Net Zero Investment for Real Estate
Gregory Borel shares a company post that highlights the financial and environmental benefits of Net Zero investments.
In our previous blog, we recommended a business transformation approach to Net Zero, starting with a clear strategic rationale. The business case is a key foundation of that rationale, and an opportunity to look at Net Zero expenditure not as a cost, but as an investment.
A well prioritised Net Zero pathway will start with areas of high value creation: energy savings, and value added services. Of course in the old real estate world, it would be hard to capture the return on investment: traditional leases and service charges do not align incentives. Fortunately, some key structural changes are appearing on the market to enable this value capture: energy concepts with new ownership and operatorship models, green leases, and valorisation of services from the asset to the grid, e.g. demand side response.
On top of these direct drivers will come the carbon value. Whether driven by market or regulatory mechanisms, carbon will inevitably be priced. The increasing attention to carbon pricing is already putting a price tag on the mitigated costs.
Such value creation examples are already seen in industry: Prologis offering rooftop PV generated power as a service to its tenants, Grosvenor including green lease clauses as a standard in their commercial office and retail buildings; and financing will follow as demonstrated by the success of the first green property bond of by Unibail-Rodamco.
Though investment may not always be fully recovered through the usual revenue streams of rent, energy savings, or service charge; Net Zero buildings will reap long-term benefits as future-proof assets. More importantly, owners and investors simply cannot afford to ‘do nothing’. As the market becomes increasingly carbon-aware, non-green assets are at risk of being devalued by future legislation, or carbon taxes. Even worse, rising tenant CSR requirements and investor standards will inevitably accompany reputation risk and stranded asset risk. Net Zero is clearly a must to reduce potential obsolescence.
“Net Zero costs” ultimately drive asset value. Approach and outlook on decarbonisation investments must shift to see holistic and financial benefits of a low-carbon portfolio.
Key points include:
Driving asset value
Value creation examples
Read the full article, Net Zero: not a cost but an investment – Understanding the Net Zero business case in commercial real estate, on Ampersand.Partners.com.