OpinionJun 23 2022

Securing a sustainable future for real estate investment

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Securing a sustainable future for real estate investment
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The government has introduced several carbon targets for building owners over the past decade as part of its wider net-zero strategy.

But it is not just government pressures that asset managers are facing; investors and tenants are also demanding improvements to building performance.

In fact, a survey from JLL found that 43 per cent of investors and 60 per cent of occupiers have set their own environmental targets.

As a result, tenants are actively seeking more environmentally friendly buildings, with demand at an all-time high for energy efficient properties.

The challenge for most asset managers – even those investing significant sums into building greener properties – is that old and inefficient buildings make up a considerable percentage of their portfolio.

While work is being done to retrofit these properties, we are already witnessing a ‘brown discount’, where inefficient properties or those not fit for the future are cheaper to lease.

This presents a key challenge for asset managers when it comes to demonstrating the value of their portfolio to investors.

Understanding the current performance

So, what are the short-term changes owners can make to protect their assets?

The first challenge for most owners is understanding the energy performance of their portfolio and individual assets.

This is an important yet challenging task for many asset managers, particularly those whose portfolios span the entire globe, or owners who do not have a detailed log of the services that have been fitted into buildings over a certain age.

Understanding the weak points across a portfolio will ensure investment is prioritised accurately.

Tenants are actively seeking more environmentally friendly buildings, with demand at an all-time high for energy efficient properties.

One of the toughest challenges in today’s ESG climate for asset owners is the myriad of regulatory changes happening across the built environment.

Legislation is continuously being updated and being aware of what policies are coming down the line is key.

By having a detailed understanding of the performance of a property portfolio, preparation for regulatory change can be managed and owners can identify how impending legislation may impact their portfolio.

For investors, this ensures risks can be managed and any exposure to weakness across a portfolio can be mitigated against.

Evaluating risk with scenario modelling

Understanding future low carbon transition scenarios can assist in determining the impact on real estate asset value in the long term.

Organisations such as Nuveen Real Assets have pioneered approaches to portfolio optimisation to consider carbon emission reduction alongside traditional risk and return considerations.

The optimised portfolio is able to maximise return for a given level of risk and desired level of carbon emission reduction, such as net zero or even net negative emissions.

Portfolios with at-risk properties will be ultimately of limited value to owners and investors. Scenario modelling to estimate potential exposure to risk can therefore be critical for investors and building owners.

Do not ignore the easy changes

In most cases, there are simple changes that can be made across buildings to improve their overall green credentials, particularly where inefficiencies are caused by operational failures as opposed to poor building design.

This could be due to lack of regular maintenance, equipment and lighting left on out of hours or thermostats set incorrectly. Using technology can ensure failures like these are addressed and overall energy usage is kept to a minimum.

The government’s road to net zero  

As part of the government’s roadmap to net zero, and as confirmed in the energy white paper, the government’s minimum EPC score for non-domestic private rented properties will jump from an E to a B by 2030.

This poses a considerable challenge and as much as 85 per cent of non-domestic properties in the UK will need retrofitting to meet the B rating.

Planning for cost-effective changes now, such as a roll out of LED lighting, while budgeting for longer-term design-led improvements will be key to reducing energy usage and help tenants lower their energy bills.

The challenge for smaller asset managers

We have witnessed significant resource invested by asset managers into improving the energy performance of their portfolio, and many are making commendable gains thus far to ensure real estate remains a stable investment.

However, as more government legislation is introduced, the challenge will be whether smaller asset owners will have the capital to undertake the necessary retrofit work needed to meet policy and investor demands.

Questions will be asked of government as to whether financial support will be made available.

Real estate has long been hailed as a sound investment and has the potential to tackle the climate challenge head on with an integrated approach to decarbonisation and government support and collaboration among investors, landlords and tenants.

Snigdha Jain is director of sustainability at planning and development consultancy Turley