ROLE, RISKS AND OPPORTUNITIES FOR REAL ESTATE INVESTORS WHILE INTEGRATING CLIMATE CHANGE RISKS...4/25/2016 The buildings sector consumes around 40% of the world’s energy and contributes up to 30% of global annual GHG emissions. At the same time, the global universe of investable real estate is worth about US$50 trillion. For institutional investors and investment managers, the core principle of real estate investment is to create and sustain long-term value.
The key step is to understand the market – occupier preferences and changing behavior, as well as the regulatory framework and legal requirements. It is equally important to adapt and respond to these emerging trends within real estate market cycles. Growing climate and sustainability regulatory pressure increased market demand for green buildings, and heightened risks from physical impacts on buildings associated with climate change, are changing real estate market conditions. These trends are impacting occupier demand and investor practices and in order to protect the long-term value of their real estate investments, it is part of institutional investors and their investment managers’ fiduciary duty to understand and address these changes and new risks and to take advantage of new market opportunities. There is a growing consensus among market professionals that demand for buildings with green characteristics will continue to increase and that such characteristics are already influencing investment fundamentals including client demand, void lengths, obsolescence, rate of depreciation, operational costs, and liquidity. In turn they agree that investment decisions made today will impact the value and financial returns of GCC and ASIA PACIFIC real estate investments and investors in the coming years. Investors are no longer awaiting empirical evidence of impact to financial performance from valuation analysis; rather they have already started to embed green building programmes in their real estate investment and asset management practices. Fiduciary duty dictates that investors should understand and actively manage such market shifts. The way forward is to embed sustainability in standard risk assessment methods and, through selection and monitoring processes, to ensure that investment managers and consultants are fully integrating sustainability and climate change considerations into investment and asset management practices. Institutional investors also have a role to engage with policy makers to encourage policies that support scaling up investments in sustainable buildings. Therefore; 1 Supporting the real estate sector to accelerate the integration of environmental, social, governance (ESG) and climate risks into investment decisions and to scale up energy and climate-related investments, including retrofitting, is thus a key factor in ensuring global temperature increase is limited to 2°C. 2,3 Climate change poses clear and material risks to the real estate sector. In addition to the physical and social impacts of extreme weather, 4 growing regulatory pressures and changes in market preferences are impacting investment performance. 5 However, there is growing evidence across geographies that a climate-friendly and sustainable real estate sector can both preserve and increase asset value. Data from the US, Australia, France, the Netherlands and Singapore make a convincing case that the financial performance of green and energy certified office and residential buildings is superior and the risk of mortgage default is lower compared to that of non-certified properties. 6 Technology and operating processes are currently being used to improve energy efficiency of existing building portfolios by a further 2-4% each year and are estimated to continue to do so for the foreseeable future. Over the long-term, these efficiency gains drive reduced operating costs of commercial and residential buildings, resulting in enhanced asset values. Indeed, new buildings can readily be built to use 30-50% less energy than required by most energy codes dating back to 2005, 7 and in growing instances can achieve zero net energy consumption. With growing evidence an increasing number of institutional investors and their stakeholders have started to recognize it as their fiduciary duty to manage climate risk in their investment portfolios, with leaders in commercial real estate systematically integrating climate risks and opportunities into existing investment, valuation and asset management processes. In summary, Key real estate investment risks and opportunities from climate change and sustainability Climate, energy and building regulations bring about obsolescence and depreciation faster than anticipated. Investment in operation, maintenance and refurbishment need to be in tune with these changes.
My next blog will focus on the Energy Performance of Buildings Directive (EPBD); and associated directive requirement for all new buildings to be nearly zero-energy buildings by December 2020..
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