Unpleasant surprises, chaotic storage systems and a muddled paper trail are things investors try to avoid and, particularly during times of economic uncertainty, ones they certainly cannot afford, writes Rosanna Woods, MD of UK and Benelux at advisory firm, Drooms.
'Energy prices, inflation, interest rates – investors are increasingly scrutinising their potential investment goals in light of current negative market trends. Is there such a thing as a crisis-proof investment? Are there risks and if so, how should they be priced in?
At times of crisis, investors strive to minimise the risks in every way possible as well as reduce any potential follow-up costs. In these situations, they place a particular emphasis on real estate quality, location and the quality of the available supporting documentation.
Unpleasant surprises, chaotic storage systems and a muddled paper trail are some things investors try to avoid and, particularly during times of economic uncertainty, ones they certainly cannot afford.
These odd bits of paper might be anything from construction permits for a property dating back to the 1980s that can no longer be found to legally binding and neighbourhood agreements that are only known about based on hearsay because they are strewn about in some basement somewhere.
In short: even though it may sometimes be possible to limit the risk regarding litigious neighbourhood initiatives or malicious competitors, a systematic lack of documentation will generally lead to increased and incalculable investment risks.
Recently, documentation obligations have also become more extensive regarding the energy efficiency of a property and other ESG-related issues, such as energy audits, technical inventories, digital samples of consumer data and the CO2 emissions of buildings, to list but a few examples.
The background to this is that European and national policy makers are placing an ever-greater focus on the construction and housing sector in order to meet the ambitious climate protection targets by 2030 and beyond. Why this sector in particular? Because at pan-European level, this industry is responsible for 36% of all greenhouse gas emissions. Therefore, it is clear that if the EU is aiming to achieve its ambitious climate targets of reducing emissions by 55% in comparison with the level recorded in 1990 by 2030, buildings must become more energy efficient – as quickly as possible and yet in a way that is plannable and implementable for all stakeholders.
As a result, a decisive investment factor will be the condition of the relevant documentation. Because properties that do not meet the respective regulations or, above all, those that are unable to prove that they do, will be subject to reduced or even zero demand over the medium term – a prospect that fills every investor with dread.
By contrast, ESG-compliant properties reduce the risk for investors. Lower operating costs and longer useful lives of assets ensure competitiveness over the medium to long term. Well-maintained documentation to demonstrate ESG compliance can also help avoid the nightmare scenario of stranded assets.
To this end, all relevant information must be collected and continuously updated before being stored in an orderly manner in a database. However, this is only possible if there are corresponding structures able to collect uniform data and make it comparable. For example, there is much discussion about digital and standardised solutions and platforms that provide investors with all verifications such as sustainability risk assessments, environmental reports, certifications, assessments and authorisations during the due diligence process, and which make individual real estate portfolios transparent as well as measurable and comparable.
There is also an emphasis on an age-old virtue: order. Contrary to popular belief, the main obstacle to digitisation is not the lack of available data and documents, but rather the simple fact that this data and documentation cannot be accessed - which can result in chaos.
The current market uncertainly is the opportune time to bring your documentation pertaining to older buildings up-to-date and in doing so this will ensure that investors will not have to price in any documentation risks. After all, experience has shown that high pressure situations calls for order to be created, and in the area of real estate documentation in particular, the industry still willingly accepts too many investment risks. And why not - things have always been on the up and up. However, all that could be about to change.’
