Securing a sustainable future for real estate investment

Real estate is responsible operationally for around 30 per cent of global annual greenhouse gas emissions. Despite widespread commitments and improvements already being made to commercial buildings, asset managers are under growing pressure to improve their environmental, social and governance credentials.

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 significant investing 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 prioritized accurately.

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 modeling

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

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

The optimized portfolio is able to maximize 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 modeling to estimate potential exposure to risk can therefore be critical for investors and building owners.

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