Scrutiny on sustainability in real estate is set to continue, meaning costly renovation is inevitable. But these costs are likely to pay off, both in terms of returns and impact on the planet, as sustainable property companies become more attractive to investors, the environmental impact is felt and connectivity improves.
Advantages in getting ahead
Mark Brennan, partner, Foresight
“Over the next 12 months we are likely to see a growing focus both from companies and investors on articulation and implementation of ESG and sustainability initiatives, and an increasing recognition that there will be a bifurcation of real estate companies that are either subject to additional cost, or who can leverage competitive advantage from market-leading practices. Portfolio allocators will increasingly focus on sustainability when considering allocations to alternatives, including real estate.
“A key challenge for market participants will be absorbing the costs associated with increased levels of environmental regulations and reporting. On the other hand, opportunities will be presented through reducing costs of capital, therefore attracting and retaining superior tenants on superior terms. The greatest changes in 2022 will be driven by the growing maturity of reporting, and increasing focus on capital market opportunities such as green bond issuance.”
Riding the renovation wave
Sara Bellenda, co-manager of the JPM Climate Change Solutions Fund
“Companies need to do more to decarbonise buildings. The challenge is the greater capital expenditure requirements but we see this as an opportunity, in particular in the commercial real estate space as improved assets may mean higher rents.
“We see opportunities in the context of the renovation wave as more companies announce ambitious renovations targets to reach net zero by 2050. They can get there by greater use of renewable energy, replacing oil-fired heating units with hybrid or electric heating systems and using existing and new technologies to connect and electrify the building.
“Because the grid is likely to be under pressure, companies such as Schneider or Eaton facilitate the upgrade and resilience of the grid, making the entire built environment connected and electrified.”
Loyalty pays off
Jake Moeller, senior investment consultant, Square Mile Investment Consulting and Research
“Commercial property (CP) funds may be in a state of limbo given recent liquidity challenges and the implications of the Financial Conduct Authority’s (FCA) long-term assets review in the UK. Yet for those investors who have remained loyal to the asset class, decent returns are still available. Square Mile’s two rated CP funds (L&G UK Property and Janus Henderson UK Property) have returned 12.7% and 10.7% (YTD end November 21) respectively against the IA sector of 6.9%.
“These funds are being managed prudently, have avoided areas that have been hit hard by Covid-19 such as retail and shopping centres and they contain quality, well-tenanted assets. Despite being subject to Covid headwinds, rental collections have remained strong, and they offer good diversification, manageable lot sizes and are maintaining liquidity.
“With sustainability being such a high consideration for investors, the opportunities in commercial property are considerable. Global real estate assets contribute 40% of total carbon emissions. Post-Covid office property demand will be driven for example, by high EPC ratings. Fund managers are increasingly improving the carbon efficiency of their buildings with renewable energy initiatives and commitments to 2030 net-zero targets.”