Sustainability, environmental friendliness, and respect for nature are topics that have gained a lot of importance among investors in the last decade. This development is far from surprising given that we find ourselves amid an unprecedented extinction crisis, with species disappearing at a rate 1,000 times faster than normal – one of the many alarming effects of climate change. In this context, global warming plays a crucial role, prompting world leaders to act in order to slow down or even stop its acceleration.

The signing of the Paris Agreement, which aims to cap global warming at 1.5°C by the end of this century, marked a significant milestone in this endeavor. However, progress toward this objective has been disappointing thus far, with Bloomberg estimating the likelihood of achieving this goal on time at a mere 14%.

Countries have a 14% chance of keeping global warming below 1.5C even in the most optimistic scenario where all net-zero pledges are met.
– Bloomberg

That said, as is often the case when government actions prove to be insufficient, people have started taking matters into their own hands. These days, consumers tend to prefer environmentally conscious companies and products. This is especially true for Gen Z, which is notorious for choosing products and companies that align with their values – sustainability being a crucial factor for many of them.

An often-overlooked sector in the popular debate around sustainability and environmental friendliness is real estate. According to the World Green Building Council, this sector is estimated to account for approximately 40% of energy consumption and 36% of CO₂ emissions in the EU. Consequently, governments have increasingly turned their attention to the real estate sector, implementing new policies and supporting emerging trends that push for more sustainable construction, designs, and features. 

Due to its substantial size and significant contribution to carbon emissions, sustainable real estate is vital to achieving a greener tomorrow. Thankfully, many solutions are already available on the market.

Reshaping the future with sustainable development – the idea behind

In today’s world, sustainable development is defined in various ways. However, one of the most prominent definitions is the one put forward by the influential Brundtland Report published by the United Nations:

[...] development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
– Brundtland Report

Considering the vast amount of resources consumed and greenhouse gasses emitted by the building sector, it's evident that the current state of the industry falls short of meeting the criteria outlined in the aforementioned definition of sustainable development.

Building greener or how can real estate be sustainable?

For real estate to be considered sustainable, several factors need to be taken into account. Among these, the choice of building materials stands out as crucial. Using materials with lower embodied carbon is an urgent need considering the building and construction industry currently contributes to 37% of global CO₂ emissions.

Additionally, the design of new buildings should focus on maximizing natural light and air circulation as well as preserving green spaces. These measures not only enhance the well-being and health of occupants but also improve the energy efficiency of the building.

We must start [...] rebuilding our cities around energy efficiency and human needs, rather than around the car and wasted energy.
– Jay Inslee, an American politician, lawyer, and economist

In tandem with prioritizing energy efficiency, the type of energy used in the first place holds significant importance. To reduce CO₂ emissions and for properties to be sustainable, renewable energy sources must be at the forefront. This can be achieved by, for instance, opting for or upgrading heating systems to cleaner alternatives powered by renewable sources such as heat pumps, and installing photovoltaic systems on building rooftops.

The adoption of new technologies in real estate can also have a symbiotic effect on both energy efficiency and the use of renewable energy. A prime illustration of this is the implementation of modern mobility concepts, such as integrating charging stations for electric vehicles and car-sharing solutions.

Combined, these concepts facilitate the transition to electric vehicles for residents while having a twofold impact on sustainability by reducing the overall number of vehicles required.

The future of sustainable real estate

Up to this point, the article has focused on why sustainable real estate is great for the environment and sustainable development in general. However, alongside these indisputably desirable aspects, sustainable real estate also offers attractive opportunities for investors.

The number of individuals and businesses investing in sustainable real estate has been growing rapidly in recent years. This trend is not surprising in light of the fact that some projections estimate the size of the green buildings market to be worth over USD 1.1 trillion by 2032, growing at a CAGR of 9.5% during the forecast period.

 

Green buildings market size forecast from 2022 to 2032 (in USD billion)
Source: Precedence Research

The International Finance Corporation (IFC), a member of the World Bank Group, published an in-depth report on green real estate in 2019, which identified green buildings as one of the most promising investment opportunities of the coming decade, with a predicted acceleration of this trend by 2030.

Indeed, according to a study by the World Green Building Council, with a payback period of as little as 3–5 years, green buildings allow for 25-35% energy and up to 39% water savings compared to conventional ones over their lifetime. Moreover, one-third of green building owners and project developers state their ‘green assets’ are worth 10% more than traditional buildings.

As a consequence, buyers and investors can expect lower utility bills, leading to increased net operating income for such buildings and allowing for rents up to 10% higher, as well as higher resale values compared to conventional counterparts.

Sustainable government initiatives reshaping Swiss real estate

The increasing demand for sustainable real estate and the associated potential for higher returns on investment are certainly not to be ignored. However, government policies play an important role, too. While it has been noted that governmental efforts to combat global warming remain insufficient, this doesn’t mean that nothing is being done or that no impact is being had.

Most recently, in June 2023, the Swiss people voted in favor of the Climate and Innovation Act – augmenting existing initiatives, with the objective of achieving climate neutrality in Switzerland by 2050. A pivotal aspect of this legislation is the reduction of fossil fuel consumption, which encourages the replacement of inefficient heating systems with more sustainable solutions like heat pumps.

It is estimated that heating accounts for approximately 40% of the energy consumption in Switzerland and 25% of greenhouse gas emissions. Hence, replacing inefficient systems that rely on fossil fuels with more sustainable ones is crucial to achieving the world’s ambitious climate goals. With the aim of reaching these goals, the Climate and Innovation Act provides up to CHF 200 million in additional funds to be made available annually over the next decade for the development and adoption of sustainable technologies.

Disregarding this paradigm shift could not only lead to missed potential returns for real estate investors but could even cause them to actually lose money should governments implement policies that require buildings to meet certain sustainability standards. What’s more, older buildings that refuse to lower their carbon footprint are likely to depreciate in value in as soon as 5 years. Therefore, taking advantage of this trend might indeed be imperative.

Conclusion

At first glance, the transition towards greater sustainability in the real estate sector may seem costly. However, the truth is that investors often overestimate the transition costs and overlook the opportunity costs linked to neglecting this trend. According to certain estimates, the expenses for green buildings are, on average, only 2% higher than those for their non-green counterparts, and this is without factoring in potential subsidies, as well as the elevated rents and property values associated with green real estate.

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