Another year passes and we know that not enough progress is being made on sustainability in general and the race to net zero in particular. The COP27 United Nations Climate Change Conference in Egypt and the UN Biodiversity Conference COP15 in Montreal stressed the need for business to create action plans in order to make more progress on climate and nature. In this context, what will real estate do in 2023? What must it do? Sustain asked a number of real estate professionals for their take.
Sustain would like to hear your 2023 predictions, ambitions or opinions and will be updating this article until the end of the month. Contact us at firstname.lastname@example.org
The Japanese government has been slow to provide policy impetus to ESG in their domestic real estate industry. It is therefore surprising that in a country not known for embracing change, real estate managers have taken it upon themselves to make significant strides in this area.
GRESB, the leading global standard for portfolio-level ESG reporting in the real estate sector, counted 122 participants from Japan in 2022, a substantial subset of the 1,820 participants registered globally. It is not only the relatively high participation rate that is worth noting, but also the consistent outperformance since 2014 that demonstrates Japanese managers’ commitment to ESG, with an average annual GRESB score of 80 versus a
global average score of 74.2.
Japanese investment managers and developers are proactively setting their own ESG targets. Mitsubishi Estate, is targeting to adopt renewable energy in approximately 50 of their office buildings and commercial facilities by the end of fiscal 2022 and has been accelerating emissions targets set earlier. Mitsui Fudosan has similarly set targets for renewable energy use in its buildings in the greater Tokyo metropolitan area.
It will be worth watching whether ESG could become a longer-term catalyst in the Japan real estate market, with Japan assuming a leadership role for ESG among global peers.
Yoshiko Nakamura, vice president of Hodes Weill & Associates
2023 is set to be a pivotal year in sustainability reporting and disclosure. We are seeing sustainability reporting move from being largely voluntary to becoming a regulatory requirement. In particular, the effect of the proposed US Securities & Exchange Commission, EU Taxonomy, and ISSB standards will likely stretch beyond the large corporations and investment funds doing the reporting. Tighter regulation will have a substantial impact on the real estate sector.
There is a strong focus on climate-related risks, metrics and impacts, which will help to inform investment and asset management decision making. Is the property sector ready for a future where the financial performance of an asset might be starkly impacted by changing climate? There is a risk that this explosion in complex reporting requirements will require a huge resource investment by the companies to comply. The industry needs to work together to create a clear path through these requirements and support the transition to a greener economy built upon a foundation of robust disclosure and transparency.
Tanya Broadfield, director of sustainability at Savills
It has proven difficult for investors to price climate risk into their decision-making, with myriad other factors to consider when trading assets. Our study of prices paid for offices in London, Paris and Sydney, however, shows a premium has emerged for buildings that have recognised sustainability ratings versus those that have not yet achieved these standards.
While a sale-price premium related to environmental ratings has become evident in the transaction market, MSCI’s work does not yet show actual building emissions have a definitive impact on performance. Reducing a building’s emissions is how the industry will eventually effect real positive change; therefore, the greater risk to a building’s value implied by high emissions should start to be accounted for during the valuation process because of the transition risk.
The threat of write-downs to a property’s value will encourage owners to make the necessary changes to a building in order reduce its emissions intensity. It also means that when these assets come to market, they will do so at a price that accurately reflects the level of capital expenditure required to bring them up to standard.
Will Robson, executive director, MSCI Research and David Green-Morgan, executive director, MSCI Research
So far it has been easy for real estate owners to say they are committed to ESG and to announce plans for what they will do. However, whilst they’re full of ambition they are often low on specifics. I think 2023 we will start to see that pendulum swing away from ambition and towards specifics. That means collecting and recording accurate data, assembling it in a useful way and using it to quantify material changes. I think there’ll be a huge amount of work around that in 2023, where we replace ambition with mission.
Johnnie Wilkinson, chief executive, Greenman Group
Disruption provides the opportunity to double-down on resiliency for investors and occupiers. In Europe, an asset’s ESG profile has become critical for occupiers to help meet their corporate ESG goals, to boost hiring and employee retention. We believe the current energy crisis should cause occupiers of lower-performing assets with higher energy costs to become even more cost- conscious. Tightening regulation across Europe will further drive change. This is a “must-have” characteristic of European investments.
We expect demand for ESG upgrades will only increase among occupiers and owners that lack the technical resources to deliver cost-effective solutions. In the long term, we expect intelligent and consistent investments in ESG upgrades to produce higher occupancy rates (driven by tenant demand) and more liquid assets, protecting investors from the downside of “brown discounts” and achieving stronger pricing at exit. This is a good window to consider advancing ESG investments.
