With the ‘European Green Deal’ (EGD), as with every growth-oriented policy strategy, come challenges but also opportunities. The European Commission aims to reshape our continent to achieve net-zero emissions of greenhouse gases by 2050. It will inevitably require deep social and economic transformation.
The below summarises some of the challenges as well as opportunities for listed property companies and Real Estate Investment Trusts (REITs), as presented during a recent CAIA (Chartered Alternative Investment Analyst Association)/EPRA webinar on the European Green Deal.
Setting the scene: A strong high-level political ambition
Cumulatively, the European Green Deal, the Renovation Wave, the EU Sustainable Finance and the post-pandemic recovery plan are creating a very strong political movement. We can therefore expect the year 2021 to be particularly fruitful in ESG-related regulations, laws and policies in Europe. For the listed real estate sector, the focus will be on the EU taxonomy of sustainable investments and the review of non-financial (ESG) reporting by listed companies.
REITs and listed property companies are the asset owners to watch
Christos Angelis, CAIA Director at Masterdam, points rightly, in one of his blogs, to REITs as an interesting group of real estate investors in the context of EGD, saying that REITs are “well-positioned to acquire assets in need of energy retrofit projects and maintain them for the long-term”.
REITs’ access to public markets enables them to gain capital rather quickly to finance retrofits, which are heavy on upfront capital costs. They are equally able to sufficiently scale up their investments, including in energy efficiency. They would therefore be the most logical partner for discussions with policymakers on how to solve current barriers to the continent’s retrofitting efforts.
REITs’ potential overlooked by policymakers
Yet, REITs’ ability to help with European retrofitting ambitions continues to be overlooked by European policymakers. As the sector grows, and with it, the number of national REIT regimes in Europe, we continue to point out the obstacles hindering REITs’ ability to invest within the European market.
Currently, only 14 European countries have a REIT regime. And although those 14 countries represent 84% of the European GDP, there are still major disparities; these are 14 unique REIT regimes with no framework in place to facilitate their mutual recognition.
However, a successful REIT regime could be an excellent enabling framework to drive investments in the retrofit of existing buildings. If only a REIT’s status in, for example, Belgium or France would be recognised in the other Member States, it would significantly facilitate their ability to further scale up investments within the European internal market. If there were a European directive enabling mutual recognition of REITs, subject to the right set of conditions, it would certainly help drive the investments toward more sustainable real estate.
What is the biggest challenge for REITs?
Supporting a new emerging business model, such as social housing in listed real estate, could also bring much-needed collaboration between governments, property companies, investors and tenants while addressing the top priorities of the Renovation Wave, such as energy poverty and retrofitting the worst-performing buildings in the residential sector.
A lifecycle assessment of the buildings and acceleration of circular economy could also help improve the way we look at the value of the existing buildings. Helping the market see the value in existing assets prior to and after renovations is probably one of the most important ways policymakers could assist the industry.
Potential of the EU Taxonomy to drive this transformation
The EU Taxonomy Regulation that the European Commission adopted last year does not obligate companies to change their business model or to conduct their business in a more sustainable way. Instead, it sets a common framework based on which the sector can determine (and then also communicate or report on) what underlying economic activities can be considered sustainable. Its ultimate ambition is to drive private capital towards more sustainable activities.