China property’s sustainability drive has historically focused more on energy intensity and indoor air quality, and with some success: energy intensity from space heating in northern China, for example, decreased by 17 percent between 2008 and 2017, and the central government announced new goals in 2020 for 70 percent of all new buildings to be green certified by 2022. But if the sector is to contribute further to the country’s 2030 peak carbon and 2060 carbon neutrality targets, and to global efforts to reduce carbon emissions, emphasis must also include tackling embodied carbon associated with building construction.
Recent years have seen severe financial stress in China’s property development sector with reports of 274 bankruptcies in the first half of 2019 and 228 in H1 2020. The government has sought to address this with restrictions on the level of debt that developers can take on. And this changes the business model for real estate.
Developers are likely to reduce the pace of expansion and put more emphasis on higher quality new build, such as green buildings, and on property management services. Several have already spun off their property management arms, with IPOs raising $5 billion in 2020, more than in 2019 and 2018 combined, according to Nikkei Asia.
These changes tie into the market for green capital. So far, green buildings have been underexplored in China’s rapidly growing green bond market. Climate Bonds Initiative’s data show that the building sector accounts for only 6 percent of green bond issuance in China, compared with 30 percent internationally.
In 2020, China issued new guidance on “Promoting Investment and Financing to Address Climate Change” and saw an increasing number of its investment managers and asset owners sign up to the UN Principles for Responsible Investment. Property firms with first-tier credit ratings that are leaders in sustainability are poised to raise new green capital with this increased interest from domestic investors.
Green capital can also be deployed in renewable energy. China is by far the largest investor, producer and consumer of renewables. One in three solar panels and wind turbines in the world are in China. But to reach carbon neutrality, China must double its annual investment in solar and triple its investment in wind. Renewable energy provided 7.5 percent of the total energy used in buildings in 2019 and the government would like to grow this percentage.
Pricing trends support this. Data from the China National Renewable Energy Centre show that in 76 cities, the price of solar power is now equal to or below that of coal-fired power.
The collection of transparent and consistent environmental performance data by the industry will better activate the financial lever of this push to transform China’s real estate industry, as investors and lenders look toward fulfilling their own carbon and other sustainability performance targets at the portfolio level.
To that end, improved transparency from highly anticipated sustainability disclosure rules on Shenzhen’s and Shanghai’s stock exchanges could give an added boost to government green building policy. This in turn would increase the industry’s chances of meeting China’s carbon-peaking timeline.