There are good reasons to rely on sustainable properties in a real estate portfolio. Studies show that they can result in better yields. A guest blog by Carolin Ludwig, Editor „Anlegen in Immobilien“.
When it comes to sustainable properties, however, it is usually those factors which reduce the yield that first catch the eye. They require higher initial investments for construction and certification. But these are normally compensated for by lower operating costs, e.g. for energy bills. So they are only a problem, if the focus is on short payback times. For long-term investments yields should exceed the additional costs over time.
Lower Operating Costs, Willingness to Pay More
There is, in fact, scientific proof of this assumption: In the “Metastudie Nachhaltigkeit contra Rendite?” (Metastudy: Sustainability Versus Yield?) from 2016 Prof. Dr. Sven Bienert from the University of Regensburg looked at open property funds. His conclusion: Sustainable features of properties can improve the financial performance and yield of a fund portfolio. Sustainable buildings offer advantages due to lower operating costs. Apart from that people are willing to pay more for sustainable buildings. So higher rents and higher resale prices can be achieved. At the same time the risk of vacancies is lower, because sustainable properties are increasingly wanted by tenants and are easier to rent out altogether. Apart from that they attract mainly tenants of high creditworthiness and tenants’ satisfaction is generally higher. Property funds must not ignore these factors, since lost rent, change of tenants and vacancies due to fluctuation are reduced.
Key to Long-Term Marketability
A trend can actually already be seen. “The significance of environmentally friendly building features has increased considerably over the last few years”, LaSalle strategist Mahdi Mokrane wrote in the context of the publication of the white paper on “Sustainability” at the end of July 2017. He predicted that the demand for sustainable properties would continue to grow. Portfolio managers should not ignore this fact, if they want their funds to remain attractive to investors.
Looking at the future viability of a property fund it might also be well worth relying on sustainability from the very start, because the legal requirements for properties are likely to become increasingly stringent due to climate change. Properties which already (more than) meet such requirements now, are therefore safer investments for the future and involve lower operative risks. So a sustainable focus of a property portfolio does not only result in better yields, but it is the key to long-term marketability.