Ratification of the Paris Accord in 2016 created the path toward a global low carbon economy, and the real estate sector is expected to contribute to the project. The World Green Buildings Council has stated that all new buildings must be ‘net zero carbon’ by 2030 and all buildings by 2050. TH Real Estate’s global head of sustainability, Abigail Dean, considers the progress the sector is making to deliver this ambitious goal in the timeframe set.
PERE: Why is the zero-carbon economy significant for private real estate asset managers and owners?
AD: Regulatory changes are pushing us all down the zero carbon path. In Europe alone, we’re anticipating changes to building regulations, the wider rollout of the Minimum Energy Efficiency Standards and the introduction of carbon taxes. Public awareness of the issues is growing and businesses are expected to demonstrate environmentally friendly policies and practices. Swimming against this tide can cause reputational damage. It’s not a surprise that investors and occupiers are making sustainability a key factor in decision-making. Asset mangers must respond and establish a clear pathway toward ‘net zero carbon’ in order to future proof the value of their buildings: we can safely assume property that is not ‘net zero carbon’ will become less liquid and less attractive to tenants. They’ll start to lose value and ultimately become obsolete. This is why it matters.
PERE: How is TH Real Estate delivering on this ‘zero-carbon’ building commitment?
AD: We’ve publicly committed to reducing the energy intensity of our portfolio by 30 percent by 2030, which puts us well on the way to zero carbon. It’s important to establish specific targets for each property in the portfolio. For example, we’ve structured our portfolio into tiers and identified the buildings that require focus. And we’re trialing technologies in these buildings to ensure we achieve rapid carbon reductions. But our sustainability strategy has been in place for over a decade now, so we’ve already seen results in terms of reduced energy consumption and carbon footprint. Renewable energy is another important focus for us and we’re rolling out onsite renewables such as photovoltaics wherever possible.
PERE: To what extent are institutional investors driving the move to zero-carbon buildings?
AD: The articulacy of investors around sustainable issues has improved in the last decade. GRESB’s sustainability benchmark has transformed their attitude toward sustainability by fostering a better sense of its importance in the built environment and an understanding of the sustainable performance of one fund versus another. We’ve definitely faced increased investor pressure to report progress in the area. Dutch, Scandinavian and Australian investors are particularly proactive, setting ambitious goals to reduce emissions across their portfolios and they’re engaging with their asset managers around the proportion of energy generated from renewable sources. They want evidence that buildings are moving in the right direction toward zero carbon. Large institutional investors are able to set the tone, and while there’s less focus on sustainability in investment markets that are more fragmented and with smaller investors, it is generally becoming a factor in their interaction with us and a feature in allocation decision-making. They’re taking a long-term view and believe it’s important to the future performance of investments.
PERE: Are there specific challenges to achieving the ‘zero-carbon’ target?
AD: ‘Net zero carbon’ is not precisely defined for real estate. This must be addressed in legislation. There is a working definition; a building that is energy efficient and uses renewable sources, but it’s not clear to what extent that energy should be supplied from onsite renewables, near-site renewables or from a renewable grid.
“The articulacy of investors around sustainable issues has improved in the last decade”
It’s also difficult for the market to identify which buildings are more energy efficient than others and to isolate the exact element within a building that is improving sustainable performance. A compare and contrast exercise is not easy. The Energy Performance Certificate in the UK, for example, actually gives very little indication of operational energy efficiency. What’s required is an operational energy efficiency rating system in Europe. TH Real Estate is part of a group called Design for Performance that is seeking to bring the Australian NABERS-style operational rating system to the UK.
But sustainability is part of market expectation now and it shouldn’t be a challenge to justify the need to focus on it as a matter of importance.
PERE: How important is tenant engagement?
AD: A significant proportion of our tenants, particularly in the retail space, have their own direct energy contracts, which makes getting visibility of energy consumption and efficiency in tenant spaces more challenging. As asset managers, we need to consider whether to focus our efforts on driving energy efficiency in landlord-controlled spaces, like the general mall space, or how best to engage with tenants to access the information we need and work with them to set the appropriate efficiency targets. We are strengthening our tenant engagement platform to address these issues because we believe it absolutely makes sense to collaborate with them to help them meet their own carbon reduction goals. The industry cannot meet the ‘zero-carbon’ goal unless tenants are on board too.
PERE: Is utilizing the latest technology and data a critical part of the pathway?
AD: It allows us to optimize energy efficiency and monitor performance more easily. But the challenge for all owners is to keep up with the rapid pace of change and innovation. Buildings not incorporating the latest smart building and energy efficiency technology will risk becoming obsolete in the long term. The sheer volume of data can be overwhelming too, so it’s important to have good systems in place to manage this. Our global energy management platform is a powerful tool that allows us to monitor progress toward meeting targets and identify areas requiring more focus. We’re also looking at systems that offer a view on energy consumption on a real-time basis. For example, we’ll know when equipment is working too hard or not hard enough at specific times, and use that knowledge to shift toward a more energy-focused maintenance regime; so gathering intelligent information to inform the maintenance schedule.
PERE: How damaging is the US withdrawal from the Paris Accord?
AD: Obviously, the federal government’s position is disappointing, but as soon as the announcement was made, individual states – California, New York, Washington DC – and districts swiftly reaffirmed their own commitments to the Accord. And the development of legislation around energy efficient buildings continues to evolve at the state level. There’s legislation in New York, for instance, around energy labeling and introducing smart meters. The US business community also remains committed to meeting carbon reduction targets.
PERE: Will the private real estate sector meet the zero-carbon target by 2050?
AD: Sadly, it’s unlikely. But I think we can be optimistic that the sector will have made significant and meaningful advances toward energy efficiency and using renewable energy and lower carbon energy sources. Europe is already moving rapidly toward lower carbon electricity grids and in the last five years the UK has doubled its capacity to use renewable energy in its national grids. Similar developments are happening elsewhere in the world. So by 2050, the electricity used in buildings in many parts of the world will be low carbon and certainly technology is helping us all edge closer to the ultimate zero-carbon goal.
This article was sponsored by TH Real Estate. It appeared in the Sustainable Investing special supplement that accompanied the October 2018 issue of PERE magazine.