Real estate in 2024: opportunities and ESG

Interview paperjam.lu from 28.11.2023

The factors mentioned above have diminished the purchasing power of families and the cash flow of investors, so many property owners who previously were able to finance their assets and bear the cost of low-interest debt are falling into capital needs, and their assets will soon become distressed. This will create opportunities for investors sitting on liquidity who are ready to buy properties with no or very little leverage on debt.

Higher interest rates and more stringent criteria from the banks to grant property mortgages are making it easier to rent than to buy. This trend is expected to continue as developers stretch out or cancel approved construction projects due to higher financing costs and the increased price of materials. We should expect to see vacancy rates going down, especially in the residential market. Property values have also been impacted, and we should expect a further drop in value over the next two to three quarters.

For investors looking at properties, the most attractive opportunities will be in logistics, residential, and value-add offices. The logistics sector has been performing well with very low vacancy rates across Europe. The same goes for the residential market, which has been boosted by the pandemic, increased immigration, and slower delivery of new constructions. The increased demand has led to higher rental income, another incentive for investors. The retail property market, on the contrary, has been experiencing difficulties since the pandemic, and this sluggishness is expected to continue due to declining purchasing power and the growth of online sales.

"Raise liquidity through equity and be ready to spot distressed opportunities arising soon."

Livio Gambardella, Real Estate Leader and Partner Accounting, Corporate and Fund Services, BDO Luxembourg

Luxembourg remains an attractive market. Not only does it continue to offer political and economic stability, both its population and economy are expected to continue growing steadily. Because the prospect of buying property is out of reach for many residents including new arrivals, the demand for rental units will continue to climb. Private equity and private banking players in Luxembourg seem to be in broad agreement on this point and see property as a hedge against inflation and a component of a robust, diverse asset portfolio.

One potential risk is that loss of purchasing power could lead to uncertainty in local business activity, which might impact property investment. Livio Gambardella of BDO Luxembourg believes the government has a role in ensuring the local market remains attractive.

"The new government needs a plan to revamp the attractiveness of Luxembourg as a centre of finance."

Livio Gambardella, Real Estate Leader and Partner Accounting, Corporate and Fund Services, BDO Luxembourg

 

ESG for real estate

Over the course of the last few years, there has been a steep rise in the awareness, discussion, and adoption of ESG. While many view sustainability in a positive light, others regard it as something of a buzzword and view it with a dose of scepticism. The EU has made real efforts to promote ESG, notably with the Corporate Sustainability Reporting Directive (CSRD) which entered into force in January 2023. This directive makes it mandatory for many companies – including those in real estate – to report on ESG criteria, which means that players in the sector need to drastically increase their knowledge, value chain engagement, and investment in these areas.

The real estate industry must adapt quickly and develop an opportunistic outlook to respond to these changes. Transparency, due diligence, and data processing are just some of the key elements that will need to be accentuated throughout this shift. It is vital that the real estate sector not seek a short-term solution to the ESG transition, but rather develop a culture with the right capabilities and skills in order to effectively evolve towards this new way of doing business. This requires a solid alignment of ESG and business strategy as well as a holistic perspective in all areas of operation.

"Sustainability requires integration into all areas of a business and should be ingrained in decision-making processes. Although it is seen by some as a far-reaching task that feels like a mountain to climb, there are simplified and effective solutions that make it feasible with visible financial benefit."

Sabrina Alam, Director, Sustainability Advisory Services, BDO Luxembourg

Some of the essential steps that the industry will need to put in action are stakeholder engagement; capacity-building across the organisation; performing a double materiality assessment; development of a future-proof ESG strategy that incorporates E, S, and G issues with a clear vision and roadmap; creation of measurable goals; and implementation of a monitoring and measurement tool to benchmark progress year on year.

At BDO Luxembourg, our sustainability practice works with clients from several industries, in particular the real estate sector, to enable the sustainability journey where we are driven by impact.