Of the 55 gigatons of carbon emitted annually worldwide, the real estate sector is the number one emitter of greenhouse gases, accounting for 37 percent of global emissions. The sector is far from meeting its net zero carbon targets set by governments globally.
Research from Deepki, a real estate data intelligence company, finds that nearly all commercial real estate assets run by asset management professionals across Europe will miss their carbon emission reduction targets.
A survey of 250 European commercial real estate asset managers in the U.K., Germany, France, Spain, and Italy finds just 5 percent of commercial real estate asset managers say that 81-99 percent of their portfolio will meet 2030’s 50 percent emission reduction target, while fewer than 7 percent say their property portfolios will be net zero by 2050.
Vincent Bryant, CEO and co-founder of Deepki, says, “If the world is to achieve the net zero emissions targets agreed globally, then it is imperative the built environment adapts immediately, a commitment that demands an investment of five trillion dollars each year.”
This equates to raising the equivalent to roughly half the size of today’s managed real estate market, no mean feat for a sector already grappling with the impact of COVID, rising global inflation, and high energy costs.
The Institute for Government’s investigation into the U.K.’s energy crisis, published in September 2022, found that “energy inefficiency will remain a major vulnerability beyond the short term” and argued that “improving energy efficiency could make a much bigger difference than energy supply measures in the medium term.”
These findings were reflected in responses to Deepki’s survey, with more than half of all European commercial real estate asset managers saying energy costs have increased by over 51 percent across their portfolios. Nearly one in five of those cite a significant increase of between 71 percent and 90 percent in the cost of their energy.
Four Steps To Reducing Real Estate Emissions
Reducing the real estate sector’s contribution to greenhouse gas emissions may seem an epic undertaking, but Bryant provides guidance in four steps to help to get portfolios on track to net zero.
The first step is to measure environmental performance for each tenant, building, and fund, and then compile merit orders for each portfolio.
Bryant asks, “How can you decide which building to refurbish without ascertaining its energy consumption or whether its consolidated consumption is reliable without identifying its heating system or metering plan? Or which meter feeds which building zone?
“Having complete, relevant information is the key to developing reliable KPIs. Armed with a strong understanding of their portfolios, asset managers can set priorities and focus efforts on those showing the weakest performance or highest risk.”
The second step involves considering ways to lower greenhouse gas emissions from the building’s use, including improving equipment maintenance or optimizing the regulation of lighting, heating, ventilation, and air conditioning equipment.
“A complete net zero approaches consider the overall cost of actions taken, be they using advanced technology or simple behavior modification. Whatever the action, remember that you’re evaluating not just financial profitability, but also the climatic effects,” Bryant says.
To help with decision-making, action plans for each asset, fund, and portfolio should be evaluated in terms of these overall costs and effects.
The third step focuses on ensuring the right resources are in place across the whole industry.
The latest report by PwC, in its Green Jobs Barometer series, finds that between 10,000 and 66,000 new tradespeople will be needed each year as retrofit takeup accelerates, with heating engineers, glazers, and insulation specialists the most in demand.
Nick Forrest, UK economics consulting leader, PwC U.K., says, “The UK has consistently under-invested in developing and transitioning skills to support the green retrofit opportunity. Currently, there are few recognized technical education pathways into the retrofit sector, and most training is done on the job as quickly as possible. In addition, the SMEs and sole traders, who are a lifeblood of the construction industry, require stronger incentives to invest in training as their opportunity cost for taking time out of paid work is greater.”
The fourth and final step is to adhere to the abundance of new building standards that have emerged to manage the property sector’s carbon footprint.
“The regulations that have emerged in recent years have proven more than just a set of rules to meet or a way to appease and attract stakeholders; they have a real impact on the value of assets and portfolios,” says Bryant.
Markets expect assets to be held to increasingly strict ESG requirements and that straying from the path to decarbonization will lead to devaluation or brown discounting.
The Deepki survey finds that one-third of respondents are experiencing asset values that are 16-20 percent lower in buildings with poor carbon footprints, and 25 percent are seeing values that are 21-30 percent lower.
Conversely, a survey by JLL found that green leases carried an average premium of 6 percent, demonstrating the potential returns from upgrading a property portfolio.
Kalin Bracken, lead real estate at the World Economic Forum, says, “Unsustainable buildings are becoming increasingly undesirable and tough to finance, boosting the demand for new or retrofitted buildings. From large institutional investors to homeowners, there has been a marked shift of interest towards sustainable real estate and the opportunities it presents to capitalize on and future-proof assets.”
Leveraging Blockchain Technologies
Where commercial real estate managers have followed the steps required to manage emissions, there is the question of ensuring a property portfolio’s ESG credentials is up-to-date and available to investors.
The ability of private investors to influence the world of real estate is currently hindered by the asset class’s illiquidity, access to ESG data for due diligence, the large capital commitments required, and the long-term investment horizons.
The emerging tokenization of the real estate market – where property ownership is divided into tokens stored on a digital ledger or blockchain – is set to accelerate the sector’s advance to net zero and further open the real estate investment market.
“Unlike conventional property ownership, tokenization makes it much easier to integrate environmental performance targets and reporting into assets, which supports the monitoring and reporting aspects of climate-related projects,” says Bryant.
While real estate remains wide of the net zero mark, there are big incentives, both financial and regulatory, to get on target while the industry is developing better tools and processes, like using tokenization and blockchain technologies, to speed up the pace of change.
Bryant concludes, “The real estate sector is facing an ESG revolution, with the uncharted territory ahead, but what matters is that the industry takes up the challenge and follows the steps to success.”
About the author:
Lawrence is a globally recognized digital finance advocate with a track record as an advisor, executive, and board member, working with startups to institutions. He is the Chair of GBBC Digital Finance (GDF), a not-for-profit promoting fair and transparent markets for crypto and digital assets, and is the former CEO of Innovate Finance, the UK fintech members association. He is the Principal of Elipses, a digital investment management firm focused on sustainable investments, systematic investment management strategies, big data analytics, machine learning, and DLT technologies. Lawrence has an MBA, is a regular Forbes and Fintech.TV contributor, and promotes ethical and sustainable finance policies for a transparent, secure, and quality digital future for everyone.
