Sunday, September 26 2021

Climate change and its potential costs to humanity made headlines again last week. What was new was the clarity of the message blaming the changes in the planet’s climate on the human race.

The results of the Intergovernmental Panel on Climate Change (IPCC) places climate change firmly on our doorstep and demanded a global response. Indeed, the starting line in today’s climate assessment could hardly be clearer.

“It is unequivocal that human influence has warmed the atmosphere, the ocean and the land.”

As real estate investors, we are particularly empowered to make significant changes. 42% of the UK’s carbon footprint and 38% of all CO2 emissions in the world come from the built environment.

However, some investors believe that tackling carbon emissions from real estate will be costly in terms of returns. We believe the opposite is true. Buildings with better efficiency ratings generally attract higher rents, lower running costs, and are more attractive to tenants and can lead to better overall returns.

Global engagement

The term “net zero” is becoming a global rallying cry, frequently cited as a necessary step to successfully limit climate change and the devastation it causes. Many countries have announced major commitments to reduce their carbon emissions, promising to reach net zero in the years to come.

Almost all countries have joined the Paris Agreement on climate change, as well as businesses, cities and financial institutions with the goal of reducing emissions to net zero by mid-century.

Here in the UK, the government is committed to reducing carbon emissions to 68% by 2030 and to net zero by 2050. For property investors, this is a very important consideration.

According to data from the Loan Markets Association, 75% of the current UK building stock is energy inefficient. If the UK government is to achieve its goal, a significant contribution from the property industry is clearly required.

The right way…

The main driving force for change will be at the national government level, through legislation and regulations aimed at reducing emissions. However, the United Nations Global Compact and the Act Now campaign are initiatives to raise awareness among companies and employees.

The Climate Pledge went even further. Co-founded by Amazon, the Climate Pledge calls on businesses and organizations to be net zero in everything they do by 2040, with a bold goal of net zero carbon ten years earlier than specified by the Paris Agreement.

More than 100 companies have now committed in 18 sectors to measure and report carbon emissions, implement decarbonization strategies and neutralize any remaining emissions with credible offsets.

As a result, more and more companies are setting ambitious carbon and sustainability goals around their businesses and the space they occupy. JLL Property Advisors report that over approximately 14 million square feet of central London office stock that has rental events prior to 2030 is currently occupied by companies that have committed to net zero or have subscribes to “science-based goals”. .

The science-based targets seek a clearly defined path to reduce emissions in line with the Paris Agreement target. This clearly demonstrates the growing demand and need for highly sustainable buildings in central London.

What is there for investors?

JLL looked at the rental business in central London and explored the relationship between rental values ​​and BREEAM. BREEAM is an established method of assessing, rating and certifying the environmental, social and economic sustainability performance of an asset. The study found that the rental activity of new Class A office buildings in central London with a BREEAM rating of “very good” or better, averaged 10% higher rents than those without rating.

The “velocity” of leasing has also improved, with vacancy rates 7% lower – compared to 20% – for those rated “very good” 24 months after completion. While results are currently being monitored for new construction, we expect this trend to continue through to grade A refurbished properties.

JLL’s latest research has revealed the tangible financial benefits that sustainable office buildings can offer and investors who target a sustainable strategy are rewarded with a combination of higher rents, higher rental speed and lower rates. higher occupancy throughout the cycle.

On the other hand, it is becoming increasingly clear that with the rapid expansion of sustainability in real estate investing, “doing nothing” is not an option. The value of your asset – no matter where it is located or what type – will be affected by increased obsolescence or abandonment of properties that do not meet professional, investor and legislative sustainability standards.

Investor appetite for sustainable real estate will not wane

Covid-19 has accelerated a fundamental behavior change – and one that will define the asset management industry of the future – the shift to sustainable investing.

Two years ago, “ESG” was in many places, just a “tick the box” exercise. It was often there to meet the demands of progressive investors in Northern Europe, and once it was enough to be a signatory to the UN Principles for Responsible Investment (PRI). We are now witnessing an entirely new level of expectation that is akin to a global revolution.

ESG value in real estate

Source: Schroders, 2021, “Valuing Net Zero and ESG for Offices”, JLL April 2021

The Public Financial Disclosure Regulation (SFDR) was adopted in March 2021 as the EU regulatory standard for sustainable investment, and private and institutional investment decision-makers have fully recognized the need to act to avoid a global climate crisis and overcome growing inequalities everywhere. We see this as a huge opportunity for private markets, given their inherent ability to really control assets and drive impact.

In our view, real estate investors have the ability to drive positive changes in the sector to contribute to the 2030 target. ESG targets and investor incentives are fully aligned and there are a number of financial benefits that a Sustainable investment strategy can bring during the investment cycle.


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