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Aegon Asset Management Investment Company (Ireland) Plc is structured as an umbrella type open-ended investment company with variable capital consisting of a number of different sub-funds (“Funds”) and is authorized in Ireland pursuant to European Communities (Undertakings for Collective Investment in Transferable Securities) UCITS Regulations and the Central Bank UCITS Regulations (“UCITS Regulations"). Aegon Asset Management Europe ICAV is structured as an umbrella type open-ended investment ICAV with variable capital consisting of Funds and is authorized in Ireland as a UCITS pursuant to the UCITS Regulations.
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There have been some counterintuitive yet confident statements coming from office REITs over the last few months. A large UK REIT/developer is feeling confident to deliver rather bulky offices in the City of London office market by 2025. Another REIT/developer in Australia expects the ratio development and investment income in office could actually shift toward the former. Counterintuitive, as office space use is expected to decline by roughly 10% as a result of work-from-home trends, while the expected economic deceleration could also weigh on demand.
The reasoning is, however, quite straightforward. Despite plenty of office space, there is only limited supply of what office users actually want: top quality green office space - which implies not only well located offices with amenities, but also low energy and carbon footprint offices. Research of Savills indicated that on average only 22% of global office space is green and the vast majority of this is already occupied. As a result, even when adjusting down office demand, current availability of green office product would be limited to only 11 months of green office take up, according to Savills.
With this scarcity for the right product, office users rely on development to deliver them the craved green office aligned with their own environmentally aware policies. This explains the willingness of the listed real estate industry to deliver into a weak office market. This is, however, also having a profound impact on the pricing for the older office space that is left vacant and repriced to reflect the necessary upgrading in order to reposition the asset as green.
MSCI published a report indicating that green offices are receiving an increasing premium in the investment market. They state the gap has accelerated further during the last two quarters to stand at more than 35% to 25% for the Paris and London office market respectively. The study compared offices with certification from the Building Research Establishment (BREEAM), U.S. Green Building Council (LEED) and GBC Alliance (HQE), versus those that have not yet achieved these standards.
Sale-price gap between offices that have and don’t have sustainability ratings
Although the MSCI research was mainly done for Paris and London, the trend is seen globally albeit in varying degrees. The price differential varies from more than 15% in Singapore and Bangkok to less than 4% in Tokyo according to Savills. The cities where the new (green) supply ratio is the lowest (below one year’s take-up) are the US cities that have limited development pipelines and dated available stock, meanwhile Europe is seeing increased environmental regulation for buildings.
Given further bifurcation in pricing of “brown” and “green” offices and assuming further progress on carbon pricing mechanisms, we expect to see an increasing trend of retrofitting in the future instead of new build. Building new would be increasingly subject to carbon tax, which would make recycling existing buildings via retrofit more attractive, lowering embedded carbon in construction. Many market specialists comment that 80% of office buildings by 2050 have already been built.
Our exposure to offices in our portfolio has been modest due to macro and WFH trends. However, where we have put our money to work is in listed REITs that own office portfolios with high green certification rates and/or mainly focus on retrofitting and upgrading existing office assets in line with the sustainable profile of our fund. There are more drivers of outperformance within our Sustainable Listed Real Estate strategy, but we see increasing evidence that alignment to sustainability trends will help us drive future returns for our investors.
Unless otherwise noted, the information in this document has been derived from sources believed to be accurate at the time of publication.
This material is provided by Aegon Asset Management (Aegon AM) as general information and is intended exclusively for institutional and wholesale investors, as well as professional clients (as defined by local laws and regulation) and other Aegon AM stakeholders.
This document is for informational purposes only in connection with the marketing and advertising of products and services, and is not investment research, advice or a recommendation. It shall not constitute an offer to sell or the solicitation to buy any investment nor shall any offer of products or services be made to any person in any jurisdiction where unlawful or unauthorized. Any opinions, estimates, or forecasts expressed are the current views of the author(s) at the time of publication and are subject to change without notice. The research taken into account in this document may or may not have been used for or be consistent with all Aegon AM investment strategies. References to securities, asset classes and financial markets are included for illustrative purposes only and should not be relied upon to assist or inform the making of any investment decisions. It has not been prepared in accordance with any legal requirements designed to promote the independence of investment research, and may have been acted upon by Aegon AM and Aegon AM staff for their own purposes.
The information contained in this material does not take into account any investor's investment objectives, particular needs, or financial situation. It should not be considered a comprehensive statement on any matter and should not be relied upon as such. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to any particular investor. Reliance upon information in this material is at the sole discretion of the recipient. Investors should consult their investment professional prior to making an investment decision. Aegon Asset Management is under no obligation, expressed or implied, to update the information contained herein. Neither Aegon Asset Management nor any of its affiliated entities are undertaking to provide impartial investment advice or give advice in a fiduciary capacity forpurposes of any applicable US federal or state law or regulation. By receiving this communication, you agree with the intended purpose described above.
Past performance is not a guide to future performance. All investments contain risk and may lose value. This document contains "forward-looking statements" which are based on Aegon AM's beliefs, as well as on a number of assumptions concerning future events, based on information currently available. These statements involve certain risks, uncertainties and assumptions which are difficult to predict. Consequently, such statements cannot be guarantees of future performance, and actual outcomes and returns may differ materially from statements set forth herein.
The following Aegon affiliates are collectively referred to herein as Aegon Asset Management: Aegon USA Investment Management, LLC (Aegon AM US), Aegon USA Realty Advisors, LLC (Aegon RA), Aegon Asset Management UK plc (Aegon AM UK), and Aegon Investment Management B.V. (Aegon AM NL).Each of these Aegon Asset Management entities is a wholly owned subsidiary of Aegon N.V. In addition, Aegon Private Fund Management (Shanghai) Co., a partially owned affiliate, may also conduct certain business activities under the Aegon Asset Management brand.
Aegon AM UK is authorised and regulated by the Financial Conduct Authority (FRN: 144267) and is additionally a registered investment adviser with the United States (US) Securities and Exchange Commission (SEC). Aegon AM US and Aegon RA are both US SEC registered investment advisers.