Impact of ESG in Real Estate

Earlier this month the team at CBRE Ireland released an interesting report exploring ‘The Role of ESG in the Multifamily Property Market’. The report can be found in full here: https://www.cbre.ie/research-and-reports/Ireland–The-Role-of-ESG-in-the-Multifamily-Property-Market–Considerations-for-the-Irish-Property-M

ESG refers to the environmental, social and governance implications of real estate, from construction to occupation. Prior to the outbreak of the pandemic, there was a global focus on climate change, which is not surprising given the impact of the built environment on carbon emissions (approximately 40 percent). The importance of sustainability in property development has become a huge driver for investors, however, it is necessary to separate the hype or buzzwords from the reality experienced by developers, occupants and operators. For both occupiers and investors, the energy efficiency of a property is already a critical factor in determining appeal and viability. Coupled with this is the appeal to residential tenants of living in a ‘green home’ that is built sustainably and one that can be maintained sustainably.

The CBRE report points out that with Ireland’s multifamily development scene still in its infancy there is an opportunity to embrace ESG initiatives early; essentially future-proofing buildings and improving their marketability. This report explores the emerging role of ESG in this rising market and looks to identify trends that will likely be impactful over the next decade. Critically, the research looks at the cost implication of pursuing ESG initiatives to understand both ROI or value and the impact of same on development viability.

The research will be of interest to anyone working within – or on the periphery of – Ireland’s private rented sector (PRS) and is worth reading in full. Some of the headline insights include the growing importance of sustainability over the next decade, and that cost is still the key factor for renters. This is a misalignment that will need to be addressed in the coming years. While the residential property market has not seen as much interest in sustainability, it’s believed that there will be greater interest over the next decade. This, CBRE believes, is due to increasing concern over climate change and the various merits of sustainability becoming more topical. In contrast, the commercial property sector has already seen robust demand for energy-efficient buildings developed with sustainability in mind. Both occupiers and investors of these commercial buildings want properties to be as sustainable as possible to meet government guidelines and make their business as viable as possible. In the commercial sector, occupiers and investors are even willing to pay a premium for this sustainability. We have yet to see this in the residential sector, but it likely to happen soon.

Interestingly, the CBRE research showed that sustainability accreditations are of less interest to end-users, which will be disappointing news for organisations that have invested heavily in achieving certification. For this reason, the property experts recommend that developers consider carefully (strategically?) which elements of ESG to prioritise.

Developing multifamily properties sustainably is an example of doing well, while doing good. It is clear from the CBRE research that designing and developing schemes with ESG in mind improves the long term value of the developments, which is a trend that is likely to accelerate. Although the increased costs of developing with ESG considerations are unlikely to be recouped through higher rent, the incorporation of the criteria increases the value and liquidity of the building and improves the health and wellbeing of occupants. This can result in more stable returns and a more valuable asset. Finally, it appears that the Irish market is in good stead to lead the way in delivering sustainable multifamily products.