The most common sustainability labels typically focus on the property construction or renovation, but they do not take account of CO2 emissions during the property management stage. Urs Frey, Fund Manager at Credit Suisse, welcomes the introduction of benchmarks by industry association REIDA. "Energy consumption is a key metric for sustainability. The new index makes it possible to compare portfolios that contain older properties," says Frey. Transparency regarding energy consumption also pays off for investors, as sustainable energy consumption increases the value of a property.
One of the biggest hurdles to greater sustainability is that sustainable goods or services may not be discernible as such, and this is especially true for real estate. Consequently, providers began marking their properties with quality labels several years ago, documenting compliance with sustainable principles for buyers and users of properties.
However, the success of the environmental quality seal led to a proliferation of labels and ratings, ultimately creating more confusion than clarification. It is not uncommon for labels in the real estate sector to be based on 20 or more factors, making it difficult to compare the various labels and ultimately making it more difficult to interpret a rating.
Lately, people are realizing that we should focus more on the most important consumption and emission data for real estate, such as includes energy consumption, CO2 emissions, and the share of renewable energy used. Many portfolio managers now have more precise data about their properties than they did just a few years ago, and in line with the saying "If you can't measure it, you can't manage it," considerable effort has been made obtain ever better energy data. What's missing, however, are benchmarks that portfolio managers can use to evaluate their efforts to reduce energy consumption and stem CO2 emissions.
In principle, demonstrating the sustainability of a property is relatively straightforward: The property's energy consumption and CO2 emissions need to be compiled and standardized in a meaningful way. In most cases, the area of the property is used as the basis for the standardization.
But what should be included in the area? For example, if the rented area is used, then a building that also includes unheated storage that accounts for 20% of the total area will have better performance figures, even though it may be more poorly insulated. The devil is often in the details when it comes to investment properties, and uniform rules are needed.
Set comparable standards
The energy reference area (ERA) has become a common way of standardizing a property's area, and it includes all building areas that are heated or cooled. Nevertheless, it often does not answer every question. For example, does a building's elevator shaft or staircase count toward the ERA? In order to do a fair comparison between property portfolios, a number of other technically difficult distinctions are necessary.
There is often no uniform procedure or corresponding standards, and the lack of standardization means that different property portfolios can only rarely be compared on a one-to-one basis. To address this issue, the non-profit REIDA (Real Estate Investment Data Association) launched a benchmarking project to create greater transparency in this field. A pilot project with five larger institutional real estate investors, including Credit Suisse Asset Management, began in 2020, and it will transition to regular operation this year.
Striving to continuously improve the measurement methodology
Benchmarking participants provide the data from their real estate portfolios and receive a report with the key sustainability figures for their individual properties and their portfolio as a whole. They can also compare their portfolio with a vast range of other properties to assess their performance. Annual reports show portfolio managers the progress they have made with the measures they have taken, increasing knowledge about effective measures in the medium term. The association also offers a forum for sharing experiences and sustainability best practices.
The measurement methodology is refined on an ongoing basis to continuously improve the data basis. For example, the type of heat pump or the source of energy for district heating are not insignificant in assessing the environmental performance. However, this information must first be compiled. There is still much to be done, but the REIDA CO2 benchmark represents a start.