The capitalization rate, desirability of location and now, environmentally-sound factors, could be guiding real estate investment decisions in the future. With environmental, social and governance (ESG) gaining more prominence in the investment community, it’s already permeating into the real estate space.
“If you’re talking to a European investor, they don’t really differentiate between ESG and financial indicators. If you’re talking to an audience that’s mainly from the U.S. or Asia, the financial indicators are a little more influential in the way those conversations are actually happening. I absolutely think that’s changing,” said Uma Pattarkine, investment strategy analyst for CenterSquare Investment Management, a global investment manager—in a National Real Estate Investor article. “One of the first things that we’ll see be impacted is the company’s cost of capital. You’re already seeing rating agencies taking into account ESG risks as they’re assigning ratings, which will absolutely directly impact the company’s ability to [obtain]debt.”
The article mentions that real estate companies that focus on development can implement heightened measures that focus on ESG, such as utilizing recycled materials, redirecting materials from demolitions into new projects and installing energy-efficient lights, appliances and HVAC systems.
“To get to net zero [carbon], real estate companies will need to invest in renewable energy, including on-site renewables, off-site renewables green power through the grid, and possibly even carbon offsets,” said Billy Grayson, executive director of the center for sustainability and economic performance at the Urban Land Institute (ULI). “Many of the biggest real estate companies are pursuing an ‘all of the above’ strategy and looking for the most cost-effective ways to invest in renewable energy to offset any on-site energy use they are not able to eliminate through their efficiency programs.”
ESG, Real Estate ETF Options
If investors want to hone in on real estate itself, it might serve them well to check out the Vanguard Real Estate ETF (NYSEArca: VNQ). VNQ seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments.
Investors who want ESG exposure via an ETF wrapper can take look at the FlexShares STOXX US ESG Impact Index Fund (BATS: ESG). The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® USA ESG Impact Index.
For more market trends, visit ETF Trends.