Green Real Estate Funds: an alternative investment for Gen Z investors
The construction and operations of buildings account for 40% of global energy use, 30% of energy-related greenhouse gas emissions, 12% of water use, 40% of waste, and employ 10% of the global workforce according to the UN Environment Programme (UNEP). With this in mind, the UN Sustainable Goals initiative lists sustainable cities and communities as one of its key targets.
Similarly, the EU is pushing several measures to prioritise the green transition, many of which concern the existing building stock, which is an asset class with a considerable lifespan. More specifically, as part of the European Green Deal, the action plan for financing sustainable growth guides investors in the real estate sector to enable an informed transition to just and sustainable decision-making.
At the same time, as the policy framework has been set with ambitious goals for all state members, another shift is taking place as Gen Z (individuals with the birth year between 1995 and 2010) is introducing a new, investor driven, investment approach. Studies show that Gen Z place more weight on factors such as socioeconomic conditions than their predecessors. The implication of this shift is reflected in how individuals from this generation connect with brands and buy services. To that end, this emerging class of investors is not only changing the landscape in the way they choose to carry out their research prior to an investment decision but are also ‘voting with their feet’ so to speak, reflecting their beliefs through their investments. They value individual expression, avoid labels or categorisation, and are more likely to invest in companies with a positive environmental impact or social cause they believe in. Additionally, investment decisions are driven by the extent of a visible positive effect for both the stakeholders and the broader community.
A recent study by CFA Institute and FINRA surveying 2,872 individuals (Gen Zs, Millennials, and Gen Xers) from the United States, Canada, the United Kingdom, and China showed that Gen Z investors prefer online platforms and instruments, are quick to take decisions, and start investing earlier (typically before their 18th birthday). Factors influencing this trend are the ability to invest smaller amounts, the popularity of cryptocurrencies and the Fear of Missing Out (FOMO). These factors, coupled with seeking advice from non-conventional sources such as social media and internet searches, have led to Gen Z investors feeling greater confidence in their futures and their ability to reach their financial goals, and have contributed to them being more adventurous, both in terms of assets they invest in, as well as their overall risk tolerance (there seems to be a high correlation between investing and gambling).
In terms of asset classes, Gen Z’s perception of risk in terms of real estate investment is relatively low. This may be down to the significant influence and assistance from family members, which 45% of those asked in the previous study said they relied on. Regardless, real estate remains one of the prime sectors that investors from this generation are looking at, after the financial and energy sectors, reflecting their preference for longer-term gains and stability. This can be attributed to the economic environment that they have grown up in, which has been plagued by financial challenges.
The real estate industry has shown willingness to cater to these investors, who invest both directly or indirectly through investment or pension plans in which they are stakeholders. “Green” real estate Funds include assets with characteristics emphasising energy efficiency, the incorporation of renewable energy sources for energy production, or strategies for reduction or mitigation of excessive energy consumption. The possibility for an investor to follow the Fund’s investment process and its progress in yielding a positive effect on the community, along with the technological prowess and mobilisation that technology can provide, makes for a powerful combination in marketing such a Fund to this new generation of investors. Furthermore, the growing “democratisation” or “retailisation” of Funds has brought this previously closed-club investment to the masses.
Investment opportunities presented to Gen Z investors need to be transparent throughout the investment process, with reporting at all stages of the Fund, from setting the investment strategy to exiting an investment and everywhere in-between. This reporting may need to be prepared by external expert advisors, who can carry out specific risk assessments be that for flooding, climate change, or change in legislation. Sustainability credentials such as those offered by industry-leading organisations like LEED and BREEAM, are common in assessing certain building characteristics, for example materials used and embodied energy. Other organisations such as GRESB are offering validated ESG performance data which can be utilised in the absence of a Fund’s own data and have created indices which allow investors to compare Funds with sustainable investment strategies to their peers.
Gen Z investors are also keen to own real estate indirectly, as indirect investments lend themselves more to monitoring through technology and allow investors to undertake more calculated risks, in line with their beliefs and opinions. Furthermore, as these investors typically allocate smaller amounts (than investors from other generations), indirect investment in real estate via Funds facilitates quick and easy decisions.
Socially responsible and green investment in real estate through Funds is a growing sector and Gen Z investors will continue to be attracted to it, provided that their priority for long-term gains and ESG factors are fulfilled through transparency, accurate reporting, and active management of the underlying real estate. Challenges remain for real estate Funds investing in less mainstream markets in attracting investors from other geographies who may not be familiar with the local real estate market and its specific characteristics. Thus, educating investors on the risks, returns and rationale of each real estate market through the channels investors trust will be critical in ensuring investors can make informed decisions.