Sustainability, Social Responsibility Are Key Issues in European Markets

Several years ago, CoreNet Global gathered together a number of senior European consultants and corporate real estate executives to identify the forces that would shape the property world over the coming decade. It wasn't long before terms like "sustainability" and the "environment" cropped up. It quickly became apparent that companies' relationships with the environment and society in general were very real business issues being taken seriously by major multinationals—and that their real estate functions lay at the heart of their policies in these areas.

There are a variety of factors pushing sustainability and corporate social responsibility (CSR) up the business agenda. Not the least of these is the globalization of business activity, which is leading companies to develop networks of professional relationships that span the world. While economically efficient, there are also several challenges. You may be confident that your manufacturing company does not directly employ child labor in producing its products, but are you ensuring that all your suppliers around the world adheres to the same high ethical standards? The financial impact of failing to do so can be significant.

Additionally, the combination of legislation and shareholder pressure is exerting a strong influence on corporate behavior. In Europe, environmental concerns have become more prevalent over recent decades. Recycling initiatives are common (or even mandatory, for example, in Germany) and a variety of energy and emissions legislation is in place or imminent following adoption of the Kyoto Protocol.

As major companies focus on measuring and improving their environmental and social performance, attention quickly turns to their real estate portfolios. The European Commission estimates that around 40% of final energy consumption in the European Community is in the buildings sector.

Almost every aspect of property decision-making has implications for environmental and social issues. For example, when acquiring a new building, a company must consider whether the site is a greenfield or brownfield; the location's impact on employee transportation; selection of materials for construction; and design and technological considerations that improve building efficiency in terms of energy and waste. Occupation and use of buildings, and the sources of energy they use, are key determinants of the carbon and energy footprint of the organization.

There are no easy answers to most of these questions, and proponents are keen to stress that this is about going on a journey, not a quick-fix solution. CoreNet research found that a high proportion of corporate activity relating to sustainability and CSR falls to the corporate real estate function for implementation. The process is very much evolutionary rather than revolutionary—companies can't change their property portfolio overnight, but they do treat each individual property decision as an opportunity to incrementally upgrade their overall stock.

So-called "green buildings" are only part of the equation, and such properties tend to be more expensive to construct. But investors who persist in asking whether tenants will pay the rent premium for a green building may be missing the most important point. Occupiers can change their requirements far more quickly than the economic life of most commercial buildings. In Europe, the market is beginning to respond. Various property investors—including Prudential and Insight Investment—are focusing explicitly on how this will affect their future investment decisions. Gazeley, a leading European developer, is building warehouses that incorporate green technology—not to secure a premium rent but in the expectation of achieving a better sale price to investors.

Savvy investors still have time to adjust their portfolios to meet the future needs of their tenants. And they need to work with major corporations now to identify what a sustainable property portfolio might look like in the future.

The views expressed in this article are those of the author and not Real Estate Media or its publications.