Alex Knapp, chief investment officer, Europe, Hines
Investors in the property sector have definitely woken up to the risks associated with not achieving significant changes to the sustainability of our asset class. It’s now one of the first questions in any investor meeting. This heightened awareness and a greater alignment of interests between investors, managers and occupiers is going to be vital if we are to achieve the changes that are required to reach net zero by 2050. It’s great to see how seriously especially younger professionals focus on ESG and impact investments. Not only does the pace of change need to accelerate, but also the willingness to adopt new solutions and materials such as wood and other technologies if we’re going to get there in time. I hope that 2023 marks a step change in our sector’s approach to this very global challenge.
Pertti Vanhanen, Managing Director Europe at Cromwell Property Group
We think 2023 is going to be a year where occupiers become much more engaged on sustainability issues. Rising energy costs and an increasing need for them to be seen to reduce emissions is changing the conversation. Leasing activity will be focussed on good quality assets that use less energy and have lower running costs. At Picton, we will be focussed on our ‘renewable’ roll out, making further progress against our net zero pathway and more widely looking to mitigate climate change risks. Hopefully next year the sustainability conversation within our sector goes further than just minimum energy efficiency compliance.
Michael Morris, CEO of Picton Property Income
The current energy cost crisis stresses the need to double down on energy reduction. But what’s not measured can’t be effectively managed, so access to both landlord and occupier data has never been so significant. Armed with a more accurate grasp of exactly how whole buildings are performing, it’s possible to work with occupiers to drive down their own costs. This is also where smart technology, energy audits, and a phased upgrade of plant and systems to improve efficiency, will have a significant impact on cost reduction.
Energy prices are unstable, and markets are likely to remain volatile well into 2023, so the focus must be on both short- and long-term reduction strategies. The payback timeframes from PV (solar panel) installations are expected to fall significantly – and could even halve against the increased grid energy costs. Reducing reliance on gas can mitigate exposure to the risks of spikes in the energy market and utilise more clean energy, while helping to achieve net zero carbon emissions.
Vicky Cotton, ESG director at Workman LLP
In order to progress the sustainability agenda in 2023, the built environment sector must embrace the need to decarbonise. In order to do this we need a cross-industry effort to go further in understanding and delivering material reuse, extending the life of greater quantities of building materials than at present.
Not only is reusing materials less carbon-intensive, but it is also more commercially viable to minimise waste in the construction process. As an industry, we need to do more to help developers identify reusable materials at the time when a building is being considered for repurposing, auditing buildings for reusable materials as a matter of course.
In addition, we need to see strong government leadership to support a wider decarbonisation agenda. Government can provide a crucial means of closing the gap between those investor and occupier organisations which are leading the way, and industry stakeholders which are either unaware or unengaged with decarbonisation.
A combination of stronger incentives and regulation will be essential to encourage a wider set of industry stakeholders to take action. We are currently working with the British Property Federation on recommendations aimed at ensuring that government policy on this pressing issue is more effective in the future.
Mat Lown, head of ESG and sustainability at TFT
One Station Hill has been rated as the UK’s best design for air quality.
The Reading office development achieved an AirScore D&O (Design & Operation) Platinum rating, with the highest score certification company AirRated has awarded.
AirScore D&O is AirRated’s review of the proposed design and operation of a building’s HVAC system. Features in One Station Hill’s design include high ventilation rates, high-efficiency particulate filters and active carbon filters.
The office building, due for completion in 2024, is part of the wider Station Hill development, a £750 million ($924 million) mixed-use regeneration scheme by Lincoln MGT, a jv between developer Lincoln Property Company Europe and real estate investment manager MGT Investment Management.
Francesca Brady, CEO at AirRated, said: “It is only in the past couple of years that indoor air quality has been truly recognised as a fundamental factor in the built environment. Our latest research suggested that over 70% of people would have their decision to come into the office positively influenced by a healthy building certification that offered transparency regarding the health of their working environment.”
Knight Frank has teamed up with Zestec Renewable Energy for a new UK solar power venture.
The partnership with Zestec, which is owned by renewable energy investor Octopus Energy, is designed to accelerate the adoption and rollout of fully funded rooftop solar PV systems across the UK. It will allow Knight Frank’s clients to implement rooftop solar PV systems without any up-front capital expenditure.
Zestec will implement a Power Purchase Agreement (PPA) model, which includes fully funding the capital and operational expenditure of each solar asset, allowing businesses to benefit from "significant savings" from onsite renewable power with no up-front cost. The PPAs will run for 10-30 years with various options at expiry.
