RUSHABH Desai, Asia-Pacific chief executive officer (CEO) of Allianz Real Estate, sees opportunities for asset owners to set the climate change agenda in the real estate industry. The property investment arm of global insurance giant Allianz is reducing the carbon footprint of its portfolio - and wants to inspire others to do the same.

But Desai will have his work cut out for him, as Asia still has some way to catch up with its global counterparts when it comes to environmental, social and governance (ESG) awareness.

"Europe is ahead of the curve and Asia is starting to catch up," he said.

The good news, he said, is that the journey has begun in Asia, with various countries such as Singapore, Japan, India and China now formulating their own ESG regulations, which are largely aligned with the European regulations.

"As one of the largest owners of real estate in the world, we have a responsibility to lead by example," Desai said. "Investors like us and others are helping Asia to do it faster. But I think it's still a couple of years behind Europe."

Green leasing

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One of the sustainability initiatives that Allianz Real Estate Asia-Pacific has embarked on, which Desai says he is particularly proud of, is the introduction of green leases to tenants of its assets.

"For example, we bought a stake in OUE Bayfront in Singapore this year. After we took ownership of it, we sat down with OUE and we said: 'We need green leases'. And we've signed our first green lease in OUE Bayfront, which I'm really proud of," Desai said.

Allianz Real Estate, on behalf of the National Pension Service of Korea (NPS) and the Allianz group of companies, bought a 50 per cent stake in OUE Bayfront for S$634 million.

OUE Bayfront, which was awarded the Green Mark Gold Award by the Building and Construction Authority (BCA) in Singapore, comprises an 18-storey Grade A office building, a conserved tower building, and an overhead pedestrian link bridge with retail units.

Aside from Singapore, it has also introduced green leases across its assets in Japan and China. In total, it has successfully signed more than 700 green leases so far this year.

"It's incredible that in countries where there was no concept (of this) - in China, nobody signs green leases; in Japan, nobody signs green leases - we have actually signed green leases," Desai said. "I'm extremely proud of the fact that we are the first in the market to do something like this."

Under these green leases, tenants share data on their energy usage within the premises, work with the company to reduce energy consumption, and agree to the use of renewable energy in the buildings, among other things.

"We also offer incentives to tenants sometimes, or encourage them and educate them on why green leases are important," Desai said. "Maybe the uptake today is less than

5 per cent. But it's a start and I think that's what matters . . . Gradually, our goal is to start with 5 per cent, then

10 per cent, then 15 per cent, and have more and more people take up green leases."

Steel-willed tenacity

With large parts of Asia still unfamiliar with ESG, it could be an uphill challenge to educate and convince players in the region to join in the fight against climate change. But Desai has a weapon in his arsenal that could tilt the wave of the battle: his steely determination.

"I typically say this, internally, that my strength lies in my tenacity. I either will find a way or make one," Desai said.

Since he came on board in 2016, to lead the revamping of the company's effort to build a diversified real estate investment portfolio in Asia-Pacific, Allianz Real Estate assets under management (AUM) in the region have surged from 400 million euros (S$614.8 million) to 7.5 billion euros.

"We started with 2 employees in Singapore (and) we now have a local expert infrastructure of about 40 people operating out of Singapore, Tokyo and Shanghai," Desai said. "And in 2020, we launched what is called the Invest Alongside Allianz strategy to onboard some like-minded third-party institutional investors."

"If you look at the journey, it is quite a sort of steep curve," he added.

The Asia-Pacific unit's AUM now accounts for nearly 10 per cent of the total AUM of Allianz Real Estate globally, which stood at 75.3 billion euros as at end-June.

The Munich-based group has targeted a 25 per cent reduction in carbon emissions from its global portfolio by 2025, en route to carbon net-zero by 2050.

Allianz is also one of the co-founders of the United Nations-convened Net-Zero Asset Owner Alliance.

With the real estate sector accounting for about 40 per cent of global greenhouse-gas emissions, Desai believes the industry can make a real difference. "Sustainability is not an abstract concept anymore," he said. "In my mind, ESG is not an option, it's a preference - for us as a company and for me as a person."

"In fact, this morning, we just rejected a very nice deal because the building has asbestos in it. While you can contain asbestos, it doesn't feel that in this current environment you want to buy a building where the asbestos cannot be removed and the ESG cannot be enhanced," he said. "So we rejected the deal despite the fact that we would have made a lot of money on it (as) it was coming at a discount."

Desai said 98 per cent of Allianz Real Estate's office assets in the Asia-Pacific are currently green-certified, out of which some 30 per cent is Leed Platinum or equivalent. Leed, short for leadership in energy and environmental design, is a green building rating system.

The company has started the certification process for its other assets, such as in the student housing, residential and logistics sectors, and hopes to achieve similar results.

