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ESG non-compliance: financial risks for the real estate portfolio

Date
22.12.23
Authors

Natalie White

Kaya Brandt

Viktoria Niggemann

Jens Thumm

Tags

Energy

Energy Certificate

ESG

Predium

Strategy

Scoring

Sustainability

Managers

Due to the increasing importance of sustainability in the real estate sector, a turning point is emerging that is significant for investors and owners: ESG standards (Environmental, Social, and Governance) are becoming the key to future-proof investments and the sustainable development of real estate.

It is no longer enough to focus solely on the traditional aspects of real estate management. Taking ESG principles into account has become an indispensable part of a successful long-term real estate strategy.

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Enforcement of ESG compliance and current market dynamics

The European Union and individual member states, including Germany, are implementing ambitious guidelines to promote energy efficiency and therefore sustainability in the real estate sector. In Germany, for example, the federal government obliges property owners and portfolio holders to improve the energy efficiency of their assets through legislation such as the Building Energy Act (GEG). These regulations are part of a broader framework aimed at reducing CO2 emissions and optimizing energy consumption in the building sector.

Growing pressure from investors, regulators and public opinion is forcing real estate companies to place sustainability and social responsibility at the forefront of their business strategies. This shift towards a stronger ESG focus is also reflected in the increasing demands of market players. Companies that invest in ESG aspects can expect higher rental income, tax benefits and an overall higher market value of their real estate investments.

In addition, the challenges of rising interest rates and persistent inflation have led to a change in market conditions, with financing costs rising and real estate valuations coming under pressure. In this context, ESG compliance is becoming a key element for the long-term value stability and attractiveness of real estate.

Non-compliance with ESG principles can have a range of consequences - from climate damage, to increased regulatory scrutiny, to reduced real estate valuations.

‍Financialimpact and consequences on the profitability of real estate

In the real estate industry, compliance with ESG criteria and the consideration of sustainability aspects have direct financial implications for investors and owners. Failure to comply with these principles can lead to a range of negative economic consequences.

Properties that do not meet ESG criteria are exposed to a growing risk of impairment. In a market where sustainability is becoming increasingly important, properties that do not meet ESG standards are often less attractive to potential tenants and buyers. This can lead to longer vacancy periods and pressure on rental income, and ultimately affect the profitability of the property.

Another aspect relates to financing options. Properties that do not meet ESG criteria may have difficulty gaining access to favorable sources of financing. Investors and lenders are increasingly inclined to consider ESG compliance as a criterion for their investment decisions. Properties that do not meet these standards could therefore have to bear higher financing costs or even be excluded from financing altogether.

Strategies for ESG compliance

The correct implementation of ESG initiatives plays a key role in increasing the value of real estate.

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Possible strategies for ESG compliance:

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  1. Investing in green building practices: Focusing on energy and water efficiency to reduce operating costs and CO2 emissions while increasing rental income and property value. The use of certifications such as BREEAM and LEED is becoming increasingly common for new commercial buildings and renovations.
  2. Social impact and governance as value creation: Intensifying social engagement and effective governance strategies, such as through WELL standard certifications, increase the attractiveness and market value of properties, promote tenant loyalty and can generate higher returns.
  3. Use of sustainable financial instruments: The use of green bonds and sustainability-linked loans, whose interest rates are linked to ESG compliance, is becoming increasingly popular. These instruments promote environmentally friendly practices and are in line with the EU's objectives for sustainable financing.‍
  4. Integrated ESG reporting: By using software solutions for ESG reporting, real estate companies can gain a better overview of ESG risks and opportunities. This makes it easier for them to recognize and increase the long-term value of their assets.

ESG compliance with Predium

The real estate industry is at a turning point where the integration of ESG principles is seen not only as a moral or environmental obligation, but also as a business imperative. Companies that proactively implement and adhere to ESG standards are strategically positioning themselves for a sustainable future and can thereby gain competitive advantage in an increasingly environmentally conscious market environment.

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Predium offers real estate owners and portfolio holders a holistic software solution that supports compliance with ESG criteria and risk management in the real estate industry:

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  • Data collection, standardization and analysis to better understand the ESG status quo of properties and identify ESG-related risks and areas for improvement.
  • Planning of measures including costs, savings potential and subsidy options in order to prioritize and plan sensible modernizations.
  • Automated reporting to create transparency and communicate progress effectively to all stakeholders.

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Would you like to know how you can not only master regulatory requirements with a value-oriented ESG strategy, but also increase the long-term value of your real estate? In a non-binding discussion, we will find out together how Predium can best support you.
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‍Book a demo.
Date
12.22.23
Authors

Natalie White

Kaya Brandt

Viktoria Niggemann

Jens Thumm

Tags

Energy

Energy Certificate

ESG

Predium

Strategy

Scoring

Sustainability

Managers

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