Real Asset Insight #6 June 2020

Insight & Strategy – Germany
Crisis accelerates drive
towards sustainable investing
Firms that adopt robust ESG strategies will be better
placed to attract financing once the pandemic passes
‘The crisis has
highlighted the
importance of
adopting a
lifecycle
approach.’
Christiane Conrads,
PwC Legal
The coronavirus crisis has brought
environmental, social and governance
issues to the fore.
‘There is more of a focus on ESG because
of the nature of the crisis,’ says Christiane
Conrads, head of the German real estate desk
at PwC Legal. ‘There was a huge demand
for ESG compliance already before the
pandemic, but now it is increasing. It has
become a testing ground.’
There were fears that there would be a
focus on the economy to the detriment of
environmental and social standards, but that
has not materialised, she adds. On the contrary,
companies are under scrutiny as never before,
and they are paying more attention to the
impact they have on the environment, on their
employees and on society.
The drive towards sustainable investing has
shifted in response to the coronavirus crisis.
‘The crisis has highlighted the importance of
adopting a lifecycle approach, and implementing
ESG strategies leads to investments that are
long-lasting and resilient,’ Conrads says.
‘ESG-compliant firms are better positioned in the
market and have easier access to financing too,
which is very competitive now because banks
are in a difficult position at present.’
Institutional investors require ESG criteria,
as do key stakeholders including regulators,
politicians, tenants and employees.
KEY LAYER OF DILIGENCE
ESG factors are a key layer of diligence in a
sector like real estate which has ‘high risk
exposure’, Conrads adds. ‘Think of stranded
asset risks, transition risks and physical risks.
On the other hand, ESG integration allows
higher rental income, lower yields for building,
higher sale price, lower financing costs and
better performance.’
Implementing a comprehensive ESG strategy
now is also an investment in the future, for
when the situation will return to normal. ‘Asset
managers have a very difficult job now, but
they are developing resilience,’ Conrads says.
‘Focusing on ESG means being well-positioned,
not just during the crisis but also when the
emergency is over.’
First quarter record now history as market turns
The Covid-19 crisis has had a dramatic
effect on Germany’s market. ‘Germany
recorded the strongest opening
quarter in its history, with a record €27bn
transaction volume in Q1, which pointed
to a €100bn figure for the year,’ says Matti
Schenk, associate, research, at Savills
Germany. ‘But this is already history.’
Germany’s GDP will decline by 7% this year,
according to the IMF, while the Munichbased
Institute for Economic Research
predicts a fall of between 7% and 20%.
‘While it is difficult to make predictions, it is
clear that demand for real estate is set to
decrease substantially, at least in the short
term,’ adds Schenk. ‘There are no rental
increases on the horizon, and over the
next month investment activity will decline
significantly, although deals at an advanced
stage will still go through.’
MARKED SLOWDOWN
Savills data show that the number of
transactions at the end of February –
around 600 – was in line with the first two
months of 2018 and 2019, but there was a
marked slowdown to below 500 in March.
‘It is a new market environment and activity
has slowed down, but the big strategic
transactions are going ahead as planned,
with little effect on pricing or income,’ says
Marcus Lemli, CEO of Savills Germany and
head of investment Europe at Savills.
Financing is also becoming an issue. ‘Banks
are still open for business but they are
more cautious, funding costs are higher,
liquidity is becoming more expensive,’
says Holger Schmalfuß, senior originator,
international investors, at Berlin Hyp.
Caution will be the rule, at least in the
short term, he adds: ‘Given that the
property financing market lags behind
the real economy, there might be trouble
ahead for banks. It all depends on the
length of the lockdown and on how quickly
the economy recovers.’
Issue 2 July 2020 | Real Asset Insight 39