August 14th, 2023
As real estate firms grapple with inflationary pressures and cost uncertainties, ESG can quickly slip down the agenda. Yet data insights can lower costs, and those that continue to focus on sustainability during this period of market uncertainty will benefit from a competitive advantage when the market stabilises, writes Ami Kotecha exclusively for React News.
The UK’s Climate Change Committee has published its annual Progress Report to Parliament, concluding that it has ‘markedly less’ confidence that the UK can meet its climate goals from 2023 onwards, compared to its last annual report.
Current market conditions are dominating the real estate news with a noticeable de-prioritisation of decarbonisation. As a sector, we’re seriously lagging on tangible net zero action. The UK was recently reported to be far behind the rest of Europe for heat pump installations, for example, and our planning system, which should be our most powerful driver for change, remains ludicrously unaligned with our climate goals. Several companies that remain committed to taking action, recently signed up to UKGBC’s letter to the Prime Minister to bring his attention to this pressing issue.
Aside from poor policy frameworks, the main stumbling block is the level of upfront investment required for a low-carbon transition, especially in an inflationary environment with cost uncertainties. But inflationary trends are starting to show a downward shift and supply chains and construction costs are also slowly showing signs of stabilising. It is a good time to invest in lowering carbon emissions.
The reality of brown discounts
It isn’t just the longer-term business case that is supportive of investing in ESG. In order to remain competitive, real estate investors need to attract occupiers and, in current times, tenants have far higher expectations around sustainability than they did even two or three years ago.
We now have sufficient published data from MSCI that shows significant bifurcations in the sale price of office buildings with and without sustainability ratings such as BREEAM or LEED. After normalising for factors such as location, size and use class, it is becoming apparent that brown discounts are being applied to assets that have fallen significantly behind on green upgrades. In the office sector, there is strong demand from corporate tenants for assets that provide healthy work environments, high energy efficiency levels and strong commutable locations – all seen as an absolute pre-requisite for attracting talent back into the office.
We are seeing similar levels of interest in green credentials from residential tenants who are far more aware of EPC ratings and lifestyle factors, including living close to green spaces and transport options that do not necessitate car ownership. In the PBSA sector, sustainable building design including fabric and energy efficiency is a no-brainer due to the significance of energy costs in overall asset performance.
Data insights reduce the cost of ESG
Investing in granular data insights can go a long way in reducing the long term cost of creating ESG-friendly portfolios and in future-proofing assets against brown discounts. The right solutions will enhance asset performance by optimising fabric quality to improve operational efficiency and drive up NOI.
Building managements systems and energy modelling help us understand peaks and troughs in energy usage, identify inefficiencies and expose wasted geographies within our buildings.
The power of machine learning and AI
Whilst every building is unique in terms of location, fabric efficiency, carbon intensity and occupier profiles, applying a process of standardisation and optimisation through machine learning (ML) can drive up the return on investment in ESG with continuous and iterative improvements in measurable outcomes.
For example, we deploy models that allow us to automatically reduce energy consumption in our operational, tenanted PBSA assets on a real time, 15-minute basis, without sacrificing the comfort of residents. The creation of a data layer also allows us to continually build and grow our understanding of how our buildings are used, opening up new opportunities for generating revenue – something that is of critical importance in the office sector with the extent of ongoing dislocation.
Get ahead of the curve
Any deprioritisation of ESG, though painful to see, won’t be permanent. Real estate companies that continue to focus on sustainability during this period of market uncertainty, despite financial pressures, will benefit from a competitive advantage when the market stabilises. Healthy, energy efficient buildings that cater to aspirational lifestyle factors will benefit from lower vacancy rates, command higher rents per square foot, be cheaper to run and easier to refinance. Granular data insights are the most practical way to make ESG investments commercially viable.
This article, authored by Amro Partners co-founder and President Ami Kotecha, was first published exclusively in React News.
July 20th, 2023