The race to achieve carbon net-zero by 2050 requires urgent action to be taken by real estate investors and lenders, according to the expert panel on a recent webinar hosted by FinLoop.
The provider of software solutions to the real estate debt market had assembled the group of specialists to discuss the complexities of carbon capital expenditure for those grappling with the challenges faced by the European investment market.
Outlining the scale of the problem, Adam Mactavish of Currie & Brown shared data on the expected level of costs associated with upgrading different types of property assets.
Drawing on the work he had done on behalf of the Investment Property Forum, he said that, depending on the individual asset, costs to upgrade energy efficiency on a property of between £50-£250 per sq metre should be expected. This, he suggested, would be best done at the end of a lease as part of a general refurbishment. However, he warned that such expenditure would be in addition to the cost of more general works and dilapidations. He also suggested that a 10–15-year plan should be put in place for each asset and that it was vital to action this as soon as practical rather than waiting until 2049.
One particular challenge faced by building owners, investors and financiers, was, according to Mactavish, that the energy ratings of individual buildings do not necessarily reflect the actual energy usage of a property's occupants. He stressed that actual energy use depends on factors such as density of occupation, the level of use of lifts and escalators, heating, ventilation, and air conditioning along with the amount of IT and other communications technology within a building.
Underlining this problem, Christine Fritz of PGIM Real Estate pointed out that EPCs differ from country to country. The difference in how they are reported makes a unified, international approach very challenging, adding that, as an investor, obtaining tenant data was the biggest headache.
According to Fritz, the realisation has dawned on the market that we are all in big trouble with a climate emergency looming and that there is not much time to fix it. She said that she felt that the sector is moving forward and maturing and hoped that the SFDR taxonomy being introduced would give the sector further impetus.
The uncertainties around the practical application of the E-taxonomy across the industry to date, along with the lack of sufficient data, were also highlighted as practical obstacles by Andreas Wuermeling of Deutsche Pfandbriefbank (PBB). He spoke about the green loan and green bonds program that PBB has launched, its decarbonization initiatives and an analysis of the level of sustainability of the bank's entire loan portfolio, with a score for each asset against factors such as energy consumption, sustainability certificates and soft factors like proximity to public transport.
The bank's principal focus is working with borrowers on plans to upgrade assets. It proactively starts discussions on transitioning assets to become green, looking to provide capital where necessary. Wuermeling outlined the bank's targets on green asset ratios are one of the factors pushing the change. He also expressed concern regarding buildings that would become obsolete and, therefore, stranded assets.
Providing the views of an occupier, Sam Pilcher of Citi Realty Services, argued that the aim to be as energy efficient as possible needs to be balanced with the practicalities of the demands of businesses combined with the wellbeing of occupiers and staff. He revealed that Citi not only looks at carbon footprints and energy use but also at waste, water, health & wellbeing. At its Canary Wharf offices, Citi has modelled embodied carbon and the savings they can make by not replacing steel and glass and is also aiming to recycle materials on-site as much as possible. The lessons learnt will be applied at their other 650 buildings across Europe, Africa, and Asia-Pacific.
He highlighted that there is a need to address the constraints experienced in buildings with outdated plant and technology, with many buildings not designed for today's use. As an example, he highlighted the need to balance the demand for fresh air circulation in post-COVID offices with the often-inevitable higher demand and cost of energy.
Rupert Gill from BlackRock underlined the importance of refurbishment, stressing that renovation strategies over new-build strategies will be essential to combat embodied carbon and to help preserve the liquidity of assets in the future.
He argued that to remain lettable, liquid, and attractive, upgrades are essential to assets and further outlined that BlackRock will lend on brown assets, as there are still transition periods now to position assets from brown to green. He also highlighted that the market has only one or two upgrade opportunity windows left before assets will start to become stranded.
Speaking after the event, Nicole Lux of FinLoop said:
What is clear is that urgent action is needed. While the challenges that have been highlighted are generally around practicalities rather than financial challenges, it is the asset owners, investors and financiers that can drive the necessary change by ensuring that capital expenditure projects focus on achieving carbon net-zero targets.
While the complexity of occupancy and the divergent nature of buildings throw up many curveballs, it is essential for the planet that the real estate sector overcomes the challenges, by ensuring that every project it invests in or funds is ESG compliant and focused on sustainability issues, she added.