COMMENT It is difficult to pinpoint a specific factor as the catalyst for the net zero carbon revolution unfolding across the global real estate industry. Strong leadership by a forward-thinking cohort of real estate owners and managers, clear signals from capital allocators and work by various industry bodies coming to fruition have all played a role. Against the backdrop of a society coming to terms with the fact that the way of the past is not the solution for the future, the result has been a ripple effect driving net zero across the industry.
The early movers are now well down the road of understanding the costs and practical implications of transitioning their portfolios, typically enabled by detailed modelling at the asset and portfolio level. Increasingly, their focus is on ensuring that these insights translate into practical steps that re-align investment decision processes. Key themes include the drive for whole building data, understanding embodied carbon, acquisition due diligence that considers net zero, and making a building’s net zero pathway a tangible factor in OPEX and CAPEX planning. Other areas appear slower to evolve, such as the changes to lease terms likely to be required and clear net zero rules for fit-out and refurbishment.
Away from the market leaders, a large swath of the industry has yet to understand the concepts involved and accept that the transition to net zero is inevitable. The realisation that prospective buyers will look less favourably upon assets that fail to demonstrate progress towards net zero is emerging as a great motivator.
The challenges the property industry will need to overcome are abundant, but one of the most significant is the risk of confusing the audience. A fantastic amount of effort continues to pour into building our understanding of net zero, but therein also lies the challenge.
At last count more than 20 different definitions already existed in the market. The sheer number makes for a convoluted landscape and there is a risk of unintended consequences if definitions were to be applied out of context. Overemphasis of operational carbon versus embodied carbon, for example, could lead to strategies biased towards redevelopment over preservation, resulting in a net increase in carbon.
Defining the issue
What is lacking is a universally accepted certification or definition of what a net zero building constitutes. This would also help to create a strong and discernible link between net zero carbon and commercial performance. While variation by sector and geography makes this hard to achieve in practice, much more work is needed to help decision makers navigate this challenging landscape.
There is, however, no shortage of “no-regrets” actions for property owners to help future-proof their assets:
1) Understanding whole building performance. Regardless of final metrics used, the ability to understand energy use intensity at a whole building level will be an inevitable requirement of net zero carbon. This means putting strategies in place to obtain tenant directly procured energy data, preferably via automation. Delineation of energy use according to landlord and tenant responsibilities is also critical to produce agency.
2) Optimise asset performance. A good place to start is with energy efficiency. Even if a strategy based solely on consuming renewable energy was to be acceptable, the size of the problem to be solved reduces with every kWh saved. Reducing energy consumption in the first place will be critical to ensuring we have sufficient low or zero-carbon electricity to meet our global needs.
3) Develop pathways. It is essential to develop an understanding of the likely cost and practical implications of transitioning to net zero over time, both at the individual asset and at the fund/portfolio level. We typically model this in five-year blocks to match the known opportunities for intervention (eg, lease events, plant replacement) and asset/fund strategy. The longer-term goal then becomes to track delivery against pathway.
4) Investment decision processes. For those who have not yet started to do so, it will be key to consider how net zero considerations will need to impact decision processes, such as acquisition and disposal, development/refurbishment briefs, and outsourcing requirements.
While a complex set of challenges will need to be overcome at an industry, country and global level, the steps that real estate owners and investors need to take are relatively clear. Against the backdrop of significant expected increases in the price of carbon over the next decades and greater focus from policy and capital allocators on ESG and carbon performance, the direction of travel is forward and early action is likely to be rewarded.
Andries van der Walt is director and head of real estate at Verco