David Goatman, head of energy, sustainability and natural resources at Knight Frank, said: “As businesses across the UK seek to reduce their carbon emissions and deal with high energy costs, it is imperative they embrace affordable and sustainable alternatives to fossil fuels. Solar power is the most cost-efficient form of onsite renewable energy generation at most of the property assets we deal with.”
Simon Booth, CEO of Zestec, said: “We have an ambition to scale in this exciting sector of the renewable energy market, an ambition Knight Frank also share.”
Brussels-listed developer Atenor has secured planning consent for its first UK project: the “deep retrofit” of Fleet House near Blackfriars Station in the City of London.
The project will retain more than two-thirds of the existing structure in order to reduce the embodied carbon of the 77,500 sq ft (7,200 sq m) project.
Designed by HOK, the rejuvenated building will prioritise user wellbeing through WELL principles and biophilic design, as well as providing public amenities, including a ground floor pub.
Eoin Conroy, country director UK for Atenor, said: “Our approved plans for Fleet House supersede an earlier scheme that would have seen the existing building demolished and a new one built from scratch. Instead, 72% of the building’s structure will be retained, emphasising our belief that the adoption of sustainable practices at the design and construction phases is both the right thing to do and will make this building more appealing to future occupiers.”
Johnnie Wilkinson, chief executive of Greenman Group, talks to Sustain about the investment manager’s programme of onsite power generation and diversification.
Greenman’s OPEN fund is the largest owner of food-focused real estate in Germany, with €1.09 billion of gross assets, and is targeting Net Zero by 2050. Generating onsite power through solar PV will be part of this and Greenman is also seeking to cut food miles by investing in vertical farming. These new business lines will also provide diversification of income; Greenman is targeting 5% of income from non-rental sources by 2025.
The motivation for this diversification has been the changing relationship between landlord and tenant, says Wilkinson. “The idea that a landlord buys a property and has this passive income for a significant period of time, has really changed. The landlord, and ESG is one driver of this, is obliged to take a much more operational approach to the building and become closer to the tenant,” he says.
“I really believe that in years to come, rent will be a small proportion of the revenue a landlord collects from that tenant. Ancillary services such as energy will end up being a more significant part of the total.”
Supermarkets are well suited to solar PV installation, because they are single storey buildings with a big roof space. “And secondly the energy consumption by grocers is huge, because of the cold storage,” says Wilkinson. “In an inefficient building, the energy consumption is getting on for 600 kilowatt hours per square metre per year.”
Rooftop solar PV can generate about half of that – in theory. In practice, supermarkets need power when solar is not generating and might not need what is being generated sometimes, for example on a sunny Sunday afternoon. Wilkinson says: “A challenge for us is to work with tenants to understand how they can maximise onsite power use. Moving heating from gas to air source heat pumps is a major win, especially for older buildings. In a best-case scenario, the stores can use 80% of what is generated onsite.”
The next stage is to alleviate heat loss from fridges and freezers, which can be as much as 70 kilowatt hours per square metre per year. Wilkinson believes the long-term solution will be for the landlord to provide energy-efficient cold storage as part of the lease contract.
There is also a challenge in asking tenants to renegotiate their energy contracts, which are typically signed with a single power company for a large portfolio of stores. “Entering into energy contracts with us as opposed to a single agreement is operationally more of a hassle for them, but they see it as a winning point because it is a good story for their customers and they have their own ESG requirements,” says Wilkinson.
Car parks are an obvious location for solar PV and there is German legislation demanding it, which has been largely ignored. “The problem is that tenants do not like anything which obscures view of their stores and branding from the road and street level.,” says Wilkinson. “Nonetheless we are working on it and plan to have 80% of our car parks covered by 2042.”
Battery storage forms part of the plan to maximise onsite power use, however the problem with this is large batteries of the type needed cannot hold power for long, certainly not long enough to run fridges and freezers overnight. In order to use more power onsite, Greenman is installing EV chargers which work well with battery storage. “The more energy we use on site, the better. If we sell it to the grid, we get seven cents per kilowatt, but we get twice that from the tenant,” says Wilkinson.
He predicts that the intersection of real estate and energy will become more and more important. “There is going to be a very big business around owning the ability to generate renewable energy in real estate.”
Vertical farming has been touted as a solution to the conundrum of consumer desire for fresh produce all year round and the need to reduce food miles. It has proven a difficult and expensive business thus far, however structural trends in urbanisation, population growth and a growing middle class in developing nations support its long-term potential.
