s not just a trendy buzzword; it’s the difference between a thriving asset and a money pit.

‍

The environmental performance of a real estate asset has become a key priority for future-savvy investors who understand that it’s pivotal to the asset’s financial performance and safeguards it from risks. However, not all investors are quite there yet with their portfolios. In a survey, 11% of investors said their assets are unsaleable because of poor environmental performance. 

‍

It goes to show that the sustainability of buildings is directly linked with their profitability, and there are multitudes of reasons behind that, which we’ll discuss in detail. 

‍

In real estate, sustainability is the new black

The built environment is responsible for a jaw-dropping 42% of CO₂ emissions. The embodied emissions add another 15%. Clearly, the real estate sector has a huge part to play when it comes to fighting climate change. But it’s not just a matter of doing the right thing – it’s also a matter of doing the required thing, aka, compliance. 

‍

Regulations around real estate’s carbon footprint have tightened like a landlord’s grip on rent day. Governments are making it clear – if your building guzzles energy like a gas-guzzling SUV from the '90s, you’re going to pay for it. 

‍

Secondly, investing in energy-efficient properties provides a solid way for investors to meet their sustainability goals (which may have sprung from increasing regulation). And it’s not lost on investors that climate pledges are great for optics. 

‍

Caring about sustainability in real estate investments helps secure assets from climate-related risks. Properties with too big of a carbon footprint risk becoming stranded, and may even become the target of penalties as governments toughen their stance on emissions. 

‍

But there’s another, equally pressing reason why real estate owners can’t afford to ignore sustainability: financing. Banks are now under immense pressure from regulations like Capital Requirement Directive (CRD) IV, an EU law designed to reduce the risk of financial institutions going insolvent. 

‍

That means banks must be more cautious about where they lend their money – especially in real estate. If investment firms want financing to acquire properties, they need to prove those assets won’t become stranded due to poor environmental performance. Otherwise, banks may see them as too risky to fund.

‍

All of the above factors have made sustainability one of the top three considerations of real estate investors. 

‍

Changing consumer incentive

Of course, we can’t forget the consumer – in this case, the tenants. Consumers, in general, are becoming more inclined to consider sustainability in their purchases. That also extends to their decisions of where to live and where to set up their businesses. 

‍

Let’s be real – your property isn’t making money if it’s sitting empty. And tenants these days want buildings that don’t cost a fortune to heat in winter or feel like an oven in summer. If your property’s energy efficiency rating looks like a bad exam grade, don’t be surprised when tenants start ghosting you. 

‍

Consider a survey’s findings in the UK: 92% of the investors surveyed said they received requests from tenants for properties with sustainable features. Also, 58% of the renters requested properties with an Energy Performance Certificate (EPC) rating of C. That’s understandable, given the rising energy costs in the UK. Still, it also goes to show that tenants are aware of the cost and sustainability benefits of a good EPC rating. 

‍

Properties with poor environmental performance risk losing tenants, which may result in low occupancy or downright long periods of vacancy. That means poor cash flow and overall dismal financial performance. Inefficiencies in energy and water usage may also lead to lower evaluation, which means properties may not necessarily sell at a profit. 

‍

So, between tenants demanding sustainability and banks making it a prerequisite for financing, real estate owners are feeling the squeeze from both ends. If you want tenants to fill your buildings and banks to keep financing them, sustainability isn’t just a “nice to have” – it’s a non-negotiable.

‍

The dangers of inaction from property owners or investors

If you’re a real estate investor, it’s time you reevaluated your investment strategy (if sustainability is still not your priority). Ignoring sustainability in your real estate portfolio is like playing Monopoly and refusing to buy properties – it won’t end well. You might get away with it for a little while, but sooner or later, you’ll find yourself bankrupt … or worse, stuck with properties nobody wants. 

‍

Here’s why the time to take action is now:

Not risk averse to climate change

Climate change in itself is a risk, and taking sustainability measures safeguards assets from those risks. For example, water shortage is a big risk, especially in urban centres with water scarcity. Excessive usage of water may lead to shortages that can hamper the quality of life for the occupants. 

‍

Similarly, as cities grow and energy consumption increases, the local grid may be stressed. That’s also a climate-related risk. With energy efficiency or on-site renewable energy production, the overall consumption and its impact on the grid can be reduced, averting the risk of becoming the victim of rolling blackouts. 

