Build to Rent (BTR) - It pays to be Green
INREV & GRESB fund-level financial returns with GRESB ESG scores:
‘Funds participating in the GRESB Assessment outperformed non-participating funds, even when controlling for factors like fund size, investment style and leverage levels.’
It’s no surprise in 2023 that the Built to Rent (BTR) sector is thriving. In fact, data revealed that investment into UK Build to Rent in Q1 2023 alone exceeded £1.1bn – demonstrating investor appetite for opportunities across the sector.
So, where does ESG come into the picture and how can it transform long-term value of an asset? We’ll break it down…
First things first, what is Build to Rent (BTR):
Build to Rent (BTR) refers to purpose-built housing designed for rent rather than sale. Schemes usually offer longer tenancy agreements and are often professionally managed by the owner or operator. With a lack of affordable housing and UK house prices and rent soaring, Build to Rent developments are an attractive option for investors seeking long-term returns.
‘Build-to-rent has emerged over the last decade as a solution to some of those issues for renters who still can’t afford to buy, but who also aren’t afraid of committing decent sums in monthly rent for a bit more security and a step change in lifestyle quality. This is what build-to-rent brings and it is why the sector is growing quickly and has seen huge investment in the last five years.’ (uown)
Where does ESG come into it?
Yes, Environmental Social and Governance (ESG) is about making more conscious choices to better the world we live in – for everyone. But now that ESG is part of the wallpaper in the real estate world, it is now promising much more than initiatives to help the planet and social injustices. It’s also now adding real value to assets and promising higher returns:
‘The focus for many investors remains on aggregating to scale, with significant attention being given to product evolution – including specification, amenity offering, durability of fit out and digital connectivity. With these considerations at the fore, sustainability and environmental credentials have typically been a secondary concern.
However, the environmental impact of BTR schemes is rapidly moving up the agenda, with some investors now putting sustainability credentials front and centre of investment decisions. A number of leading investors in the sector are making a conscious effort to innovate and evolve their approach to investment, which is helping to drive improved performance of buildings.
This increased commitment from leaders across the industry demonstrates the wider significance and importance of the ESG agenda. There is also now a growing focus on ‘future proofing’ assets to ensure maximum liquidity of investments in the years ahead. Central to this, is reducing risk of obsolescence triggered by future regulation change or shifts in tenant sentiment and preferences.’ (Knight Frank)
Add to this the fact that the Future Homes Standard will require a 75-80% reduction in emissions in new build homes by 2025, with an interim uplift in building regulations taking effect from June 2022; ESG is very much here to stay and here to help drive asset value long-term and ROI.
Who is benefiting from ‘Green Assets’?
When it comes to having a greener, more sustainable asset that aligns with ESG performance, it’s clear everyone along the transaction benefits. From Asset Owner and Investor, down to Operations teams and Residents / Tenants, with green assets even driving more demand from tenants:
‘Given that BTR is a long-term investment and as such considers the net operating cost (cost of running a development). Spending more capital upfront on more sustainable development will create a compounded return over the life of the development through increased NOI. In fact, the data shows that for every 10% increase in a development’s sustainability features, there is a 7% increase in demand from tenants.’ (UK BTR)
When it comes to Fund-level and Investment benefits, INREV and GRESB recently commissioned a paper to link fund-level financial returns with GRESB ESG scores, to really understand the correlation between green assets and return. And ultimately, the results don’t lie. Key highlights from the paper included:
Funds participating in the GRESB Assessment outperformed non-participating funds, even when controlling for factors like fund size, investment style and leverage levels.
In particular, improvements in the GRESB Performance Score and GRESB Environmental Score are linked to higher total returns. Albeit these benefits vary depending on funds characteristics and timing of participation.
So, what can Investors and Asset Owners do today to benefit their long-term outlook?
Utopi is a specialist ESG technology platform for multi-tenant real estate. Not only do we collect environmental data from your assets, but our easy-to-use platform means you can review near real-time ESG performance whether it be from one asset, or across an entire portfolio. The result? You can improve your asset’s ESG performance by 20%.
And it gets better – access to this ESG data will mean when it comes to reporting on ESG performance, applying for ‘Light Green Funds’ under SFDR Article 8, or monitoring progress for certifications like GRESB, BREEAM or Fitwel; Utopi makes it a smooth, efficient, and friction-less process.
Want to know more? Make sure to speak to our expert team about BTR today, and how you too can benefit from using our specialist ESG Technology alongside competitors in the UK, Europe and further abroad…
After all, the data shows that it pays to be green!
Author, Ben Roberts (CMO, Utopi)