Entering 2025 the real estate sector has never been more critical to global ESG success. According to Architecture 2030, in 2025 buildings contributed to 42% of emissions globally, and 64% of these emissions are from building operations and 36% are from embodied carbon. By 2035, embodied carbon emissions could likely be over half of the emissions from the built environment. Then there are the issues of climate risk that are becoming prominent questions for the sector to grapple with. As we play out 2025, ESG themes are poised to evolve from a compliance obligation into a strategic opportunity. According to GRESB (The Global Real Estate Sustainability Benchmark), the most important ESG factor that is moving the industry forward is Decarbonization, which is certainly a positive shift for the sector.
Positive sentiment around commercial and residential real estate began to grow at the back end of 2024, as interest rates began to fall. Research by MSCI. states that however with continued economic uncertainties in 2025 “investors must carefully balance top-down allocation strategies — determining exposure across geographies and property types — with the granular, bottom-up asset-selection and asset-management decisions”. This translates to ESG winners having detailed information on their inventory and its performance, both financially, and in terms of sustainability.
According to Deloitte, 2024 saw the combined effect of investors’ appetite for ESG and sustainability performance. Their Real Estate Sector Outlook report states that “with the increase of the ESG regulatory framework, real estate market participants have a lot to gain from monitoring their exposure to changing regulations and keeping on adapting their ESG strategies and diligence programs.” This focus should not just be on compliance in 2025, but also on value creation. This can be achieved in three broad ways states MIPIM:
In 2024 ESG factors such as embodied carbon, low carbon fit-outs, and the circular economy continued to gain attention from investors and stakeholders. These trends will continue into 2025, states Knight Frank, along with the rise of smart technology integration. Yet technology is only useful if the building itself is efficient by design and is in operation. Indeed according to Knight Frank’s Alpine Property Report, nearly half (49%) of respondents consider energy ratings essential when purchasing a property.
Then there is the growing issue of physical climate risk. Real estate by its nature is effected (and affects), ESG issues at a local level, such as flooding risks, and resilience to extreme weather. Extreme weather events are increasingly negatively affecting the value of Real-estate assets through higher insurance premiums. One only has to look at the wildfires in Los Angeles this month to see the huge effects of even one climate-related risk event. Below is the PRI’s summary of the impact of negative ESG factors on value erosion.
| Summary of impact | |
|---|---|
| Additional Capital Expenditures | Equipment upgrades to improve energy performance |
| Increased Costs | Higher insurance premiums due to physical risk factors |
| Future income uncertainty | Tenant and leasing disruption due to extreme weather events |
| Obsolescence risk | Buildings that do not meet minimum energy performance standards set by legislation |
According to the PRI, investing in the real estate sector in terms of ESG brings up two important things to consider. The first is that real estate is often a long-term investment, which means ESG issues can play out over a long-term time horizon too. In fact, over 80% of buildings that exist today will still be standing in 2050 warns JLL. This makes it crucial for direct real estate investors to incorporate ESG factors early on in the investment process and of course throughout all design stages. One theme topping everyone’s wish list of late is the idea of ‘Generative Design’. This new way of designing factors in, climate risks and social risks at the earliest stages of concept development through scenario planning. Generative design, states Deloitte in its Generative Design Whitepaper, aims to address all ESG factors including the “quality of life for residents, access to daylight, open spaces, and amenities”.
The shift towards ESG-focussed sub-sectors within real estate has in turn seen a major shift toward Data Centre (DC) investments in the last 12 months. This has implications for the real estate sector more generally, as the lines between infrastructure and real estate blur.Real estate investors are seeking a ride on the AI train, yet DCs are a huge consumer of power and water, while on-site renewables are often not always practically possible in urban areas. However, DC players have successfully harnessed an ESG success narrative, while continuing to acknowledge the importance of racking real-world emissions in line with its Climate Neutral Data Centre Pact (CNDCP) commitments. A good exemplar for the real estate industry more broadly.
According to D1percent, 94% of retail investors in the UAE would be interested in ESG investing. With Saudi Arabia’s investments in renewables and green infrastructure, such as through its mega-city project NEOM, the region now has an added incentive to develop green real estate to fulfill investor demand.In the UAE specifically, the real estate sector has seen wide-scale adoption of sustainable sources of energy such as solar power, which is available abundantly in the UAE. To tackle social sustainability factors, the UAE has encouraged the integration of bike lanes and park spaces. These green spaces also help buildings use less water for air conditioning, by harnessing natural design elements for microclimate cooling. This is a welcome development since Savills specifically points out that the UAE water usage (500 Litres per day) sits 50% over the global average.
The construction and real estate sector employs close to 19% of Dubai’s working population and contributes 14% to the GDP. While the UAE is to be praised for its leadership on ESG in real estate, especially with its Net Zero 2050 commitments, there are still significant risks that are perhaps not getting adequate appraisal by developers and investors. For instance, approximately 85% of the UAE’s population and over 90% of its infrastructure of the UAE is located/lives, within a few Kilometres of the coastal areas. Rising global temperatures and global sea levels expose the UAE’s water, coastal, marine, and dryland ecosystems making it a challenge to sustain economic activity sustainably. According to Savills, rising temperatures also pose a direct risk to buildings and infrastructures, agriculture, and overall food security thereby negatively impacting public health.
With the rise of e-commerce and its related supply chain efficiencies it creates, one sector has been gaining increasing interest from ESG investors in the Middle East, and that is Warehousing. Backed by prominent retail operators as well as key government-backed landlords such as Dubai South and KEZAD Group recent developments have embedded ESG principles into design and operations. By leading on ESG, warehousing is a great example of a real estate sub-sector that has adapted fast to changing consumer preferences. Unlike the retail sector where 80% of a retail landlord’s emissions are associated with tenant activity, KEZAD (Khalifa Economic Zones Abu Dhabi) funded warehouses are home to companies in the recycling and renewable energy sector. This is just one compelling ESG success narrative that the real estate sector should take note of.https://pdf.euro.savills.co.uk/uae/dubai/esg-me-2023.pdf
In 2021, the UAE launched its first sustainable real estate investment trust (REIT) with Emirates NBD Asset Management has been a successful initiative to enable investing in sustainable real estate. This innovative five-year term sustainability-linked loan included a mechanism to adjust Aldar’s interest margin annually in line with the achievement of targets on energy and water intensity, waste recycling, and worker welfare. The results in Masdar City are therefore a ‘greenprint’ for the sustainable development of cities with a clear focus on energy and water efficiency, mobility, and the reduction of waste.
Since 2021 sustainable real estate has kept growing fast in the UAE, however of the total office stock that is currently available across Dubai in 2023, only 22% had a LEED certification (the world’s leading real estate sustainability certification for real estate, along with BREEAM and GRESB), and less than 10% of the retail stock across the UAE is green-certified. Thankfully progress in 2023-24 continued to be catalysed by the UAE’s ambitious green building regulations, which are setting ever-higher standards for sustainable construction. One example is the Estidama Pearl Building Rating System (PBRS), which is currently mandatory for proposed construction projects in Abu Dhabi. These initiatives and regulations have helped in part to enable a 30-40% reduction in energy use in new buildings in 2024 (compared to those built before 2014). All these recent developments tally well with forecasts that indicate an upward trajectory in the demand for sustainable real estate in the region through 2025 and beyond.
