Investing in the future

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Buildings could become stranded assets in investment terms as regulations tighten across the UK and Europe, Dan Grandage head of ESG Real Estate at Aberdeen Standard Investments has warned.

He says: “If you look at real estate and at the energy it consumes, as a responsible landlord, we have to try and tackle that.”

Grandage says that building new energy efficient buildings have to be part of the story. However he notes that the replacement rate of buildings across the EU is 1 to 1.5% annually. “Most buildings here today will be here by 2050. We have to focus on both new buildings and modernising assets,” he says.

You can flood proof a building but what if no-one can reach it?

He says that due diligence is increasingly assessing whether a building is affected by rising sea levels and rising water tables but you also have to ask if they put protections around the building whether anyone else is able to get to it.

“From a flood protection aspect, as a major landlord, we can probably get insurance but what if our occupiers can’t because of flood risk?”

He says we also have to think about increasing summer temperatures and the fact that a typical UK building is not set up for this cooling-wise, certainly not to keep a building to an efficient enough standard.

He says the asset manager will set out a pathway to reaching net zero by 2050 next year in the context of tightening regulations from the UK and the EU – effectively a tsunami of legislation.

He says France is setting annual reduction targets which ASI, as a commercial real estate owner, has to hit or face a fine.

He says that in a UK context, the energy performance of buildings is similar to that required for fridges, dishwashers and cars.

In 2018 the UK introduced a new law that if your building is at the lowest level of efficiency – F or G – you can’t let it out. “Given our model is buying assets and hilding them and letting them it is a serious risk.”

He says for context, in 2012, 20 per cent of buildings in their portfolios may have been in these categories though it is near zero now.

However the direction of travel from policymakers is to move to a position where F become E, and then D and so on.

The firm has to ensure its stock meets those requirements or it can’t make the return it needs.

He says that the Carbon Real Estate Risk Monitor have been looking at what it takes to reach net zero for member states and building types.

“What they have identified quite quickly you will get an increasing number of buildings that will effectively be stranded for not meeting environmental regulations or because occupiers will not be able to occupy them.

“Of course, there is also an opportunity to improve bad buildings where people can’t see the potential or build new and better ones.”

He says the challenge is further illustrated by work from the Dutch Green Building Council. It shows that a typical office building needs to be at 40 units of energy per square metre to be Paris proof, but that currently it currently ranges from around 140 to 120.

Landlord and tenant will need closer collaboration

As an investment house, Aberdeen Standard has been installing solar panels on all its buildings – it funds the installation and sells the energy to the occupier below market rate. The arrangement is included in the lease and lets the occupier potentially meet their obligations as well.

He says this makes sense even with the falling away of subsidies in the UK is being rolled out in their buildings across Europe.

He says the other area includes lighting.

“If we are going to hit these targets, we suspect we will have to engage even more with occupiers. The relationship is often seen as adversarial and that has to change.”

He says the energy used by a building will often split 20 per cent landlord and 80 per cent occupier. “On the current model, we will do the staircases and communal areas and tenants will look at their own spaces. But we are looking at models where we take over the wole building. Our investors are looking for carbon data but our occupiers don’t have that.”

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