Whether you like the idea of investing in line with your personal values or believe the growing demand for sustainable or environmental, social and governance investing is a fad, there is no escaping the importance of sustainability in investing.
Globally, this sector is worth $30tn (£21.2tn) in assets under management annually, accounting for around a quarter of all professionally managed assets.
The need to prioritise people and planet alongside profits is only getting stronger. The UK’s commitment to achieve net carbon zero by 2050 means sustainability is no longer a ‘nice to have’ but a legal obligation.
However, the UK residential property sector is lagging behind. Many real estate funds and real estate investment trusts have, like their counterparts across professional investment sectors, been paying attention to sustainability for some time.
But these institutions are only responsible for a fraction of the housing market. UK residential property is dominated by individual investors or small private companies: 94 per cent of property investors were individuals in 2018, while in 2016, 93 per cent of residential property investors owned four or fewer properties.
Many smaller investors are not aware of the growing importance of sustainability, nor why if they get it right it could make financial sense.
What is sustainable residential property investing?
At its simplest, sustainable property investing is about making profit from property – buying, building and improving bricks and mortar assets, with positive ESG impacts (or at least without negative impacts).
Unlike charity, it is about making a profit, creating competitive long-term returns. Unlike traditional investing, it is not about a ‘quick buck’ with no care for others or the world we inhabit.
The positive externalities that can be measured by ESG criteria range from improving the affordability of quality housing for local key workers to reduced emissions associated with heating homes.
The investors I work with want cash flow and to protect and grow their wealth without too much risk or hassle. The most important commercial argument for sustainability is that it can help you achieve these goals in the long term.
More sustainable investments can improve long-term cash flow
Your cash flow as a property investor is rent less costs, which include finance, management and maintenance. More sustainable investments can have better cash flows.
Tenants may be willing to pay higher rents in exchange for lower heating bills that come with environmentally friendly properties. Providing quality, affordable housing to the type of tenants who will benefit most from this, such as young families or key workers, generally reduces void periods. Families stay longer and key workers keep their jobs throughout market cycles.
With the advent of green mortgages, finance costs are falling for investors in more sustainable properties, while maintenance costs are also lower; for example, eliminating the cost of repairing and replacing gas boilers.
More sustainable investments enable you to protect and grow wealth
With commercial property, tenants and potential buyers are willing to pay more for environmentally efficient buildings, so they are worth more to investors.