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Hard Truth: Investors May Need To Accept Lower Returns For ESG To Succeed

Looking for the latest insight into Ireland's ESG agenda and how it affects the real estate market? Look no further than Bisnow's Ireland Real Estate ESG agenda, held on 1 June, Dublin.

Investors in Irish real estate may need to be willing to accept lower returns when making older buildings ESG compliant if they and Ireland are to commit to meeting climate goals, a leading investment manager has said.

Investors may need to accept lower margins to build more ESG-compliant schemes.

“There is a price to be paid for ESG. I can rip out all the gas boilers from all of the buildings that I have and replace them,” Henderson Park Asset Management Director Ronan Webster said.

“But renewable energy comes at a cost, so there is a price to be paid for ESG, and investors alone are going to have to accept lower returns if they want their buildings to be fully ESG compliant.”

Commenting ahead of Bisnow’s Real Estate ESG Agenda event in Dublin on 1 June, Webster said that in terms of real estate, a core aspect of recent ESG agendas is to ensure more of Ireland’s real estate meets Nearly Zero Energy Building criteria.

“Dublin is about 45M SF of offices, which is about the same size as Manchester in the UK. But only 17% of that stock is top-rated,” Webster added. “When you are building a building your exit strategy is to sell that building to a core fund.

“Everyone focuses on the shiny new buildings, but the question is more about what are we going to do about the other 83%? We’re not going to knock down those buildings over the next 10 or 20 years to make them NZEB.”

The investment picture for ESG has evolved dramatically over the past half-decade with the climate agenda in particular rising up the list of priorities for governments worldwide. Investors have followed suit.

“We are seeing significant demand from investors and international funds in ESG office assets, and investors who don’t wish to develop or refurbish real estate assets will focus on acquiring assets that already have some form of high sustainability rating," Savills Ireland Associate, Office Agency Conor Egan noted in a recent market briefing.

"This will lead to increased demand and more than likely higher prices for green office buildings."

A number of Ireland’s recent office schemes that have contributed to the sustainable agenda include the 360K SF Navigation Square scheme in Cork’s Albert Quay as well as Iput’s 80K SF scheme titled the Tropical Fruit Warehouse, which has a LEED Platinum rating for its environmental credentials.

The 92.6K SF scheme at 76 Sir John Rogerson’s Quay is qualified as LEED Gold, and is leased to Rabobank, Trinseo and Algebris.

Iput launched its sustainable manifesto last autumn and aims to meet a net-zero carbon target by 2030. 

The Irish ESG sentiment is part of a broader ESG movement across Europe. Dutch developer Edge is constructing a 26-storey tower near London Bridge that aims to be the most sustainable office tower in London. Edge Executive Managing Director Fons van Dorst told Bisnow earlier this year that the ESG issue has gone from an occasional aspiration to a core part of many companies' operations, which is changing their office requirements.

Europa Capital is one investor that has seen the shift in sentiment firsthand.

"I would say that investor sentiment has definitely changed in the last seven or eight months," Europa Capital Head of Sustainability & Development Lynn Smith said.

"We had COP26 in Glasgow [last year] and following that event, there was a huge increase in the number of inquiries we're getting from our investor clients asking about ESG and what we were already doing about embodied carbon."