Circularity: What Now? – LIST auf den Punkt

Wood as a building material, brief forays into biodiversity, and CO2 as a critical factor for the real estate industry—in a sense, the circle has come full circle in Köln, tying in with the three previous topics of “LIST auf den Punkt.” The selection of our discussion partners alone made it clear how all the major players and stakeholders in the industry influence one another. In addition to our “LIST auf den Punkt.” speakers from the financial sector (Michelle Pigulla (formerly Fischer), Berlin Hyp) and the innovation drivers (Markus Steppler, DERIX Group), Sebastian Theißen (LIST Eco) and Tim Schlüter, Head of Direct Real Estate at the asset manager Ampega Asset Management, were also in attendance. So, let’s take a seat on the “LIST auf den Punkt.” sofa and dive into the discussion:

Where do asset managers currently stand on the topic of circularity?

Tim Schlüter: As a portfolio holder, to be honest, there isn’t a business model yet, and none is in sight. We are, of course, engaged with the topic, but we are also “merely” portfolio holders. We acquire assets and optimize them within our portfolio. At the moment, we’re asking ourselves questions about circularity in a theoretical context. But we haven’t yet moved beyond this conceptual stage. When we’re back to acquiring project development opportunities, have to decide between Project A or B, and discuss the criteria, circularity will certainly factor into the decision.

What matters? What questions will finance pose to project development in the future?

Michelle Pigulla: We have deliberately divided things into the categories of new construction, renovation, and existing stock. When someone builds something new, the question of a building resource passport comes up. We ask: Are you doing anything in this direction? Is there any data at all? This is how we open the conversation and show: As a bank, we’re interested in where the customer stands. But that can only really take off once a certain amount of data is available. Only then are we in a position to evaluate and validate it. There are many different types of material passports being created, along with various calculation methods. Only once I can evaluate it can we move into a substantive discussion.

What’s the problem? Don’t we already have enough data from the existing tools?

Sebastian Theißen: We have a vast vocabulary that is difficult to compare in practice. We’re still at the point where, at best, we have a market standard for circularity assessment. The previous government announced a digital resource passport, but that didn’t happen. There’s a sense of helplessness and stagnation. It’s difficult to gauge whether and how things will move forward. In theory, we’ve once again created a perfect tool, but in practice it isn’t entirely applicable. As soon as we get a standard, it will be easier. The key is information sharing.

Why not more often? Manufacturers are the key. Why aren’t there more companies and innovation drivers working like DERIX?

Markus Steppler: That also depends on the business model. Our business model is to buy wood from the forest and the sawmill and use it to carry out construction work. When you realize that resources might become somewhat scarcer over the next 20 years, you start thinking: What is my resource? Where does the raw material come from? No longer just from the forest, but also from the technical cycle. We want to take back as much as possible to reuse it. There’s an economic rationale behind this. Why doesn’t everyone do this? It starts with regulations: Try reinstalling an electrical outlet somewhere else. You can’t do that because it would cause it to lose its certification. So the ball is also in the court of policymakers, who actually already hold the keys with the Circular Economy Act. If you actually specify in the tender that all materials must be taken back, or that carbon credits are available, then before you know it, the industry will be grappling with these issues and finding solutions.

What has developed well in recent years, and who is the ultimate obstacle in practice?

Sebastian Theißen: A very strong awareness has developed, which really gained momentum with the EU Taxonomy. That was the kick in the pants the industry needed. The demand for building resource passports, for example, has increased—even from public contractors. It’s also more about how to extract information from existing buildings to make a decision on demolition or renovation. That needs to be promoted even more. In Germany, the biggest hurdle is time. You want to do something, but the excavator for demolition is already scheduled to arrive in three weeks. By then, it’s often too late to go through the building and see what can be salvaged and reused. Cost-effectiveness is the other major issue. You often find some building components that can be reused exactly as they are. But that’s not yet a critical mass. So the existing building stock still needs time for awareness and reuse options to develop further.

Interjection: New construction, preservation of existing stock, renovation—so which is it? Do real estate projects have what it takes to make a real impact?

Tim Schlüter: The crucial question is what can even be invested in at all in the future. What should we base our investment strategy on? The entire discussion is currently still very much centered on project development and new construction. I believe we need to shift it toward the existing building stock. The extremes within which we’re having this discussion are still so far apart that it’s really difficult for property owners to find the right starting point. The only trigger can be the future preservation of a property’s value. But that’s actually a moot point, because the issue is inherent. It’s clear that a non-sustainable property that isn’t energy-efficient will lose value. For us as portfolio owners, the only option is to manage it in a way that’s inherently resource-efficient.