Greenman has a vertical farming subsidiary, Potager Farms, and will develop the concept at a number of its stores. “We are working with a few tenants to see what we can do to grow locally out of season and help with their Scope 3 emissions,” says Wilkinson.
He believes the real future of vertical farming could be somewhere different, however. “In the long term, where it's really going to be successful, is not at the grocery store, where we're trialling it at the moment, it's going to be in the distribution centres. You can grow incredible amounts of vegetables in a relatively small area, more than one tenant can sell in a day. Whereas if we were to place a vertical farm inside the distribution warehouse, where their lorries are distributing to 10- 20 different stores in a day. That's where scale meets demand.”
As part of its Net Zero journey, Greenman has pledged, wherever possible, not to demolish any of its buildings, instead: “We will repurpose them. So vertical farming might take up first floor units that will never be rented to a retailer. Or an area of car parking that's not required.”
The final part of Greenman’s sustainability plan is to invest in food-linked social projects, which will meet the coming commitments for Greenman OPEN, which is set to convert to become an Article 9 fund. Wilkinson says: “We in the process of converting our open-ended fund into an Article Nine fund, so we will commit to social activities and enabling activities education on solar, food and nutrition. We are going to commit about 0.5% of NAV per year to these initiatives, which doesn't sound much, but the NAV is more than €700 million, so we can do something material.”
The importance of sustainability alongside wellbeing in the workplace has taken centre stage over the last few years, and as our understanding of how buildings impact both climate change and our health grow, so does occupier demand for better spaces in this regard. As a result, developers are pouring more resources than ever before into creating high performing, welcoming and supportive environments.
There is a commercial angle here too. Investors and developers are benefitting from the link between wellbeing and sustainability and real estate asset value, in both leasing and sale terms. These facets of a development are now essential to attracting investment and occupiers as well as maximising longevity and sustainability.
Occupiers and indeed their employees have been a major driver in this process. They are increasingly more rigorous in assessing the buildings they occupy and are demanding the highest ESG standards and flexibility to provide an enhanced experience. A range of multi-use spaces that can cater for everything from private work to relaxation and collaboration, including access to nature, are now a prerequisite.
It’s not just about amenities either. Employers have embraced their pastoral role and want their teams to feel cared for, with a sense of belonging and community and a focus on their physical and emotional wellbeing. It’s important for retention and attraction, but also for their employer responsibility and brand reputation. Employees in turn want to be inspired and encouraged to go to the office.
That said, while we are seeing a lot more businesses commit to wellbeing and sustainability targets, there is still a lack of creative expertise and knowledge; however, we expect this to change with rising understanding and adoption of smart technology, real-time data use, efficient heating solutions and biophilia.
Our 150,000 sq ft 11 Belgrave Road redevelopment in London Victoria is a good example of what a workplace of the future will look like. What does this mean in practical terms? The process of making improvements to sustainability and wellbeing is a hugely detail-led approach. Measures like preparing building materials off site, prioritising non-toxic materials such as timber and stone, as well as low carbon concrete and steelwork, all reduce an asset’s carbon footprint.
Next, the internal environment. Intelligent heating and cooling systems deliver thermal comfort alongside huge reductions in peak demand. Measures like passive ventilation remove fine dust along with carbon filters to remove carbon dioxide and, together with display screens to inform occupants of energy use, empower occupants to better manage their own carbon footprint while creating a better work environment. Tuning a building’s indoor LED lighting to circadian rhythms as well as adjusting the natural colour temperature of any particular time of day also keeps occupants comfortable.
Biophilic design is also key. We have a 2,600 sq ft garden on the ground floor of 11 Belgrave Road – re-assigning prime lettable space like this would have been unheard of, but it’s made our scheme more health and sustainability conscious. Pollution-filtering plants, such as ivy, contribute to the removal of toxic pollutants while helping to regulate indoor building temperature.
Finally, placing workstations in proximity to windows or an atrium will improve lighting, and with smart lighting and solar controlled glazing, can optimise energy savings while improving occupier wellbeing.
Technology like smart apps can also optimise digitally-enabled services to tenants, such as bike booking and charging along with smart lockers at on-site gyms, both reducing the individual carbon footprint of visitors, while also supporting them in their fitness goals.
Apart from higher asset value, better performing buildings are inherently more future-proofed and ready for regulatory changes. They will be at the forefront of the workplace revolution and drive environmental and social value too, ensuring the real estate sector plays its part in a more sustainable world for generations to come.
Ilyas Aslam is chief operating officer at real estate private equity investment and advisory group Quadrum.
More than nine out of ten (93%) of global institutional investors actively consider ESG and sustainability in their real assets investment decisions, according to new research from Aviva Investors.
