Despite the recent hurdles that have been thrown at Build to Rent and the overall property industry, developers and investors are still moving towards a more ESG-friendly and sustainable future, according to M&G Investments.
However, challenging economic conditions could slow progress, therefore increased integration between asset management and ESG teams is imperative.
Meeting net zero targets begins with detailed audits of existing portfolios to develop decarbonisation pathways.
Designed to identify assets that are at risk of becoming significantly devalued or ‘stranded’ without investment, these pathways inform decisions about the most effective, feasible course of action.
Determining where and when to allocate capex is often based on the cost and time involved in implementing a particular measure.
Equally, investing in a building that is unlikely to need alteration in the next 15 years could be more cost effective than ploughing capital into one that will require a large-scale retrofit in five years’ time.
“ESG can’t be a ‘tag on’ factor anymore; it needs to be properly integrated into how buildings are managed and how lease events and negotiations happen. Ideally you want a program of improvement initiatives that can happen in and around a tenant’s occupancy. That might mean working creatively with the space by condensing occupancy from three floors to one, for example, while work is carried out on those levels. Or lighter touch works like lighting upgrades, which can have a significant impact without heavily disrupting tenants.
“Where it gets tricky is when major works such as insulation, heating and cooling upgrades are required. These works can make a building inoperable and may only be possible when a building is up for vacant possession. That’s where understanding the sort of lease, the timing of the lease, and the longer-term plan for the building is important. ESG can’t be a ‘tag on’ factor anymore; it needs to be properly integrated into how buildings are managed and how these events and negotiations happen.”
Laura Jockers, Global Head of ESG, Real Estate, M&G
With less available capital and higher construction costs, financial viability is more challenging in the current environment; yet impetus for asset repositioning is gaining.
M&G Investments shares that more stringent regulation will require some investment to keep buildings in line with EPC standards for example. However, demand continues to rise for green buildings from occupiers and investors.
“We’ve seen a sea change in thinking, from ‘location, location, location’ to ‘location, specification and sustainability’. Initiatives that represent low hanging fruit are unlikely to be a problem; the big decision point is whether to invest heavily or not.”
Laura Jockers, Global Head of ESG, Real Estate, M&G
These decisions will be based on several factors including the investment proposition for the asset, and whether a building has reached a point in its lifespan where equipment needs recommissioning or replacing.
ESG benefits are part of that, by virtue of higher specification kit for example. Despite this, ESG costs won’t be the tipping point for whether large-scale retrofits happen or not.
“The cost of implementing green measures is increasingly seen as an investment rather than a cost as it ultimately creates an asset that is lettable, and less likely to depreciate or face obsolescence.”
Laura Jockers, Global Head of ESG, Real Estate, M&G
In the near term, M&G Investments says that the focus is likely to concentrate on measures that target maximum energy savings for least cost.
“If we’re looking at 2050, every building will need to be addressed. But if we’re looking at the next ten years, targeting maximum energy savings for least cost will get the real estate industry on the road.”
Laura Jockers, Global Head of ESG, Real Estate, M&G
This is an equation of costs versus potential energy savings, the change in a building’s energy use intensity, and the long-term benefits of shifting to renewable energy systems and electrification of buildings.
Typically, the deeper the retrofit, the higher the cost – but also the higher the energy savings. However, aiming for measures that deliver the lowest cost per kilogram of CO2 saved could be more viable.
While economic fundamentals are more challenging, regulation is non-negotiable and tenant demand is rising for energy efficient buildings with lower running costs.
“This will require a greater level of integration between asset management and ESG teams to make the most of every possible opportunity to make a green improvement without incurring additional work or disruption to the tenant.”
Laura Jockers, Global Head of ESG, Real Estate, M&G
Maximising asset management strategies is therefore key in achieving progress in the current environment.
