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ESG brings changes to Korea’s real estate

There is an active movement to receive eco-friendly certifications such as LEED and WELL for commercial real estate in Korea.

三月 09, 2021

Environmental, social, governance (ESG) as well as sustainability are key to the post-COVID world, and equally applicable to the real estate market. Since real estate activity accounts for 40 % of the world’s carbon emissions, environmental regulations are becoming stricter and investors are paying more attention to ESG criteria when making investment decisions.

Introduction of ESG

Major countries have declared targets for carbon neutrality, as a new international climate system begins in 2021 with the Paris Climate Change Accord. As a result, interest in ESG has increased and ESG demands are mounting in all real estate assets groups. To reduce carbon dioxide emissions from real estate, the Korean government implemented the Green New Deal policy starting from July 2020, in order to digitalise and promote green buildings. In the Korean real estate investment market, significant global pension funds and large management companies have presented ESG conditions to set up blind fund agreements (limited partnership that lacks a stated investment goal for the funds that are raised from investors), using ESG as a significant investment principle and strategy.

Why is ESG so Important?

The real estate sector accounts for roughly 40 % of the world’s carbon dioxide emissions, thereby impacting climate change. ESG has emerged as a keyword in real estate as climate changes greatly influence building maintenance cost and valuation. Hence, a lot of developers are interested in environment-friendly assets that help to create a sustainable community and commit to social responsibility. Green Buildings have demonstrated to add value to the property by reducing short-term operations costs and led to lower vacancy rate and rent escalations.

For instance, Kendall Square Logistics Properties and IGIS AutoWay Tower of IGIS Asset Management received the highest GRESB rating in Korea. In addition, fund managers find it easier to get investors’ approval when setting up funds, if they invest on real estate that fulfils the ESG evaluation criteria such as GRESB. Many real estate companies in Korea are working to receive the Green Building certification such as LEED, WELL and GRESB. For instance, Namsan Square Building in CBD and IFC in Yeouido received LEED Gold Grades, while Pulmuone Institute of Technology received this certification for the first time in Korea's R&D centre.

The interest of Korea's real estate ESG is focused not only on the environmental certification system but also on social responsibility. For example, the average floor space allocation per employee in traditional Korean office buildings, ranges between 7 and 8 square metres per worker. Now, more companies aim to increase the floor space allocation to 10-11 square metres to adhere to social distancing and create a refreshing office ambience.

The proportion of eco-friendly certified buildings in real estate in major global cities is surging. Among Asian cities, Shanghai, Hong Kong, Beijing and Singapore have a Green Building adoption rate of more than 20 %. Given the heightened global interest, ESG will likely play a larger role in Korea, on the back of a blooming REITs market.

Figure 1:  Examples of Adoption of ESG in Real Estate in Korea

Asset

Examples

Applications

Office

AutoWay Tower

Green Building, Soft-BeMS

Logistics Centres

Kendall Square
Logistics Properties

Energy saving system

Data Centres

KT, LG CNS, SK C&C

PMS(Power Monitoring System)

Retail

Hyundai Department Store

Low-carbon power operation, promotion of greenhouse gas and waste reduction

Source: JLL

Above is a list of ESG implementation examples. AutoWay Tower implemented the real-time energy diagnosis web service (Soft BEMS), which reduces carbon emissions by cutting energy consumption in buildings. Kendall Square aims to save energy by adopting ERV ventilation, reduced electricity consumption and water recycling systems. In data centres, PMS (Power Monitoring System) allows the tracking of real-time power usage. Hyundai Department Store is making efforts to minimise carbon emissions by utilising smart energy management and lighting control systems. By doing so, the company also strives to reduce greenhouse gas and waste reduction.

One of the leading causes of climate change is carbon dioxide emission, which could be improved if the real estate industry adopts environment-friendly features. In terms of valuation and acquisition of a property, ESG will continue to play a pivotal role in the future.