The green building market is booming
The green building market is booming: While only 550 buildings had been certified by 2013, by the end of 2022 this figure had already risen to around 2,800 - a growth rate of around 250 buildings per year! The transaction volume is also impressive: €11.2 billion was achieved in 2022 in single deals with sustainably certified buildings. This means that the €10 billion mark for green real estate was exceeded for the fourth time in a row. It seems that certificates such as DGNB, BREEAM or LEED are experiencing a strong increase in importance in the wake of Taxonomy & Co. We talked to Hermann Horster, Head of Sustainability, about what green buildings are all about, which asset class is most often certified and how BNP Paribas Real Estate is meeting the demand in the market.
Mr. Horster, how would you define the term "green buildings"?
The term "green building", which originated in the Anglo-Saxon world, is admittedly misleading. Today, it is no longer just about the environment, i.e. ecological issues such as the energy efficiency of an office building or the materials used, but also about social aspects, such as whether employees feel comfortable at their workplaces. And, of course, the connection between economic efficiency, good governance and the environment. Therefore, "sustainable building" or "ESG-compliant property" would fit better than "green". At the same time, the topics of CO2 and energy have taken on an absolutely central role in the real estate industry in the wake of the climate crisis. One example of this is climate pathways, which now play a significant role.
"The very dynamic upward trend observed since the EU Green Deal with the Taxonomy and Disclosure Regulation continues unabated. With a share of 30.6% of the commercial investment volume, certified properties once again set a new record in 2022."
Mr. Horster, how would you define the term "green buildings"?
The term "green building", which originated in the Anglo-Saxon world, is admittedly misleading. Today, it is no longer just about the environment, i.e. ecological issues such as the energy efficiency of an office building or the materials used, but also about social aspects, such as whether employees feel comfortable at their workplaces. And, of course, the connection between economic efficiency, good governance and the environment.Therefore, "sustainable building" or "ESG-compliant property" would fit better than "green". At the same time, the topics of CO2 and energy have taken on an absolutely central role in the real estate industry in the wake of the climate crisis. One example of this is climate pathways, which now play a significant role.
How do you recognize an ESG-compliant or sustainable building?
Until now, the simplest identification mark was a corresponding certification. There are currently three recognized certificates: DGNB (German Sustainable Building Council) from German-speaking countries, LEED or BREEAM from the Anglo-Saxon environment. The DGNB has a market share of over 80 percent in the new construction segment, and overall (with existing buildings) it is around 64 percent. LEED certification is also mainly used in the new construction segment, whereas BREEAM focuses more on existing properties.
With the tremendous upswing in the topic of ESG/sustainability in the real estate industry, which we have been experiencing for several years, certificates are no longer sufficient for many market participants. Although these are experiencing an increase in importance due to the new regulations and laws on energy, sustainability and ESG in buildings and portfolios, which have not yet been fully defined, asset managers and investors also want detailed answers to their questions about ESG in purchasing or asset management. For this reason, scoring and rating tools as well as procedures such as GRESB and ECORE, climate pathways with CREEM or ESG due diligence have been developed or are increasingly being used.
But let's be clear: Conversely, this does not mean that buildings without a certificate are not sustainable. Small and medium-sized enterprises in particular often refrain from certifying their sustainably designed buildings for cost reasons.
Office properties will continue to account for the largest share of property types in 2022. In the case of commercial real estate, however, the topic of sustainability and ESG criteria has not been paid to such an intensive extent for so long.
What is driving this market? Certainly, the increased environmental awareness of society as a whole and in the industry is contributing to this; However, the development is clearly driven by the EU with the new Sustainable Finance Disclosure Regulation (SFDR). For the first time, legal criteria (taxonomy) and categories (SFDR) apply to sustainable investment products. With MIFID II, certain real estate funds that do not comply with Article 8 or 9 of the SFDR were also classified as unsustainable in investment advice this year.
The examination of whether and to what extent buildings comply with the sustainability criteria of the taxonomy has thus become central for asset managers and investors in regulated funds. In addition, there are other ESG criteria. However, since the regulatory requirements have not yet been fully defined – further test criteria will follow and implementing provisions will also be submitted later – There is currently an understandable uncertainty in the industry with regard to sustainability and ESG, which apparently led to increased interest in the well-known sustainability certificates in 2021 and 2022.
Demand is growing continuously, especially in large cities. Around 80% of the investment volume of certified green buildings is accounted for by A-locations. In 2022, Berlin (€3.2 billion), Frankfurt (€1.7 billion) and Munich (€1.6 billion) were particularly popular with green building investors.
Current examples of certified buildings
- DGNB PLATINUM: T1 Four in Frankfurt
- DGNB GOLD: Holz-Hybrid Bürogebäude Timber Office in Hamburg
- LEED GOLD: Highlight Towers in Munich
And what role do landlords play when it comes to "green building"?
Institutional and regulated investors, such as open-ended real estate funds and insurers, have also preferred to invest in sustainable buildings in the past – if only for economic reasons. In the case of certified properties, they have a better chance of finding international corporates than tenants with a first-class credit rating, as they often see the certificate as a rental criterion. This is also the reason why there is hardly any building renovation in attractive office locations such as Frankfurt that does not also include sustainability certification.
What does BNP Paribas Real Estate offer clients in connection with sustainable office properties?
We offer comprehensive services on this topic. This starts with consulting: For example, we carry out a time- and cost-optimized ESG building or portfolio analysis based on central ESG KPIs and, if necessary, derive concrete measures from this. In doing so, the aspects of sustainability are always linked with those of economic efficiency: The reduction of CO2 emissions goes hand in hand with the reduction of energy costs.
Another element is sustainable property management: This reduces life cycle costs, reduces ecological risks and minimizes pollutants in portfolio management in order to be able to make the workplaces in the building safe and economical in the long term. As part of investment consulting, we also advise our clients and clarify with them, for example, whether ESG due diligence, energy monitoring, proof of taxonomy conformity or even a sustainability certificate for their existing buildings or projects is worthwhile.
How is BNP Paribas Real Estate positioned in the market in this area?
We are involved in this area in a variety of ways, which is strongly perceived in the market. For example, we are involved in various working groups on the topic of sustainability. We are actively collaborating with BNP Paribas Real Estate and our asset manager BNPP REIM on the ECORE initiative. I myself am active in ZIA and RICS and Vice President of the German Sustainable Building Council (DGNB).
As explained above, the topic has also gained enormously in importance for customers. Sustainable, ESG-compliant buildings have gone from being a trend to an absolute must-have. As a result, hardly any transactions take place without an ESG assessment. ESG screening and the planning of measures play an important role in asset management.