Decarbonising Apac’s real estate sector

Tighter building standards and demand for more sustainable buildings present opportunities for investors

Achieving net-zero carbon in real estate partly depends on the efforts of real estate owners, but is also significantly influenced by the energy mix for electricity generation in each country.

In Asia-Pacific, the building sector accounts for between 14% to 33% of direct and indirect CO2 emissions from usage of energy and heat.

According to the International Energy Agency, aligning the building sector to the decarbonisation targets in 2030 and 2050 requires a combination of measures. These include improving access to renewable energy at both the energy grid and building level as well as undertaking efforts to improve buildings energy performance.

Governments are expected to continue to play a pivotal role in decarbonising the energy grid, which real estate owners have little direct control. Eventually, the power grid will need to evolve so that renewable energy generation will play a more important role in the future.

C40 cities

The C40 cities initiative is a major network of global cities that aims to halve the emissions of its member cities within a decade.

Out of the C40 cities, 23 cities have signed the C40 Net Zero Carbon Buildings pledge, committing to adopt regulations and planning policies to ensure that new buildings are net-zero carbon by 2030 and all buildings by 2050.

In Asia-Pacific, C40 signatories include cities such as Tokyo, Sydney and Melbourne. On the real estate front, efforts to decarbonise buildings by reducing the use of gas and fossil fuels for heating systems are underway. In addition, building owners are increasing the use of renewable energy through on-site and off-site renewable energy procurement.

In Australia, the National Australian Built Environment Rating System (Nabers) for emissions factors recently announced changes that buildings that still use a high proportion of gas will see a reduction in Nabers Energy star ratings by 2025. In addition, access to green finance in Australia would require buildings to achieve at least a 30% of reduction in emissions or at least a 4.0-star Nabers energy rating within five years.

In Singapore, existing buildings will need to meet higher minimum energy efficiency levels or building energy performance to be certified green under the new BCA Green Mark 2021.

From 2022 onwards, the minimum energy savings improvement will be raised from 25% to 40% compared with 2005 levels. On the financing front, major banks in Singapore have committed to limit new loans for polluting sectors including upstream oil and gas as well as coal.

In Japan, conformity to energy conservation standards under the Building Energy Efficiency Act currently limited to non-residential buildings with a floor area of 300 square metres or more, will be mandatory for all new residential and non-residential buildings from 2025 onwards. In addition, the use of renewable energy will be mandatory in Tokyo including the installation of solar panels for new houses.

The inclusion of on-site instalment of renewable energy will also become necessary in cities such as Seoul, where solar power will be required on new buildings from 2023 onwards.

Major countries in Asia-Pacific including China have gained a total of 19.5 points due to the widespread comprehensive implementation of appliance standards and labelling programmes, as well as mandatory building energy codes for new houses and public buildings.

Investor focus

From an investment strategy perspective, the tightening of building efficiency standards, as well as shift in occupier demand towards more sustainable buildings presents a clear opportunity to refurbish existing, well-located, grade B stock in markets with low vacancy.

Aligning real estate investments with more sustainable building standards supports the needs of occupiers’ demand and reduces the risk of obsolescence while potentially increasing the liquidity of the real estate investments at exit.

Apart from energy monitoring, health and wellness of employees have also been a top priority for occupiers post pandemic, particularly good indoor air quality and the need to reduce airborne infections and pollutants.

As highlighted by the 2023 Honeywell Healthy Buildings Survey, more than 93% of the surveyed employees had higher expectations for indoor air quality in their workplace than they did three years ago.

Given the greater emphasis on health and wellness, real estate owners could expect to see more focus on asset level data from investors, including performance on indoor air quality.