Rescuing the value in stranded assets

Stricter environmental requirements increase the risk of problem properties in the real estate sector. At the same time, there is a growing appreciation of the role of refurbishment. Transformation concepts are the name of the game. By Christine Mattauch

It’s a great model: Dirk Gratzel buys sites that no one wants and lets other people pay for the remediation and refurbishment. The Zeche Westfalen colliery in Ahlen, Germany, is one such example and comprises 74 hectares. Coal was extracted here until 2000, when the site fell into disuse. Now, Gratzel is converting it into an eco-paradise. The transformation is being financed by companies like the DM drugstore chain that want to offset their environmental impact.

The 54-year-old has called his startup “Heimaterbe”, which translates as “homeland legacy”, and he has big plans for it. The aim is to become a listed company that invests the majority of its proceeds in buying contaminated sites – but which also distributes profits to shareholders. “It’s an exciting and very modern investment project,” says Gratzel. “We’re generating an ecological benefit as well as an economic return.”

We’re generating an ecological benefit as well as an economic return.
Dirk Gratzel Founder, HeimatERBE

As unusual as this form of space recycling is, it highlights the opportunities associated with the current discussion around problem properties. Greater awareness of climate issues, resource scarcity and stricter EU requirements are all making refurbishment of existing properties a hot topic for the real estate industry. Unconventional ideas are needed in the fight to ensure that assets don’t become stranded. “The demand for transformation concepts is huge,” says Anne Sanftenberg, Professor of Real Estate Management at the BBW Hochschule – University of Applied Sciences in Berlin. 

There are two sides to this development. On the one hand, regulation at national and European level is increasing the risk that existing properties will plummet in value and, in a worst-case scenario, lose their function. The Netherlands, for example, is planning a ban on office buildings that are not energy efficient from 2023. Sanftenberg recommends devising strategies now to ensure that properties remain competitive. In future, “every property in a portfolio will need to be screened on an ongoing basis” and digital tracking of CO2 emissions should form the basis of every decarbonisation plan. Having a roadmap for energy efficiency will be a prerequisite for actively managing risk and to ensure that buildings don’t become stranded assets.

To date, transformation has generally not been the most cost-effective option, although the benefits in terms of sustainability are plainly visible.
Henrike Waldburg Head of Investment Management Global at Union Investment

On the other hand, there’s a new appreciation of existing properties as recognition grows that it is significantly more environmentally efficient to upgrade or refurbish them than to go down the demolition and new build route. The current buzzword is grey energy. “To date, transformation has generally not been the most cost-effective option, although the benefits in terms of sustainability are plainly visible,” says Henrike Waldburg, Head of Investment Management Global at Union Investment. Around 70 percent of CO2 emissions occur during construction due to the use of concrete and steel. The production of cement for new buildings, for example, accounts for 8 percent of global greenhouse gas emissions, and for 11 percent of emissions in Germany. Waldburg: “Reusing existing properties is therefore central to the circular economy.” The taxonomy already imposes standards here, but buildings must also comply with energy requirements in the relevant market. Experts are therefore calling for criteria to be established for sustainability upgrades – with regard to using ecological construction materials, for example.

Our business involves a lot of craftsmanship. There aren’t enough people with the right skills out there.
Timm Sassen CEO, Greyfield Group

Some specialists understood this need earlier than other people. One of them is Timm Sassen, whose Greyfield company has been transforming lost places into showpieces since 2012. “We’re trying to be a driver of change for the industry,” he says. He calculates the CO2 content of the grey energy in each derelict property. Sassen even takes on apparently hopeless cases. One example is the indoor swimming pool in Duisburg’s Hamborn district, which closed back in 1998 and has 5,700 tonnes of CO2 locked up in it. The building is being turned into offices for Duisburg’s job centre. At present, Sassen is transforming an old print works in Essen city centre with 21,000 tonnes of embodied CO2 into a last mile location for food logistics. Others applied to redevelop the site, attracted by its proximity to the city centre, “but we were the only ones who wanted to retain the existing structure,” says Sassen.

Greyfield currently has nine projects on the go. That figure could actually be higher because “requests are coming in all the time,” says Sassen. What’s holding him back is a shortage of skilled workers. “Our business involves a lot of craftsmanship. There aren’t enough people with the right skills out there.” He is calling for more research and development, particularly into analytical techniques that provide transparency into old properties. Another area of concern is that although more attention is being paid to refurbishment of existing properties and many people are talking about the building life cycle, investors are barely taking that into account yet. “The opportunities and risks have changed. But that’s not reflected in market prices.” Not yet anyway.

Philipp Enenkel, Head of Real Estate Management at Aurelis, believes that part of the problem lies in the different ways of assessing sustainability. He sees an urgent need for standard benchmarks. “It’s a real pain that there are so many different benchmarking and scoring systems” – from GRESB to GRA and GRI. There’s also uncertainty about future regulatory requirements, and the fact that most systems don’t include the climate pathway. Having said that, for Aurelis as refurbishment specialists there are now even more opportunities around renovating existing buildings. 

“When we make acquisitions, our main focus is on derelict sites and commercial properties that we can upgrade,” says Enenkel. One example is Turbinenwerk Mannheim, an 18-hectare site formerly occupied by a turbine plant with a host of existing buildings and warehouses which the developers are gradually renovating for modern uses. There’s no shortage of demand for high-quality space in refurbished properties with “tenants increasingly appreciating sustainability”. Because it aligns with their image and ethos, they are prepared to accept slightly higher rents – which is also likely to boost the value of such properties.

It is “apparent that the growing trend for sustainable real estate will open up a range of exciting prospects in the transformation property segment,” according to a market study conducted by Union Investment and bulwiengesa. That also applies to marketing. The study highlights examples of best practice such as the Neue Höfe development in Herne. Here, a former Hertie department store that had been unused since 2009 was transformed into a multifunctional building with offices, retail outlets and services, restaurants and a fitness studio. The Pace project in the Pasing district of Munich is another case in point. A high-rise complex with rental apartments dating from the 1960s was refurbished and integrated into a new development with owner-occupied apartments. Will today’s exception become tomorrow’s norm? The PwC Emerging Trends in Real Estate Europe 2022 survey quotes one respondent who said: “In ten years’ time, building new buildings will be a very rare occurrence.” Sustainability criteria are pivotal here to fully exploiting the potential of transformation properties and making a significant environmental contribution.

The logistics sector is likewise undergoing transformation. According to calculations by Garbe Research, the carbon footprint of a refurbished warehouse is half that of a new build, even after 20 years. “We need to build a bridge for existing properties,” says Jan Dietrich Hempel, co-managing director of Garbe Industrial Real Estate. This can be done by reducing energy consumption through modern heating technology, geothermal energy, LED lighting and solar panels on the roof, for example. “The potential is huge.” 

According to Hempel, around a third of Garbe’s developments are brownfield sites – which is also a sign of transformation. Interest is growing in spaces that were previously used for commercial purposes, reports Raphael Thießen, managing director of Brownfield24, an online platform for such sites. “Even residential developers are showing interest these days.” This is not just due to a growing awareness of sustainability but also because many such sites are centrally located and have good transport links. Thießen sees space recycling as a growth market and is now expanding his marketplace to create a competence centre that brings together a network of specialist service providers. Aurelis is one of them. Philipp Enenkel believes that “in flourishing regions, it’s only a matter of time before there are no derelict sites left.”

By Christine Mattauch

Title image: Getty Images

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