Closing remarks: Let’s talk again, ...

Tim Schlüter: ... Michelle. I’d like to discuss how high the risk premium is between ESG and standard financing. Markus Steppler: ... Tim. I’d be happy to follow up with you to ask what the driving factors are and what the framework conditions need to be for this to become a viable investment case. Sebastian Theißen: ... Tim. I’d also like to talk to you about the portfolio and what information is needed, as well as what we can already provide. Michelle Pigulla: ... Markus. I’d like to talk to you about the added value for the owner—the fact that they aren’t even aware of the value they actually have there. That’s exactly the missing link for us as a bank. People who apply for financing with us sometimes don’t even realize what treasures they have there. So how do we ensure that the information is passed on to us and that we can continue working with high-quality data? Then we’ll have the data we need.

Final Round: This needs to be kicked off now.

Tim Schlüter: We shouldn’t always view the circular economy as a burden, but rather as an incentive system—and thus as a matter of course. The issue is so obvious that we simply have to act. Markus Steppler: We always look to the Netherlands. They’re five years ahead of us when it comes to sustainability. What’s happening there right now will reach us in five years. I’d love to realize a project involving a project company with shareholders, where materials—not money—flow. That’s coming next; I’d like to predict that. Sebastian Theißen: I would absolutely love to create a real-world project and a showcase that demonstrates that circular construction is also economically viable. We’re currently working on calculating all the parameters and factors and comparing them. We want to think as ambitiously as possible in circular terms and back that up with facts and figures. We need proof that this is possible. Michelle Pigulla: We need to push for more exchange. We’ve also noticed here at “LIST auf den Punkt.”: There’s a wealth of knowledge, data, and ideas for solutions out there that just need to be brought together. That’s the positive part. We don’t have to invent the solutions; we just have to find the right levers to pull. If we’re all ambitious, we have a chance to get this done at the right pace.

Our conclusion from Jürgen Utz: Out of the dilemma, into collaboration!

“The relevance of materials to our CO2 emissions and biodiversity is central—and thus circularity is set to become a key success factor. After all, the 2040 climate targets are difficult to achieve with buildings that were not constructed or renovated in a circular manner. This is a genuine risk factor, not least because the consumption of new resources must be drastically reduced anyway. It is therefore essential to now put the logic of the circular economy and the financial sector’s requirements for the necessary transformation into practice. Otherwise, stranded assets will arise not only due to CO2 emissions from operations but also due to a lack of circularity, as soon as demolition or renovation is no longer cost-effective because the materials cannot be reused in the cycle. All stakeholders must now take action to remove the structural barriers. Banks need data so that circularity can be factored into their valuations. Manufacturers and planners can already provide a great deal of data. At the same time, building owners are more likely to invest when the added value is clear. We must now work together to resolve this “chicken-and-egg stalemate.” It is time for investors to activate the business case; otherwise, policymakers will have to intervene.” More on “LIST auf den Punkt” regarding circularity

When people talk about the circular economy, they’re also talking about CO2 allowances. Is offsetting through allowances and carbon credits also of interest to banks?

Michelle Pigulla: The principle is actually brilliant. The question is whether our colleagues see it as a value-adding factor in their assessments. They always ask: Is the market willing to pay more for the building? Here, too, we need a large volume of data. It’s not enough to have a single building where that’s the case. If there are two equivalent buildings, one of which includes the certificate system as an extra and the other doesn’t—is the market willing to pay more for it, and does that make the building more valuable? We can quantify the value differences, for example regarding energy efficiency. Once we’ve got the hang of it, that needs to be factored into the valuation as well. There are various components that can be tweaked: a risk component, a value component, and a margin component. The real value lies in pure value advantages. Sebastian Theißen: The state of North Rhine-Westphalia did exactly that. This allowed the district of Viersen to write off the residual value of raw materials at the district archive. That was a huge advantage for them in real estate valuation. This is the flagship project. In this case, the public sector was faster than the private sector and issued this decree. The district of Viersen is now continuing this approach and even taking it further. For example, the residual values of raw materials in MEPs are also to be included in the valuation. It’s exciting to see how innovative a single district is already being in this regard.