‍

Non-compliance/fines

Regulations are targeting the real estate sector as well. And non-compliance isn’t really an option. It’s bad for the asset and the holder’s reputation and risks financial penalties, which can impact the bottom line.

‍

The European Union (EU), for instance, has ambitious plans for the building sector. It has introduced the Energy Performance of Buildings Directive, according to which it plans to decarbonise all buildings in the block by 2050. It lays out measures for renovations and retrofits that make old buildings more energy-efficient. 

‍

Other regions/countries are also adopting similar regulations and goals. For instance, in the UK, commercial properties must have an EPC rating of B by 2030 to be subletted. 

‍

Stranded assets

Worst-case scenario? Your property could end up as the real estate equivalent of a flip phone – outdated, unwanted, and impossible to sell. If your building isn’t up to sustainability standards, don’t be shocked when tenants and buyers swipe left. 

‍

Stranded assets become the investor or owner’s liability. It won’t produce income and will lose its value, possibly selling at a loss or not at all. As the saying goes, it’s better to be safe (as houses) than sorry. 

What can you do to make real estate more sustainable?

Integrating sustainability requires a proactive and multifaceted approach for real estate investment companies. Here's a breakdown of actionable steps to make your portfolio greener:

‍

Make sustainability a priority for all new investments

• Integrate sustainability criteria into your investment strategies
• Prioritise projects that incorporate green building principles and renewable energy solutions
• Conduct thorough environmental impact assessments
• Consider the long-term effect of the property on the surrounding environment
• Set measurable goals for energy reduction, carbon emissions, and waste management
• Ensure these targets align with industry best practices and evolving sustainability standards
• Collaborate with developers with a proven track record of creating environmentally responsible buildings
• Seek out partnerships that emphasise innovation and the use of sustainable technologies

Audit current assets for environmental performance

• Conduct comprehensive energy audits with professional companies that assess the energy performance of a property 
• To monitor energy usage in real-time, utilise advanced technologies, such as building management systems and smart meters
• Assess water usage and waste management
• Identify opportunities to reduce water consumption through efficient fixtures and landscaping
• Implement waste reduction and recycling programs
• Evaluate building materials for new constructions, renovations, and additions
• Determine if harmful building materials are present and make a plan to remove them or offset them 
• When making repairs or renovations, choose eco-friendly materials

Invest in improvements that make current assets more sustainable

• Determine areas that could improve resource efficiency, and determine the return on investment, for example, energy cost cuts
• Invest in energy-efficient HVAC systems, lighting, and insulation
• Where possible, embrace renewable energy systems, such as solar panels and geothermal heating
• For water conservation, install low-flow fixtures, rainwater harvesting systems, and drought-resistant landscaping
• Enhance indoor environmental quality (this one’s growing in importance nowadays)
• Improve ventilation, air filtration, and natural lighting
• Install smart building technology that optimises the building's performance
• Consider deep retrofitting older buildings to bring them up to modern, sustainable standards

Keep track of legislative changes

• Dedicate personnel to stay on top of regulations and to monitor evolving environmental regulations and building codes
• Ensure that your portfolio complies with all applicable sustainability requirements
• Participate in industry forums and associations to stay informed of emerging trends and best practices
• Advocate for policies that promote sustainable real estate development

Consider green certifications for your assets

• Apply for green building certifications, such as LEED, BREEAM, or NABERS, after completing their requirements
• Use the green certification to boost property value, attract tenants, and improve reputation
• Highlight your green building certifications in marketing materials and investor reports
• Showcase your commitment to sustainability to stakeholders and the public
• Maintain and improve the buildings to continuously meet the standards required by the certifications

‍

Sustainable real estate will be profitable real estate

Sustainability isn’t just a box to tick on a compliance checklist – it’s your golden ticket to a future where your buildings are worth more, not worthless. The sooner you embrace it, the sooner you stop bleeding money on inefficiencies. It’s an opportunity to make real estate assets cost-effective, resource-efficient, and liveable. 

‍

Banks are watching. Tenants are watching. Regulators are watching. And if your property isn’t keeping up, you might find yourself stuck with a building nobody wants to live in, buy, or finance. In the very near future, demand for green buildings will soar, meaning sustainability will play a big role in the profitability of properties. 

‍

comundo can play an important part in making assets in your real estate portfolio more sustainable. As an invaluable energy and associated emissions accounting tool, it dispels everything you need to know to understand the energy performance of your assets. It provides up-to-date, verified data to help you make the right decisions and improve the environmental performance of your real estate investments. 

‍