With the construction and operation of real estate estimated to contribute 40% of total greenhouse gas emissions globally, designing more environmentally friendly buildings and retrofitting existing assets to improve their energy, water, and waste systems has long been a push for the industry, with BREEAM and LEED both nearing their third decade. However, achieving buy-in from landlords has long centered around the premise that energy efficiency improvements would lead to decreased running costs for the building and a saving for the tenant that could justify a higher rent. The data around this has been mixed, with some studies demonstrating a lower running cost for the asset, while others showing a higher running cost, though still more than offset by higher rental returns. It is important that investors view improvements to the resource efficiency of assets not only through the lens of achieving higher rents, but also the potential downside risk of inaction.
While there are not yet any global in-use building certifications that have widespread adoption, the example of NABERS certification in Australia, launched in 2005 and now an implicit requirement for assets to be lettable, demonstrates the potential power of such tools. In the case of NABERS, a combination of tenant- led demand and required reporting for certain assets has led to widespread adoption of the certification. In other markets, for example the UK where buildings with Energy Performance Certificates (EPCs) below an E rating will be unlettable past 2020, uptake may initially be regulation-led.
In Europe, BREEAM in-use certification is becoming increasingly more popular, and investors should carefully consider the risk of waning tenant demand for assets that do not meet environmental impact benchmarks, rather than expecting a price premium.banks begin to offer discounts
The cost of such improvements can also be mitigated through products such as ‘green loans’, as banks begin to offer discounts on financing where the borrower commits to delivering environment- linked improvements to the asset. Lloyd’s Bank in England, for example, has introduced a 20bp margin discount for such cases, to promote sustainability. ‘Green bonds’ are also a growing option. While a small proportion of overall public bond market at less than 2%, annual green bond issuance is expected to reach $1trn USD by 2020, and to date most issuances have been oversubscribed. With a large market of investors looking to improve the ‘green’ rating of their portfolios, these offer landlords a way of financing such capital expenditure at an attractive rate.
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