EU Green Deal – real estate assets face stranding risk

Portfolio managers will need to aggressively decarbonise their European real estate investments this decade if they are to stay aligned with the EU’s Green Deal carbon dioxide emission targets.

Signatories to the 2015 Paris Agreement committed to limit global warming to 2° C, and preferably 1.5° C. To reach those goals, the Carbon Risk Real Estate Monitor (CRREM) set out greenhouse gas (GHG) intensity reduction pathways that the different property types will need to take. A GRESB sample that aggregates the performance of more than 8,700 commercial properties across the EU and UK suggests that, on average, assets risk becoming stranded around 2027 under the CRREM’s Paris-aligned 1.5° C pathway without further substantive action. On the 2° C pathway, stranding would occur approximately 10 years later. The sample comprises retail (high street, warehouse and shopping centre), office, healthcare, hotel, industrial and distribution warehouse and lodging, leisure and recreation assets.

Real estate asset performance varies

The real estate industry as a whole is responsible for 38 percent of energy consumption and 29 percent of greenhouse gas emissions in Europe. Cutting these figures will be vital if the European Union is to meet its 2050 net-zero carbon target. But achieving the necessary reductions requires massive change and investment. Some real estate assets will find it easier to make progress than others. Becoming carbon neutral relates not only to operational carbon emissions, but also to the emissions stemming from the building materials used and the construction process, Lisette van Doorn, chief executive of the Urban Land Institute Europe, observes. Therefore, although still complicated, achieving full lifecycle carbon neutrality is easier for new construction since the building design can be as efficient and optimised as possible, she says. “However, existing buildings must work harder to achieve carbon neutrality due to building-specific challenges such as equipment retrofit feasibility and payback period, roof capacity for renewables and tenant coordination.”

Given that the construction-related emissions have already been expended, refurbishing an existing property is usually preferable to building a new one. Nevertheless, some old buildings and those with energy-intensive equipment, such as data centres, will struggle to cut their usage sufficiently to ever reach zero carbon emissions. In terms of sectors, Van Doorn notes that commercial real estate has made more progress than the residential segment. “There is more pressure from regulators, investors, tenants and communities for the commercial sector to decarbonise,” she explains. “At the same time, ownership in the residential sector is scattered across many individual homeowners, who also don’t operate their homes in a commercial way.”

Different property types have different characteristics, such as their energy mix
Erik Landry, Climate Change Specialist at GRESB

“Different property types have different characteristics, such as their energy mix, and therefore should be benchmarked against different targets to comply with the 2° C targets,” Erik Landry, climate change specialist at GRESB, explains. Despite having the lowest GHG intensity baseline, distribution warehouses in the EU risk becoming stranded around 2035, Landry observes. Shopping centres and high street retail are, on average, forecast to become stranded even sooner, demanding swift and comprehensive action if they are to stay aligned with the Paris goals. Healthcare assets in the GRESB sample have the longest stranding horizon, of around 2040.


Pressure to change

Stranded asset risk, resulting from tighter requirements around buildings’ sustainability performance, is a key consideration for institutional investors. “More than ever, investors are asking detailed questions around environmental sustainability to the managers they are investing with, and building decarbonisation into their portfolios,” Van Doorn says.

Large institutional investors, such as insurer AXA and Dutch and Danish pension funds ABP and ATP, are progressively screening their investments in line with ESG taxonomies, piling more pressure on real estate investment managers, developers and owners to green their portfolios. The European Commission’s Green Deal and reforms to the Dutch pension industry – the largest in the European Union and fourth biggest in the world – will further drive allocations to assets with higher ESG scores, investment specialists at an AXA Investment Managers roundtable argued. Regulation and political commitments are another spur. “For example, in the Netherlands, as of 1 January 2023 office buildings need to have a minimum energy certification before they can be let,” Van Doorn notes. 

Action to avoid stranding

The question is how to prevent assets becoming stranded. Adopting GRESB reporting to measure and understand real asset performance progress is one aspect, Landry says. The focus is then on reducing energy consumption, promoting energy efficiency and procuring renewable energy.

“Off-site renewables are the most effective in terms of scale,” Van Doorn notes. “By utilising a solution that can be applied across an entire portfolio, it’s possible to achieve a greater degree of carbon reduction at a faster pace.” However, not all renewable energy is equal, Landry emphasises. “So it matters where you obtain your energy from, including whether it is generated on-site or off-site, and taking things like grid proximity into consideration.” How a building is used, and whether you can get more use out of it, will be important. As is engaging with tenants on how much energy they consume and collecting their data.

“Asset managers and landlords need data to understand how their buildings are performing,” Landry says. “In many cases, that data belongs to the tenant and is unavailable to the landlord. Tenant engagement can be a powerful mechanism to access that data and help facilitate best practices in energy use and thus GHG emissions.” Managing refrigerants in cooling systems to contain “fugitive emissions” from leakages or end-of-life retirement – a GHG source that may not be accounted for in the daily monitoring of asset performance – will have an additional impact. Tackling embodied carbon – which stems from non-operational phases such as material manufacturing, transportation and assembly, and accounts for 11 percent of all carbon emissions worldwide – poses a particular challenge. According to the World Green Building Council, “upfront” carbon (the emissions released before a building or infrastructure starts to be used) will account for half of the entire carbon footprint of new construction between now and 2050. The Council is calling for all new buildings, infrastructure and renovations to have net zero embodied carbon by 2050, and for all buildings to be net zero operational carbon.

