Assets Sustainability: a key factor for value retention

The term sustainability was coined in German-speaking countries and goes back to forestry. As we understand it today, a sustainable business activity or investment takes into account the three components of ecology, social responsibility and conscientious management, or ESG for short (Environment, Social, Governance).

In recent years, sustainability has become more and more of a global issue. Consequently, the view that sustainability pays off and is associated with long-term positive effects for society as a whole is gaining ground. The relevant United Nations Sustainable Development Goals (SDGs) are to a significant extent directly or indirectly related to climate change. Since the emission of harmful greenhouse gases is largely attributable to the construction and operation of buildings, the real estate industry is facing a major challenge. You can find out more in a study conducted by the Federal Office for the Environment (FOEN).

In addition, real estate represents a long-term investment. It therefore makes sense for investors to take sustainability considerations into account simply in their own economic interest. The focus is not only on long-term economic efficiency and value retention, but also on the ideal interaction of the property with ecology, outdoor areas and the needs of users. Insufficient air quality in the building, inadequate public transport connections or disproportionately high maintenance costs can affect the long-term value retention of a property.

The biggest sustainability risk at the moment is likely to come from climate change. Consequently, climate risks are prompting new requirements in terms of building standards. Both the building shell and building ventilation must be designed to handle more frequent heat waves. At the same time, warm air must of course be kept indoors in the winter. More significantly, social and political pressure to slow climate change can have a critical impact on a property’s long-term marketability. The resource consumption of the real estate portfolio is likely to dominate the political discourse on the perception of sustainability for years to come. Moreover, unlike many other sustainability aspects, this criterion can be clearly measured in figures.

The fact that investors, buyers and independent appraisers attach great importance to the topic is a sign of the times. According to Katharina Hofer, economist and UBS Real Estate Analyst, “The importance of sustainability criteria is likely to play an increasingly important role in real estate valuation.” It is already becoming apparent that the importance of “green” real estate is rising in the portfolios of institutional investors or when leasing to large companies. “Brown properties, on the other hand, are at risk of markdowns in valuation,” explains Katharina Hofer.

Future requirements for investments and, in particular, for activities in the real estate sector are clearly discernible. With its EU Taxonomy, the EU has created a classification system that substantiates the meaning of the EU’s environmental and climate goals for investors. In the longer term, the aim is to massively improve the energy efficiency of buildings whilst significantly reducing CO₂ emissions at the same time. The EU Taxonomy is scheduled to come into force in January 2022.

Given that there is currently no comparable set of rules in Switzerland, future Swiss standards will probably be based on the EU Taxonomy. Switzerland is committed to the Paris Climate Agreement, and the Federal Council’s long-term climate strategy for 2050 is moving precisely in this direction. The cantons, which have sovereignty when it comes to energy and building laws, are also increasingly taking the same path.

Read more about the topic of sustainable real estate funds in our article “Sustainability of Swiss real estate funds” with real estate expert Katharina Hofer