Institutionals The secret to a successful transformation lies in the existing

The real estate industry is facing enormous challenges in the face of the transformation required. This concerns the topics of sustainability and energy efficiency, but also changed usage concepts and higher quality requirements, for example due to the requirements of “New Work”. The necessary changes can and must already be implemented in new buildings. But new construction alone cannot be the solution. The much greater lever is in upgrading the stock.

There are almost 21.5 million buildings in Germany. Demolishing these within the shortest possible time and replacing them with new buildings would, firstly, be unrealistic, secondly, not desirable in most cases and, thirdly, would also be counterproductive from an ecological or climate-political perspective. Unrealistic because there is neither the construction capacity nor the capital to be mobilised. Not desirable, because these are often buildings worth preserving in the context of historically grown neighbourhoods of cultural value. And environmentally counterproductive, because demolition and new construction release so much CO₂ that it takes decades for these emissions to pay for themselves through more energy-efficient operation - in some cases longer than the life of the building.

 

The German Building Culture Foundation estimates that in 2035, only 8% of the building stock in Germany will consist of new buildings (from construction year 2022). Of the 92% of old buildings, around 30% are estimated to be particularly worth preserving, while 3% are considered monuments.

Thus, the transformation of the building stock can only be successful by adapting the stock to new requirements and thus making it fit for the future. After all, climate resilience and long-term use can only go hand in hand with profitability and profitability if current and future needs are taken into account. Every building is unique, which is why the necessary measures differ from property to property. However, energy renovations are almost always part of a package of measures. In addition to modernizations, extensions or top-ups are also possible approaches.

Renovation projects must preserve the history and character of a property and offer added value to the city district. This is often also about preserving cultural values. Jens Böhnlein, Global Head of Asset Management and Sustainability at Commerz Real, explains the challenge as follows: "Integrate the DNA of the present and enrich it with a new vision. Developing an understanding of the environment, implementing inclusive planning as well as a long-term orientation of the product and acceptance in the citizenship are essential success factors for the conversion." Here, you have the opportunity to “rethink the existing and convert it into concepts that can last for many decades again”. In doing so, Böhnlein sees his industry as obligated: “Who wouldn't want us as asset managers to start implementing intelligent conversion concepts and planning for the long term with the inventory?”

“Instead of demolishing and building new buildings, existing buildings should primarily be upgraded and further developed,” confirms Sarah Dungs, Chairman of the Board of Management of the Bauen im Bestand association. This reduces CO₂ emissions exactly where they occur. However, there is also something to consider: “The problem is well known, and not least, our mindset and decision-making as well as applicable laws and regulations mean that demolition and new construction often seem more profitable than existing construction.”

The facts are known: The building sector is responsible for about 40% of direct and indirect global CO₂ emissions, but also ties up a third of all resources, most of them in construction, and generates more than half of waste from construction and demolition materials. In Germany alone, 54 hectares of green space are sealed every day by new buildings and traffic areas. All of this speaks in the sense of a circular economy for the preservation and/or reuse of existing properties.

At the same time, almost all investors now see the risk of stranded assets - i.e. properties that cannot be sold or refinanced due to sustainability or other quality characteristics - as a significant driver for portfolio restructuring. At the same time, there is also a great opportunity for investors in this major challenge - namely a gentle modernisation or revitalisation of old existing properties with potential and taking into account their tangible and intangible value. Regardless of whether it operates under the name “Manage-to-Core”, “Value Add” or “Manage-to-Green”.

Three concrete case studies from the Commerz-Real funds’ portfolio provide examples of what this means.

“Inventory has value and we as a company and asset manager need to think about how we can reduce our overall footprint,” summarises Jens Böhnlein. Deliberate handling of what is available can make a major contribution here. However, in order for the transformation in the portfolio to continue to accelerate, the existing substance needs to be valued differently financially. His suggestion: “The emissions have already been emitted, but avoiding decommissioning results in a significantly more positive balance sheet, which could be offset by a CO₂ credit.”