Why ESG is driving residential investment strategy
Investor attitudes towards sustainability are beginning to dictate future investments.
2 minutes to read
Residential investors have historically built strategies around the risk return profile of projects, the stability of income those projects might offer, local demographics and the potential for scalability.
ESG (environmental, social and governance) considerations were of lesser importance only a few years ago. The term didn’t get a mention in our 2019 report, for example.
Yet four in ten investors now say that sustainability considerations will be the key factor determining their investment strategy during the next three to five years. The remaining 62% say the metric will be ‘somewhat influential’.
Competition for green buildings is already fierce and is set grow. We expect a steady divergence in the values and viability of green and so-called brown buildings, similar to the theme playing out in the commercial property sectors. Some 87% of our respondents agree that ESG credentials will create a value premium for assets, while 72% indicated that they would pay a premium for schemes with strong environmental and sustainability credentials.
Led by investors
Investors are dictating the approach to ESG, according to 81% of our respondents, more than regulatory change (51%), or tenants (32%). Investment committees are imposing increasingly strict standards in order to future proof assets, guaranteeing liquidity in the years ahead. Central to that is push reduce the risk of obsolescence triggered by regulatory changes or shifts in tenant sentiment and preferences.
Indeed, whether or not ESG matters to tenants has been a source of uncertainty, though that appears to be changing. More than 60% of respondents believe good ESG credentials will help improve occupancy and tenant retention.
While we increasingly expect the green credentials of buildings to resonate with tenants during the years ahead, the sector is uniquely positioned to drive social value and support tenant wellbeing. Our previous research into the student market has highlighted the importance of accommodation in supporting student wellbeing, but it is undoubtedly a factor across residential asset classes.
Driving social value
This was particularly evident during the pandemic, as operators held events spanning wine tasting to virtual fitness classes in order to retain a sense of community while residents were unable to travel or see family and friends. The process highlighted the benefits of purpose-built, flexible, actively managed accommodation in helping to create diverse, integrated and engaged rental communities, while it also highlighted the role accommodation can play in supporting seniors.
These issues are increasingly influencing scheme design and business strategy. Some 81% of respondents said “nurturing a sense of community” was either important or very important – the overwhelming favourite of the options on offer. Delivering more green space, incorporating more work and study spaces, incorporating new technologies and boosting the amenity provision were also selected as important or very important by most respondents.