A further 17% consider ESG and sustainability to be critical factors in investment decision-making, the UK investment manager’s Real Assets Study found. The report canvassed views from 500 institutional investors around the world, representing more than $3.5 trillion in assets.
With half of institutional investors having a net zero commitment in place, the study found 28% of respondents allocate to real assets to capture its positive ESG impacts, compared with 17% three years ago.
Daniel McHugh, chief investment officer, real assets, at Aviva Investors, said: “Whilst concerns about high valuations feature prominently in this year’s responses, just 22 per cent of institutional investors see climate-related obsolescence as the most material risk.
“Currently, capital pricing models do not adequately capture new factors such as this in their numbers, which carry material risk for investors. That has to change. As the market looks at assets through a net-zero lens, even prime assets could become vulnerable. Investors must be alive to how quickly – and to what extent – obsolescence could accelerate and the potential impact it could have on portfolios.”
Aviva Investors found 67% of institutional investors feel they have a responsibility to invest sustainably. However, more than three-quarters (79%) favour a fund or strategy that prioritises financial returns whilst integrating ESG factors.
Respondents consider greenwashing the biggest material risk (52%) to investment in sustainable real assets, ahead of concerns over valuations (44%).
The real estate industry is wasting time on debating reporting and data auditing instead of acting to improve buildings, claims the head of sustainability for Allianz Real Estate.
“I understand there is a risk of greenwashing, but currently we are wasting too much time with proving we are doing the right things – with debates over reporting, auditable data and standardisation – instead of doing the right things”, Raphael Mertens, chief sustainability officer for Allianz Real Estate, which has €91.3 billion ($98.82 billion) of assets under management, told AsianInvestor magazine.
Time which should be spent on improving buildings’ sustainability was being wasted due to a focus on getting auditable data on emissions, he added, saying that he spent a lot of time talking to regulators and auditors about data harmonisation.
Mertens also said asset owners needed to accelerate tenant engagement if they wanted to achieve their sustainability goals.
Grosvenor has helped 28 small and medium sized companies to commit to Science Based Targets for carbon reduction.
The property company’s UK arm established a free mentoring programme to help suppliers with fewer than 500 employees map and reduce their own carbon footprint. Now 28 firms are on the pathway to recognition by the Science Based Targets initiative SBTi).
They will boost the current total of only 140 UK SMEs which have validated near-term targets with the SBTi. Companies assisted by Grosvenor include architects, building surveyors and contractors, security, recruitment, construction and maintenance firms.
The programme will support the companies in abating an estimated 55,000 tonnes of carbon by 2030.
Victoria Herring, sustainability programme director, Grosvenor, said: “Our SME partners are incredibly supportive of our environmental ambitions, but they don’t have the resources of larger businesses. Transformative partnerships are a key part of our own net zero ambition. And, as a critical part of our supply chain we created this programme to help SMEs on their journey but also to support them in remaining competitive with clients.”
“The response has been fantastic and we’re proud to be contributing significantly to the number of SME’s with Science Based Targets. We’ll be looking at how we can expand the programme to support other parts of our value chain.”
Sam Field, director, Murray Birrell Chartered Surveyors – the first SME from the programme to achieve a validated target - said: “As a busy SME with limited resources and lack of designated qualified manpower in this discipline, Grosvenor’s initiative has enabled us to commence our pathway to achieving net zero.
“The scheme has provided us with the calculation tools, support, and motivation to measure our baseline and to create an action plan for moving forwards towards our target.”
Grosvenor now plans to expand the initiative, most likely to its tenant base. The company has more than 1,000 tenants across its Mayfair and Belgravia estates in London, two-thirds of which are SMEs.
Wesley Ankrah has joined Savills Earth as social value director.
Ankrah joins the broker’s specialist energy and sustainability division from Dominvs Group, a UK real estate developer, where he led a social value team which delivered social and community value projects and strategies for projects in the City of London, Nine Elms, Stratford and Enfield.
Prior to Dominvs, he founded SeerBridge, a social value and community benefit consultancy which worked with clients such as housebuilders Berkeley, Bellway and Galliard, and The Earls Court Development Company.
David Jackson, head of Savills Earth, said: “Wesley has industry recognition for his work in social value and we are delighted to welcome him to Savills Earth. His appointment will bolster our ability to ensure social value is embedded in projects from the earliest stage and thereby optimise the benefits derived from the S of ESG.”
Ankrah was awarded Social Value Creator of the Year at the inaugural 2021 Real Estate Investment & Infrastructure Forum.