There’s not much time left to avert a global warming disaster, and that means the real estate sector has to make big changes to existing building stock as well as to development projects in the pipeline.
If Extinction Rebellion protests, Greta Thunberg’s impassioned warnings or David Attenborough’s prime-time call to arms are not persuasive, consider this: the United Nations estimates real estate accounts for about 40% of the world’s energy consumption and a third of all carbon emissions. If, as the UN also says, we have little more than a decade to avoid irreversible damage to the environment, real estate needs to change its behaviour – and fast.
“The UN produced its report at the end of last year saying that we have 11 years to avoid catastrophic climate change,” says Abigail Dean, head of sustainability at Nuveen. “That means two things for real estate. First, we need to make very meaningful changes to our buildings over the course of the next decade. Second, we need to have a very clear strategy on how we move buildings towards net zero carbon. Buildings need to be not consuming any more energy than they can produce from renewable sources, ideally on site. And we are a long way away from that.”
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There may be quick, inexpensive wins – Dean estimates buildings can reduce the energy that they use by 10-20% through closer monitoring of consumption, replacing lights with LEDs, upgrading heating and cooling systems and “putting in place good behaviour measures” – but there will be no quick fixes.
“There are going to be certain elements of climate change that are unavoidable,” she warns. “So even if we do the best possible job we can in the next decade, there will still be unavoidable climate change impacts and that will have an effect on real estate value.”
Guy Grainger, EMEA chief executive of JLL, sees inertia as perhaps the biggest barrier to progress in the UK. “People have seen it as a box-ticking exercise in the past and not as a value proposition. We need to really change the mindset around this.”
Focus, he says, must shift from a cost and ROI mentality to one that recognises that “if you don’t do this, actually your asset in the future will be less valuable”.
Tougher laws?
Dean says that without elective action, tougher laws are likely as governments seek to play catch-up. “At the point at which governments have that collective moment when they appreciate the true risk – and I think we are very close to that – they are going to have to put in much more stringent legislative programmes than maybe industry would be comfortable with. That is something that as an issue we are going to have to deal with within the next decade, and those organisations that have started to get ahead of the curve are going to be much better placed.”
There are good examples of businesses and governments around the world seizing the initiative. Derk Welling, senior responsible investment and governance specialist at APG Asset Management, the sustainability-focused €487bn pension fund manager, cites New York as a city that has implemented more stringent targets on carbon emissions.
Mike Sales, chief executive of Nuveen, sees other countries leading the way. “You look at Holland, you look at the Nordics and you probably look at another sophisticated market such as Australia as a country that has seen this coming.”
Now the likes of Nuveen are looking to work with partners with a track record in this area, such as Dutch developer Edge Technologies. It has developed one of the most sustainable buildings in Amsterdam, and the two businesses are working on projects in the UK and Germany and teaming up for the first time in the US.
“I think everything you do now is all about sustainability, but it’s also about looking at your legacy stock and how you deal with that because that comes at a cost,” says Sales. “The office sector is going to come under extreme pressure in terms of the amount of capital expenditure required to make a building semi-sustainable.”
Light that fire
Grainger agrees. “I think we need to ignite that fire inside a few leaders out there to really prioritise this,” he says. “The UK has been really good on renewable energy but buildings will move up the agenda. An extra 2.5bn people will move to cities by 2050. We are already consuming two-and-a-half times what the world can produce and, particularly in major Western cities, during that period only one in five buildings will be demolished and redeveloped. We have to repurpose and reimagine all the buildings and that is actually much tougher to do than rebuilding. So there’s a big task ahead for us.”
But even where there is leadership, the UK real estate sector still has a long way to go to meet demand.
“We have been searching for a new office in London,” says Grainger. “Because I have a passion around this, I wanted to find a carbon-neutral building and that is extremely hard to find in London, which is amazing. I find that shocking, actually.”
But get sustainability right and the business benefits are clear, too. “If you make it central to your strategy, I am convinced in the future it will bring shareholder value if you are listed and huge employee value if you are not, because you’ve got a real driving purpose and actually you are doing something which not only contributes towards helping prevent climate change but, honestly – and this is critical – it will attract more demand in the future. If you are developing a multi-family scheme at the moment, then in five years’ time if those apartments are carbon-neutral or zero-waste they will definitely be more attractive to all generations.”
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Flexible working and valuation changes will lead sustainability drive
Nuveen chief executive Mike Sales says the speed of the flexible working revolution, led by WeWork, offers grounds for optimism that sustainability can become embedded in UK real estate thinking: “It’s coming. Just probably not as quickly as we would like.”
But much will have to change for it to get there – from construction and energy ratings to lease structures and valuation.
Abigail Dean, Nuveen’s head of sustainability, says: “There is a real challenge with the valuation community in that they are by their very nature backward-looking. And as an industry we intrinsically know that buildings that are more energy-efficient and more sustainable will hold their value better. But that is not reflected in the way that they are valued at the moment.
“Are the valuers assessing some of these buildings – which clearly need an extraordinary amount of work done on them to bring them into the 21st century – on the correct basis? In certain sectors, if you are not working off the right basis then whatever you spend on these buildings is not going to generate return. With where values are today, you know there’s some pain around the corner.”
Derk Welling, senior responsible investment and governance specialist at APG, says structural change will deliver results. He suggests merging sustainability and valuations teams to embed sustainable thinking. “The valuer should understand the sustainability credentials of an asset. To date, I think that’s not the case. Why not have valuers issue BREEAM certificates?” he says.
Dean says the link between sustainability performance and value has been proved in Australia. “What they have there is the NABERS rating, which is an operational energy performance rating. We don’t have that in Europe. We have BREEAM but it is not an operational rating. We have the EPC certificate, which is not based on actual energy consumption. So where they have introduced this rating system in Australia, you have a direct link between the amount of rent that occupiers will pay and how energy-efficient the building is,” she says. “That would be a game-changer in Europe if we could introduce an operational performance rating.”
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