Between climate and price commitment: ESG in the residential sector

ESG criteria are also becoming increasingly crucial for residential real estate. The demands are increasing, not least on the social issue: how can we succeed in reconciling climate protection and affordable housing?

March 22, 2021

Sustainability is becoming a criterion that investors in the EU must take more and more seriously. In 2021 and the following year, two crucial regulations will come into force that are likely to become highly relevant for financiers and thus developers of residential real estate: EU Regulations 2019/2088 on sustainability-related disclosure requirements in the financial services sector (Disclosure Regulation) and 2020/852 on establishing a framework to facilitate sustainable investment (Taxonomy Regulation).

The Disclosure Regulation establishes comprehensive reporting requirements for sustainability risks of investments for most financing actors from March 2021. The Taxonomy Regulation, which follows in 2022, sets extensive requirements for the promotion of sustainable financial products. It is based on six categories such as the avoidance of climate risks and environmental pollution or efforts for better recycling and waste avoidance. Overall, therefore, financiers are required to be considerably more transparent than in the past, especially when they advertise sustainable products.

Social climate demands environmental compatibility

Indirectly, this also puts the onus on developers of residential real estate, who in any case must meet ever-increasing national energy efficiency standards. "Sustainability has become one of the key challenges for residential real estate development. On the one hand, the numerous regulations contribute to this, but on the other hand, a social climate that demands more commitment from the real estate industry, not only for environmental sustainability. Ignoring this megatrend is a risk that investors and developers simply can no longer afford", explains Michael Bender, JLL Head of Residential Germany.

This development offers opportunities for the real estate industry, not least because the public sector provides extensive support for sustainable residential real estate, for example through programs of the Kreditanstalt für Wiederaufbau (KfW). For example, a low-interest loan with a repayment subsidy of 15 percent, up to a maximum of 18,000 euros per residential unit, can already be obtained for the KfW 55 standard. "Such funding measures from KfW can also be applied for in the area of commercial real estate development and thus enable project development at attractive conditions - and subsequently affordable, climate-friendly living space", says Klaus Platen, JLL Team Leader Residential Investment in Munich.

Stable cash flow with price-linked residential construction

However, climate protection is only one aspect of the ESG criteria that are increasingly permeating the real estate industry. The rent debate in urban centers has long since become one of the key political issues. Affordable housing is the demand in almost every major city in the country. The social debate, which has become very heated in places, has even led some investors to view the living sector with due respect, out of fear of reputational risks.

Price-regulated housing, on the other hand, is a field that promises investments with a social tailwind. In many places, however, this is a purely theoretical question anyway. "Especially in metropolitan areas, new developments are almost exclusively approved only with a proportion of price-linked housing units", says Bender. For investors, he said, these properties are definitely attractive, beyond the image issue. "Stable cash flow, virtually no vacancies and a tendency for tenants to stay for a long time make such properties an investment with a high degree of security – even if this argument has admittedly lost some of its appeal in times of general housing shortages."

And especially for investors who think very long-term, these properties become an attractive investment due to the subsequent discontinuation of price maintenance. "Investors whose perspective extends more over decades than years, such as family offices, are thus expanding their portfolios with considerable potential for value appreciation", explains Platen.

Michael Bender,Head of Residential Germany
Michael Bender
Head of Residential Germany