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EVORA Insights Roundtable in Milan


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Our first Roundtable in Italy was an epic – over three hours of discussion in between eating five delicious courses on a warm October evening. Together with our co-host Savills IM, our team hosted guests representing the best of Milan’s real estate investment community.

“How much does it cost?

Our guests were a mixture of investment and sustainability professionals, so this discussion about climate risk was kept focused in the context of fiduciary duty, and the imminent recession. It’s still about the money. That was a regular call out to understand the cost of transition, of mitigation and of improving ratings.

It was felt that investments in ESG should be rewarded through returns, but there was uncertainty amongst our guests about whether that would be the case, particularly as belts tighten and the regulatory environment weakens. Italian investors were said to have less tolerance for short-term ESG costs than some of their international counterparts.

“Let’s not allow the search for perfection get in the way of action – the time is now”

Whilst SFDR is not perfect, we know the direction of travel for the market when it comes to climate change and the related risks. We have to move past theory to practice. Some firms have done numerous assessments of the options for improving their assets, and whilst they may not be perfect with complete data, we know enough to get started.

Given the cost to improve – ~20% of market value – and the weak market signals on sustainable investment returns, there was a question about how much should be done and how quickly? And how to get all stakeholders on board with those plans? What happens when the equity is depleted or the value is less than the debt? However, those guests representing international investors felt the urgency and a desire to move forwards at pace.

“Real estate in Italian is ”immobile”; it doesn’t move.”

There was a recognition that climate risk is increasing, particularly flooding and heating blackouts in Milan. Even in New York, one investor has developed a property where the ground floor was designed to flood. Recognising that properties are ”immobili”, their value is grounded in the location, and that this could change as the location will have to face down physical climate change and local climate regulations that is inevitable.

In Italy there is a lot of historic properties, which are harder to transition and are at a disadvantage compared to new property developments that have the opportunity to get it right first time. In fact, many felt that there was no excuse for new buildings not to be net zero carbon. Properties which are too costly to transition are being shortlisted for disposal before the market fully factors in climate risk.

“There is no standardised way or common language.”

Despite the desire to act and invest in improving properties, there are clearly barriers created by a disorderly transition and a regulatory environment that is not aligned with a below 2 degrees future. That’s a hindrance to investors allocating capital to lowering emissions in real estate because the market is not recognising this increase resilience is the asset value – the price signals are misguided.

There is a lot of ESG noise and no common framework on data nor for pricing. Investors struggle to factor ESG into asset management business plans because there is no common way to measure ESG capex out of total capex. Nor is there an obvious organisation who can take on the role of creating a standard for Italy.

“We’ve been struggling with data for 15 years.”

Collecting data about the sustainability of real estate is difficult because it is a highly fragmented market and the data is owned by a broad range of stakeholders with little incentive to share. It is only in markets where regulations have required that data is made public, like parts of the USA and France, that investment firms have been able to use it to make informed decisions. Comparable data in Italy is in short supply, but would be useful.

As an industry we’ve become preoccupied with data collection and coverage. In fact, GRESB rewards data coverage more highly than whether the data shows performance improvements. Asset managers are bombarded with requests. Yet, the investors weren’t even sure that the right data was being collected as it is rarely used in investment decisions, including pricing assets and assessing investment value. It does find its way into asset business plans, but it is often discounted because the reward can’t be measured.

“EPCs are a great fake, and green building certificates and ratings can obscure actual performance and risks”

Having a green badge matters in Italy – they are one of the top countries for LEED green building certifications. This is for marketing, not because the market believes in sustainability. It is to attract tenants and now Gold or Platinum is considered the minimum to doing business.

Energy Performance Certificates (EPCs) are used as a measure of climate resilience, even though they are not based on the actual energy consumption of a property. Across Europe, and even within countries like Italy, they are different or even impossible to compare. Some highly rated buildings are actually poor performance and, vice versa, poorly rated buildings are actually more efficient. The same was said about green building certificates, nZEB and GRESB, which is a problem for judging whether assets and funds are sustainable or not.

Concerns do exist that unsustainable properties will become harder to let, with increased vacancy rates, and that they may become uninsurable, and ultimately decrease in value. There is a desire to understand those price signals ahead of actual price corrections.

“There is a push for sustainability-linked loans.”

In funding green buildings and for managing climate risks, there is a growth in green credit products. However, they are more expensive in Italy. They require more reporting and more work so are not desirable for refinancing at the moment.

Putting this all together, it seems that the Italian real estate market will struggle to become more climate resilience, despite the appetite amongst some investors and their managers to do more. Carbon pricing or financial regulations and building regulations would help the real estate market see the right price signals. In a global real estate market, new regulations could avoid Italy falling behind other major markets with stricter climate legislation.