InstitutionalsThe secret to successful transformation lies in inventory

21 million buildings

There are nearly 21 million buildings in Germany that are not residential buildings.¹ Demolishing these within a very short time and replacing them with new buildings would firstly be unrealistic, secondly not desirable in most cases and thirdly also counterproductive from an environmental or climate policy perspective: 

Unrealistic because there is neither the construction capacity nor the capital to be mobilised. Not desirable because they are often preservable buildings in the context of historically grown neighbourhoods with cultural value. And environmentally counterproductive, because demolition and new construction would release so much CO₂ that it would take decades for these emissions to be amortised by more energy-efficient operation - partly longer than the life of the building.

The Bundesstiftung Baukultur (Federal Foundation for Building Culture) estimates that only 8 percent of the building stock in Germany will consist of new buildings in 2035 (from construction year 2022). Of the 92 per cent of old buildings, around 30 per cent are considered particularly preservable buildings, and 3 per cent as monuments.²

Consequently, 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. Because only if current and future needs are taken into account can climate resilience and long-term use go hand in hand with profitability and economy. 

Every building is unique, which is why the necessary measures vary from property to property. However, energy renovations are almost always part of a package of measures. In addition to modernisations, attachments or extensions are also possible.

Developing stock means preserving historically grown neighbourhoods

Renovation projects must preserve the history and character of a property and add value to the city district. This is often also about preserving cultural values. Nadia Eichelberger, Global Head of Real Estate Office & Industrialat Commerz Real, explains the challenge: "To integrate the DNA of what exists 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 citizenship are essential success factors for the conversion." In doing so, you have the opportunity to “rethink what exists and translate it into concepts that can last for many decades”. Böhnlein sees this as an obligation for his industry: “Who, if not us as asset managers, now have to start implementing intelligent conversion concepts and long-term planning with the existing assets.”

“Instead of demolition and new construction, existing buildings need to be refurbished and further developed,” confirms Sarah Dungs, Chairwoman of the Verband Bauen im Bestand. This reduces CO₂ emissions exactly where they occur. However, there is also something to consider: “The problem is known, but not least our mindset and decision assumptions, as well as applicable laws and regulations, make demolition and new construction often appear more profitable than building in existing buildings.”

The figures speak for preserving inventory

The facts are known: The building sector is responsible for about 40 percent of direct and indirect global CO₂ emissions, but it also binds a third of all resources, most of which in construction, and generates more than half of the waste generated from construction and demolition materials. In Germany alone, 54 hectares of green space are sealed every day with new buildings and traffic areas. All of this speaks in favour of the preservation and reuse of existing properties in the sense of a circular economy.³

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, this major challenge - namely the careful modernisation or revitalisation of older properties with potential and taking into account their tangible and intangible value - also presents a great opportunity for investors. Regardless of whether it operates under the name “Manage-to-Core”, “Value Add” or “Manage-to-Green”.

Three practical examples show possible options

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

Renovation should also be recognised financially

“Inventory has value, and we as a company and asset manager need to think about how we can reduce our overall footprint,” Nadia Eichelberger sums up. Deliberate handling of what is present can make a major contribution to this. However, in order for the transformation in the portfolio to continue to accelerate, the existing substance must be valued financially differently. Your suggestion: “The emissions have already been emitted, but avoiding demolition creates a much more positive balance sheet, which could be offset by a CO₂ credit.”