The social dimension
To date, sustainability has mostly been discussed in the real estate sector in terms of the environment and energy efficiency. Now attention is increasingly turning to the S in ESG. Many market players are taking the initiative themselves rather than waiting for rules from Brussels. By Christine Mattauch
At first sight, it looks like any other business park. Located on the motorway between Prague and the German border, it features the usual cluster of industrial buildings, logistics warehouses and parking areas. But something is different here, near the Czech town of Bor. There’s a clubhouse where you can get something to eat, plus inexpensive mini apartments for long-distance commuters. Not to mention green space, sports facilities and play areas, including a basketball court. “It means a lot to the tenants and their employees. Investors like it, too,” says Jan-Evert Post, Head of Funding and Investor Relations at Dutch company CTP, which developed and operates the site.
CTP has more than 100 industrial and logistics parks in its portfolio and social infrastructure is becoming an increasingly important aspect. “Some 20 to 25 percent of our parks will be equipped with such features over the next few years, especially the larger ones,” says Post. Sustainability counts – and is certainly a factor for a listed company. “ESG comes up in virtually every conversation with investors,” says Post, i.e. environmental, social and governance issues. “The energy performance of our buildings is already very good. Now we’re increasingly turning our attention to social aspects.”
The S in ESG
“Social value encompasses environmental, economic and social wellbeing and understands each of these in terms of their impact on the quality of life of people.”
Up to now, discussion in the real estate sector around sustainability has mainly focused on the environmental dimension, but social factors are moving up the agenda. “Investors are increasingly making the issue part of their strategy,” confirms Susanne Eickermann-Riepe, Chair of the Institute for Corporate Governance in the German Real Estate Industry (ICG). There are two reasons for this – social features create a point of difference, which is welcomed by the market, and tend to raise the value of a property.
Attention shifting to social sustainability and the associated opportunities
Although there are no legally binding provisions as yet, it’s likely to be only a matter of time before the European Commission lays down social taxonomy criteria. The Platform on Sustainable Finance, an expert group that advises the Commission, provided some initial pointers to the rules in July. In line with the environmental taxonomy, there will be criteria that funds must comply with if they want to call themselves sustainable. A key distinction will be whether they simply possess certain characteristics (Article 8 of the EU Sustainable Finance Disclosure Regulation (SFDR)) or have sustainability as an objective (Article 9, SFDR).
In addition to processes within a company, there will be a focus on the social quality of properties – which can be a challenge, depending on the type of use. “Some asset classes are better candidates than others,” says Eickermann-Riepe. The Brussels initiative is pushing at an open door. Investors who are aware of their social responsibility already view social sustainability as an opportunity. “Previously, many of our initiatives remained under the public’s radar. When we get involved in social projects today, it attracts more attention due to society’s greater overall engagement with the sustainability debate,” says Volker Noack, managing director at Union Investment Real Estate GmbH. “We shouldn’t always wait for legislation, we should be showing how much creative energy there is in the real estate industry,” adds Jens Böhnlein, Global Head of Asset Management and Sustainability at Commerz Real. “The S can help give people confidence in us. It’s in our own interests to raise our game.”
When we get involved in social projects today, it attracts more attention due to society’s greater overall engagement with the sustainability debate.
Investors see opportunities in the affordable housing segment, for example. In December, Munich-based company Wealthcap bought 115 apartments for apprentices and students with the express aim of providing low-cost accommodation in what is a very expensive city. According to industry sources, Nuveen is working on strategies for impact-oriented funds as per Article 9. Their target group? People with disabilities. Last year, Catella launched a fund for real estate with a “social responsibility” function. The first acquisition was a multi-generation development in Bielefeld, Germany. Investor and fund manager Industria Wohnen, meanwhile, operates an open-ended special fund called “Wohnen Deutschland VII” that invests exclusively in sustainable and social residential projects. The aim is to generate a distribution yield of 3.75 percent, which is an attractive proposition for many investors, according to Industria managing director Arnaud Ahlborn. “They also benefit from a very reliable income stream,” he points out. Additionally, the investment contributes towards their own ESG strategy.
Subsidised housing is attractive in terms of social criteria
As social aspects come to the fore, demand for subsidised apartments is also rising – a sector long regarded by professionals as unattractive. Back in 2016, Erlangen-based GBI was one of the first developers in Germany to make social housing an investable product. The sector now has the potential to go mainstream. “Over the past few years, we’ve sold projects to the value of around €300 million and have the same amount again in the pipeline,” says Simon Hübner, a GBI board member. “ESG is a massive driver of demand.” As a result, community assets such as care homes, schools and nurseries/kindergartens are also sought after. For example, Warburg-HIH launched the “Zukunft Invest” special fund in 2020, which primarily invests in kindergartens. Carsten Demmler, managing director at HIH Invest Real Estate, calls it a “niche but logical product that has struck a chord with our institutional investors.” This is fully compatible with a focus on returns, he stresses: “Kindergartens are a highly resilient investment.” Leases tend to be long; operators are creditworthy and, in Germany at least, their obligations are often protected by public sector guarantees. Social aspects are less tangible when it comes to office and commercial properties, but there are still exciting opportunities.
Kindergartens are a highly resilient investment. It’s a niche but logical product that has struck a chord with our institutional investors.
Ensuring comparability of social strategies across use classes
BNP Paribas REIM’s ESG Action Plan for 2021 to 2025 includes the following objectives: “Improve health and wellbeing of tenants, ensure access for disabled people, provide sustainable mobility.” Contract design can also be a starting point. Are tenants and contractors respecting basic social standards in their dealings with their employees? How does a property contribute to local infrastructure? What is a building’s added value for local people and residents? “Buildings are still rarely viewed in context,” says Eickermann-Riepe. The expert cites the management of Hamburg’s HafenCity as a successful example. Cologne-based developer Pandion takes a rather different approach. It allows artists to use soon-to-be-demolished buildings and derelict sites free of charge, and subsidises new build space. “As developers, we see ourselves as an important part of what makes a town or city,” says Pandion’s manager in Berlin, Mathias Groß.
It is clearly difficult to compare such diverse strategies. The key aim of the taxonomy is thus to create transparency for investors around sustainability. On behalf of the ICG, the Real Estate Management Institute (REMI) at EBS University has developed a model that assesses projects based on their individual sustainability objectives and allows them to be compared via a points system. “The aim is for investors to be able to apply the model themselves,” says the head of REMI, Kerstin Hennig. The effort involved depends on the quality of the data. Time will tell whether the model gains acceptance, but at least a start has been made.
Interview by Christine Mattauch and Fabian Hellbusch