German companies still in discovery about ESG compliance

Many real estate companies in Germany are still grappling with the implications of the ESG era and haven't yet come to terms with the unspecified costs and vague regulations of the new ESG criteria, according to recent survey conducted by Engel & Völkers Investment Consulting (EVIC).

The study, "Risk-Return ESG: Where does the industry stand?", was carried out by EVIC in March and April among 50 real estate investors, asset managers and project developers from German-speaking countries.

Only one in ten respondents stated that they already work with concrete ESG criteria in regular operations., while bout a third had not yet started implementing them in their own company. As many as 56% of the respondents reported that fundamental strategic decisions on the topic of ESG have already been made in their own company. At present, sustainability criteria are particularly important when buying properties, with older properties that are not ESG-compliant already falling out of favour with investors.

Kai Wolfram, managing partner of EVIC, says: "As expected, the real estate industry is still a long way from comprehensive ESG implementation. However, due to increased regulation of the financial sector, the pressure to act is growing strongly. The entry into force of the EU Disclosure Regulation in March has already caused noticeable movement. The market will fix it: The need for ESG compliance will consequently intensify further. Already in the foreseeable future we will see price reactions in older portfolios that require extensive upgrading."

58% of the survey respondents said they expect prices of non-ESG-compliant properties to fall in the medium to long term, while about 10 percent of the respondents even expect that such properties will be virtually unsaleable beyond that. In contrast, around 40% of the survey participants are optimistic that no ESG-related price fluctuations are to be expected.

While ESG equally affects both residential and commercial property, EVIC board member John Kamphorst said: "In the residential segment, social aspects in particular are likely to play a greater role in the future. In the commercial segment, on the other hand, it can be assumed that the challenges lie specifically in the area of "E" as in "Environment". There is clearly a need to catch up here compared to residential construction."

The majority of respondents (56%) are not yet taking specific steps to upgrade existing assets to ESG compliance - which is actually where the biggest challenges are in implementing ESG criteria - although 40% claim they do want to optimise their assets and/or have them re-certified. But for half the respondents, the issue of who should pay the resulting costs is still completely unclear. While for 42% of respondents the regulatory requirements are simply too vague, with a lack of clearly measurable KPI's for setting unambiguous targets and benchmarking against them.

The full results of the ESG survey can be found here: https://bit.ly/3yI5Mfi