"From a value perspective, offices are the biggest chunk so it was important for us to start with the office (segment)," Desai said. Offices accounted for close to a third of Allianz Real Estate's Asia-Pacific AUM as at end-June.

Green certifications and green loans

In Singapore, one of the group's notable office buildings is Duo Tower and Duo Galleria. The twin towers were jointly acquired with Gaw Capital Partners for S$1.6 billion in 2019.

Located in the fast-growing Bugis district in Singapore, they comprise 560,000 square feet (sq ft) of premium Grade A office space and 60,000 sq ft of retail space.

The asset was completed in 2017 and was awarded the Green Mark Platinum certification, the highest accolade from BCA.

UOB advised and syndicated a senior secured green loan facility for the acquisition, and also assisted the borrower to create a Green Loan Framework in accordance with the green loan principles by the Asia Pacific Loan Market Association.

"As part of UOB's commitment to forging a sustainable future, we take a proactive approach to seizing green business opportunities together with our clients," said Lim Lay Wah, UOB's head of the financial institutions group. "Allianz Real Estate is one of our long-time partners in this aspect and we are expanding our collaboration to more environmentally-friendly projects that promote sustainability across the region."

The bank says it sees the importance of ESG as a new economy driver, as it opens up access to large pools of capital, builds a stronger corporate brand, and promotes sustainable long-term growth benefiting companies and investors.

"UOB works closely with our partners and customers to support the development of green projects that will help combat climate change and leave a positive impact for the environment," Lim said.

The way Desai describes it, the benefit of taking up a green loan is not financial or economic advantages, but transparency. "We want to be transparent about which buildings are green and which buildings qualify for a green loan," he said.

Desai said the group is embarking on a journey to look at the rest of its portfolio to see which assets can be converted into green loans. But this would mean getting the buildings to a minimum level that the banks are willing to classify them as qualifying for green loans.

"We do spend a lot of money on the asset to qualify as a green asset," Desai said. "It does mean higher cost for us as an asset owner."

At the end of the day, he said, the company has to make returns for its investors. There is therefore always a concern that it is more costly for the business with no payback.

"However, if you think about the future, the assets which are ESG compliant, from a pricing perspective, should get a premium over assets which are not compliant. The industry hasn't gotten there yet, and I can't point to you what the pricing differential between a compliant and non-compliant building is. But as we are buying buildings, there is more demand for compliant buildings versus non-compliant buildings - which basically means the pricing is going to be higher for compliant buildings," he said.

There is a line of sight that 'yes, the buildings will be differentiated' and there will be an economic payback as well as an environmental payback . . . I think that is going to come into play in the future," he added.

Green communities

As a parent to a young child, Desai said his commitment to ESG principles is also about being socially responsible and leaving a better planet for future generations.

"I try to teach my daughter about saving the earth; (but) in fact, it's the other way around," Desai said. "Nowadays, kids are taught (about climate change) in school, so a 3-year-old actually tells me to switch off the light or turn off the tap, and says: 'Papa, we need to save the Earth.'

"Businesses are now signing up for this because all businesses want to be socially responsible. At the end of the day, we've got to be able to go back home and face our families and be proud of the fact that we did something today at work which is going to help the planet in the future generations."

The way Desai sees it, attention to ESG is slowly becoming part of our DNA and translating to business.

"The industry, in general, has come together, especially in the last 24 months, to collectively take tangible steps to reduce the carbon footprint and develop healthy buildings for the environment and the communities that live and work in those buildings," he said.

To this end, he says Allianz Real Estate Asia-Pacific has partnered with a tech provider to roll out a mobile app in Singapore to help create a sense of community at Duo.

The app helps users make bookings for facilities such as the gym or restaurants, and also allows tenants to give feedback.

"It's a community that we have created and the tenants are so happy that we are now rolling it out in some of our other assets," Desai said.

At the same time, he says it is imperative that the company engages with market participants across the broader industry - including governments and local players as well as joint-venture partners and managers - so all can come together to understand why ESG is important and ensure that everyone is moving towards the same goal.

When Allianz Real Estate invests in a fund, for example, it seeks to ensure that the fund manager has strong ESG policies and guidelines in place. If the policies are not up to expectation, Desai said, the company will review the policies and suggest changes.

"Allianz is certainly at the forefront of ESG, definitely in Europe, as well as in other parts of the world, including Asia-Pacific," he added. "With the community app, the green leases, the green loans, I would say we are one of the first movers in ESG and others will catch up soon. But we are proud to be the first mover and take the initiative forward."

"We are engaging with the broader community in the real estate world to ensure that everybody moves together, because Allianz by itself is not going to be able to change everybody's mindset. We need everybody to move together," he added.