ESG

Key Takeaways

• Net zero in existing stock by 2045
  Decarbonizing the built environment is playing an increasingly important role in the strategies for curbing climate change in Germany.
• Greater focus on sources of renewable energy
  The expansion of renewable energies and the shift away from fossil fuels need to be accelerated to achieve a safe, climate compatible and economically successful future. 
• Technology and digital solutions for automating data capturing 
  The ability to provide proof of greater returns from sustainability initiatives will bolster the endeavors of investors and property owners to increase and/or safeguard the value of their real estate.
• Green premium
  Commercial occupiers are prepared to pay a rental premium for the switch to green energy and for real estate that meets sustainability standards. 
• Opportunities from repositioning real estate 
  The demand for ESG properties is on the rise. Opportunities for leveraging the value of existing stock through creative solutions are currently opening up for value-add and opportunistic investors.
  

Upside potential from location-related sustainable development

Focus on the energetic refurbishment of buildings
Germany must become climate neutral by 2045 at the latest – as defined under the German government’s law on climate protection. Implementing a climate-neutral building stock nevertheless harbors challenges, particularly in the current environment of high financing and construction costs. Occupiers, builder-owners and investors are therefore called upon to coordinate their priorities, ESG goals and timelines even more carefully.

Achieving the goals centers around the energetic refurbishment of existing stock and switching to renewable energy resources, with special emphasis placed on generating power from photovoltaics. Another important step consists of digitalizing the capturing of building data and the analysis process. This approach will give owners and tenants a better insight into the costs and on using sustainability initiatives, facilitating more informed decisions. 

Higher rent levels in certified buildings
Net zero obligations in combination with structural change in occupier requirements will increasingly fuel greater demand for buildings with good social and sustainability features, flanked by improved efficiency. Occupiers are already prepared to pay a “green premium” of 5.9% as an average across the Top 5 cities for ESG-certified office properties (Figure 1).  

Certified rent (premium) compared with non-certified rent (H1 2023)

Source: CBRE Research 2023, Is sustainability certification in real estate worth it?

Upside potential with sustainable location-related development

German office stock is not very sustainable yet, which may increasingly translate into a commercial risk for owners
By the first half of 2023, the proportion of certified office space in Germany’s Top 5 locations had risen from 7% in 2018 to an average 14% (Figure 2). The risk and the costs associated with less sustainable properties will increasingly manifest in the year ahead, particularly in the case of holders of property portfolios. This will apply not only to the office segment, but also to all asset classes considered in the following.  

Green premium/brown discount gap is widening
Market preferences are changing against the backdrop of an increasing awareness of climate change, along with statutory requirements. Cutting-edge building technology and fit-out, enhancing the well-being of occupiers through upgrades, and the greening of outside areas contribute to raising property value and play an important role, especially regarding the future viability of the office sector. 

Buildings with high sustainability standards will benefit in terms of rental growth rate, occupancy rate, depreciation and yield.