Augmenting Valuation And Longevity In Commercial Real Estate

Environmental, social, and governance (ESG) factors have become a necessity rather than a trend across industries, including the commercial real estate (CRE) industry in India. As more investors demand responsible and sustainable investments, companies are taking ESG into account when making decisions related to their real estate holdings. As a result, the significance of ESG in the realm of commercial real estate is increasingly gaining attention. 

The environmental factor of ESG in CRE is concerned with the impact of real estate assets on the environment. Investors are becoming increasingly aware of the effects of climate change and are looking at companies that are taking steps to mitigate their environmental impact. This includes reducing energy consumption, water wastage, and greenhouse gas emissions by incorporating technology, sustainable design features, and renewable sources of energy. One example of this is the LEED certification system, which rates buildings on their environmental sustainability. Investors are increasingly looking for buildings in India that are LEED-certified or have similar sustainability credentials. It not only shows that the building is environmentally responsible and can reduce long-term operating costs through energy efficiency measures but also makes it a lucrative investment proposition.

The social factor deals with the impact on the community. In real estate terms, this includes factors such as tenant satisfaction, community impact, and labour practices. The emphasis is on socially responsible firms that have a positive impact on their tenants and the community they operate in.

Governance deals with factors such as board diversity, executive compensation, and shareholder rights. Investors are looking for companies that have strong governance practices and are transparent in their decision-making.

Attracts sustainable investment

In recent years, there has been a notable shift in investment patterns, with a growing emphasis on sustainable and accountable investments. Companies that prioritize ESG practices in their commercial real estate portfolios are more likely to attract capital from these environmentally and socially conscious investors. Such investments increase liquidity, improve access to funding, and enhance creditworthiness, all of which contribute to a higher valuation.

Tenants are becoming increasingly concerned with the environmental and social impact of the buildings that they occupy. By investing in sustainability and social responsibility, companies can improve tenant satisfaction and retention rates.

Another financial benefit is the reduced operating costs. As per industry estimates, green buildings cost around 2-5% more on average to construct but save nearly 15-20% in operational costs. By investing in energy-efficient measures and sustainable design, companies can reduce their long-term operating costs. This can lead to increased profitability and the valuation of the property.

Mitigates risks and enhances operational efficiency

ESG considerations enable commercial real estate companies to identify and manage risks effectively. By implementing sustainable practices, such as energy-efficient systems, waste reduction measures, and water conservation initiatives, companies can minimize resource consumption, reduce operating costs, and mitigate potential environmental liabilities. These efforts contribute to higher operational efficiency and lower long-term risks, thereby enhancing financial performance and valuation.

Enhances marketability and attractiveness to tenants

Buildings with green certifications, energy-efficient features, and sustainable design elements are more likely to attract high-quality tenants who are willing to pay a premium for such spaces. This demand leads to premium rentals, reduced vacancy periods, and improved occupancy rates, thus enhancing the financial value of the property.

Regulatory compliance and reputation

Regulatory frameworks around the world are evolving to address sustainability challenges. Commercial real estate companies that embrace ESG principles position themselves favourably by demonstrating compliance with existing and forthcoming regulations. Compliance not only helps avoid penalties and legal issues but also safeguards the company's reputation. A strong reputation for ethical and sustainable practices attracts stakeholders, including investors, customers, and partners, which positively impacts the overall valuation of the company.

Long-term value creation

ESG initiatives are integral to long-term value creation. Sustainable buildings are resilient to climate risks and adapt well to changing market dynamics. By future-proofing their properties, companies can ensure long-term asset appreciation, minimize potential value depreciation, and mitigate risks associated with obsolescence. Investors and stakeholders recognize the value of sustainable practices in securing a company's financial future, which is reflected in enhanced valuation.

In a nutshell, the role of ESG in Indian commercial real estate goes beyond being a checkbox exercise. Embracing sustainability practices within this sector is pivotal to enhancing valuation and financial value. By attracting sustainable investment, mitigating risks, improving operational efficiency, and capitalizing on tenant demand, commercial real estate companies can unlock significant benefits. Furthermore, adhering to regulatory frameworks, safeguarding reputation, and creating long-term value solidify their position as responsible and financially sound organizations. As ESG continues to gain prominence, embracing these principles will become imperative for companies.

(The author is CEO, Vestian)