Only after efficiency-enhancing actions have been exhausted should industry players resort to carbon offsetting, Landry urges. “Some amount of offsetting might be required to get certain buildings carbon neutral, especially if we include embodied carbon, but in no way should it be used in lieu of these other operational actions.”


Progress by sector

Office, industrial/logistics and residential real estate are the most attractive investment sectors for institutional investors. Across these key property segments, initiatives and innovations are accelerating as industry participants address the greenhouse gas challenge.

Distribution warehouses have the lowest GHG intensity baseline in the GRESB scores. But the sector is expanding rapidly. CBRE’s EMEA Real Estate Market Outlook 2021 notes that growth in online retailing, accelerated by the pandemic, will continue to drive demand for logistics space in 2021. As the sector expands, so will the need to reduce facilities’ emissions.

Logistics real estate company Panattoni aims to generate zero carbon emissions by 2025. The firm introduced its Go Earthwise green solutions strategy in 2020 to embed energy saving solutions at the design and construction phase. Its policies reduce CO2 emissions by up to 230 tonnes per year for a 10,000 square metre facility. The Go Earthwise programme features larger green buffer zones at the entrance to buildings and a new-look façade, with a shell made predominantly of aluminium and glass in the office and social sections. Facilities have enhanced insulation in the roofs and walls to reduce emissions of exhaust gases and carbon dioxide, and generate up to 20 percent energy savings in heating the facility. All new-builds incorporate technologies such as automated electric energy management, heat recuperation in the ventilation systems and LED lighting, and have a minimum BREEAM Very Good rating. The majority also have LEED and DGNB certificates.

“In the UK, all buildings from now on will have all electric heating and cooling, roof-mounted photovoltaic installations to offset 10 percent of regulated energy use, rainwater harvesting for toilets, intelligent LED lighting internally and externally, super airtight buildings and 15 percent roof lights to the warehouse,” Panattoni CEO Robert Dobrzycki says. 

In the UK, all buildings from now on will have all electric heating and cooling, roof-mounted photovoltaic installations to offset 10% of regulated energy use.
Robert Dobrzycki, Panattoni CEO

CIT and Foster + Partners’ planning application for London’s first ever net zero carbon workplace and commercial hub at Colechurch House by London Bridge is a sign of things to come. The planned development will replace a 1960s office block with a mix of affordable workspaces, shops, a restaurant, public park and new home for Southwark Playhouse Theatre. The building façades will incorporate solar shading, ventilation, light shelves, water catchments and photovoltaics. The scheme is topped by landscaped roof terraces, with passive ventilation “chimneys” that pull fresh air into the offices.

At Union Investment Real Estate, the company’s carbon neutral ambitions extend across its entire international portfolio of approximately 400 properties. Through its Manage to Green strategy, Union Investment aims to boost sustainability and carbon savings both for new, highly-efficient buildings and existing stock, making them all climate neutral by 2050.

The challenge is to manage this goal in a large, complex, international real estate portfolio. “It’s been shown that existing instruments (e.g. green building certificates) are not sufficient to bring about the transformation of real estate portfolios,” Jan von Mallinckrodt, Head of Sustainability at Union Investment Real Estate, says. “Union Investment developed its own ‘atmosphere’ scoring model in 2019 for this purpose. The advantage over existing instruments is that it enables portfolio holders to derive concrete measures for achieving the climate path and thus the necessary transformation.”

The “ECORE” initiative – which scores properties from 0 to 100 based on three clusters: governance, consumption and emissions, and asset check – is supported by over 50 portfolio holders and seeks to build on the atmosphere system and create an industry standard, Von Mallinckrodt notes. The scores show where a property or real estate portfolio is in terms of ESG, and identifies potential measures to achieve the corresponding goals. “The open-source ECORE scoring model provides a roadmap detailing which measures can be used to achieve the respective ESG goals, and thus has a concrete benefit for every portfolio holder, investor and user,” Von Mallinckrodt says. “It makes sustainability performance comparable within the respective peer group and highlights topics that portfolio holders can really influence.”

Where possible, Union Investment is also optimising energy procurement. The common areas of its buildings in Germany, Austria, France, Poland, Sweden, the United Kingdom and more recently the Benelux region have now switched to sustainable energy sources, bringing significant reductions in the properties’ ecological footprint. “It would be even more effective if the tenants also purchased green electricity, but this is not within the decision-making authority of the owner,” Von Mallinckrodt says.

Among residential sector investors, ESG strategy has become “more important” or “significantly more important” in the last five years for 85 percent of respondents in a recent Savills survey. Bouwinvest Real Estate Investors, the largest residential institutional investment manager in the Dutch market, is working with sustainability consultant INNAX to develop a roadmap for making its entire portfolio – which also comprises offices, retail, hotels and logistics – carbon neutral no later than 2045. The roadmap sets out the steps its funds need to take at both a portfolio and individual building level to maximise energy efficiency over the coming decades.

Data collection is an important part of Bouwinvest’s plan to green its portfolio. Through the data, Bouwinvest can assess the features of each building and its energy efficiency, and determine how to cut energy consumption and carbon emissions. The firm has already reduced the energy consumption of its funds by between 20 and 25 percent since 2012. The next steps towards net zero carbon will require more capital investment, which will be guided by medium-term roadmaps.

Title image: Getty Images

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