ESG is set to be the biggest investment driver in Africa in 2021

One theme will dominate headlines, markets and investment decisions in 2021. It won’t be pandemics, economics or market cycles; it will be ESG. Two of Knight Frank’s sustainability experts explain why these three letters matter so much to occupiers and landlords when it comes to African real estate Anthony Duggan, Head of Global Capital Markets ResearchDavid Goatman, Head of Energy, Sustainability & Natural Resources EMEA
5 minutes to read

ESG, or to give it its full description, environmental, social and governance factors, has seen a dramatic acceleration during 2020. No longer just “the right thing to do”, understanding and delivering on these dynamics is now a business imperative.

Why will this impact real estate? Well, if the world is going to reach the targets set as part of the reaction to the globally recognised “climate emergency” then real estate needs to play a part – and it must be a significant part, as 36% of all carbon emissions originate from the built environment. Governments, regulators and all of those looking to have an impact will have to work hard to bring this figure down.

So, expect regulation and reporting to continue to intensify. And this will increasingly mean investors putting pressure on asset managers to fall into line and to deliver the ESG performance they need to show.

At the same time, the end user – the property occupier – is also working on their own impact agenda and will be demanding that the real estate they commit to has the required characteristics to be part of their own decarbonisation solution.

The move towards ESG investing is not just occurring at a global level but in Africa as well. For decades, ESG principles across the continent have been reflected through investment by development finance institutions. With rising institutional capital flows into real estate across the continent, adoption of ESG standards by investors such as Actis is serving as a benchmark for investing.

The upshot of this rapid shift in perspective around ESG factors is that property investors now have an additional set of criteria to consider when buying, selling or redeveloping assets. Appraisals and valuations will increasingly be looking across factors such as the performance of the physical asset itself, the locational risk of where the asset is located and, increasingly, an understanding and measure of the tenant counterparty risk. Collectively, this risk assessment is referred to as Climate Value-at- Risk, or CVaR.

The cost of not understanding this dynamic and not applying it is likely to be significant, even if the investor is not governed directly by the reporting and regulatory standards. What we are seeing in the market now is that those assets with the ESG characteristics that investors are increasingly looking for are experiencing a short term “green value premium”. However, over the longer term our house view is that an increasing awareness of the transition costs of bringing assets up to “institutional” ESG standards plus the other measures impacting value calculations will mean that buildings with poorer climate performance will increasingly see value eroded.

This discount will continue to accelerate towards what is likely to be a cliff-edge “brown value collapse” on the not-too-distant horizon for those assets that cannot match the standards required. This cliff-edge is not dissimilar to that being experienced by the “stranded assets” of oil and gas companies.

ESG is the biggest threat to real estate performance since the global financial crisis, but investors will not be rescued by cyclical market dynamics. Understanding the risks and, of course, the significant opportunities this brings will be the hot topic globally in 2021.

The E in ESG


Globally, sustainability has perhaps been the strongest driving force for ESG in real estate. There are now more than 120,000 green-rated real estate assets in clusters spread around the world.

Across Africa, the built environment landscape is set to change, adapting to local needs for real estate with a greater emphasis on sustainability underpinned by increasing urbanisation and rising populations. African cities and urban populations are set to grow at an unprecedented rate of 3.5% per annum. By 2050, Africa’s cities will be home to 1.3 billion more people than today, resulting in increased demand for buildings – with 80% of those that will exist in 2050 yet to be built.

There are currently approximately 700 certified green buildings in hotspots across the continent with the most dominant rating tools being Green Star (Green Building Council of South Africa), the LEED rating system (US Green Building Council) and EDGE (IFC). While South Africa continues to account for more than three-quarters of these buildings, rapid green growth has been witnessed across the continent, underpinned by a range of factors.

These include the changing legislative tide across countries such as Rwanda, where the Rwanda Green Building Minimum Compliance standard is mandatory for all upcoming commercial developments. In Ghana, the launch of the Eco-Communities and Cities National Framework has seen green buildings grow in popularity and the development of iconic buildings such as the Atlantic Tower in Accra. In Morocco, sustainable development is now a national priority, following the adoption of the National Sustainable Development Strategy.

Increased demand for green buildings can also be attributed to the availability of a broad range of financing options for investors and developers. As of October 2019, the Stockholm Sustainable Finance Centre notes that green bonds in excess of US$2 billion had been issued in Africa. Kenya’s Acorn Holdings’ green bond, focused on purpose-built student accommodation, was the most notable for the real estate sector so far. Further, increased availability of green financing from financial institutions such as Housing Finance in Kenya is providing a green mortgage credit line of up to US$20 million.

In addition, as they mainly rank as Grade A developments, the majority of the sustainable commercial offices developments across the continent have a greater tenant retention capacity resulting in income resilience and increased investor interest. As indicated in our Active Capital report, it is important that buildings reflect the ethos of the brands that operate within them. Therefore, as occupiers increase their focus on sustainability, occupation of green buildings becomes a very visible way to demonstrate their commitment to the cause.

Although the certification of green buildings can be challenging, especially in markets without set guidelines, sustainable buildings will go a long way towards influencing resilient returns by ensuring tenant retention and reducing occupancy costs in the medium to long term.



  • Sustained demand as a result of occupiers’ preference for buildings that reflect their ethos and values
  • Higher rent premium and value preservation for green-certifed buildings

Financial institutions

  • Regulatory compliance
  • Tax relief or exemptions on qualifying assets such as green bonds


  • Reduced business risk
  • Access to “green” finance for energy and resource efficiency projects
  • Product diversification
  • Brand and reputation growth above peers