Sustainable real estate funds are popular among investors

Sustainable investing in real estate is growing in popularity. Why is this?

Investors are becoming increasingly interested in sustainable Swiss real estate funds. This means that investors assess a company’s ability to identify, quantify and manage environmental, social and corporate risks. Given the high volume of greenhouse gases emitted by housing stock, the focus here is on ecological considerations.

What distinguishes a “green” investment fund?

Switzerland is currently developing measures and guidelines by which to determine whether a fund can be classified as green and sustainable. These may be based on the EU classification. There have never been any standardized requirements for sustainability reporting, making the selection process and comparability for investors even more challenging. Portfolio managers must thus communicate their sustainability measures very clearly. Due to relatively simple measurability, the funds currently focus on CO2 emissions, energy requirements and sources in real estate as well as building certifications.

What guidance is available to investors? Or, in other words: what benchmarks exist?

In order to determine and communicate their own sustainability status, a growing number of real estate funds are joining organizations that externally audit and independently evaluate their sustainability efforts. These help fund management companies evaluate how they can improve their performance and communications when it comes to sustainability. This is something which investors can also benefit from. The Global ESG Benchmark for Real Assets (GRESB) is currently considered the global benchmark for assessing the sustainability risks of real estate investments. The Swiss Sustainable Real Estate Index (SSREI) is the Swiss equivalent of GRESB.

How does sustainability impact your expected return?

Funds aligned with the GRESB or SSREI benchmark outperform those which do not report to a benchmark standard by an annual 1.2 percent over a period of ten years. This difference in annual performance has been twice as high in the last five years. However, it is too early to determine whether this difference in performance is simply due to a more successful sustainability strategy.

What will happen next?

We expect local real estate fund managers to increase and diversify their existing commitment to sustainability, as this can improve investment returns. This is likely to play an even greater role if property values are no longer supported by falling interest rates. What’s more, better communication will likely improve transparency for investors, for example, concerning physical climate risks or social criteria such as internet coverage.

Read more about the topic of sustainability in the real estate sector in our article “Sustainability: a key factor for value retention”.

Katharina Hofer, Chief Investment Office UBS GWM

Katharina Hofer is an economist and real estate expert who works for the UBS Chief Investment Office. She holds a doctorate in economics from the University of St. Gallen and has been with UBS since 2018.

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