By Aneysha Minocha,
Simplifying the route to Net Zero
Decarbonisation of the built environment is key to achieving our climate goals. Rapid retrofitting is required by 2030 for the UK’s worst performing buildings. Based on EPC data, 581 properties require retrofitting each week.
But it’s complicated. According to research from RICS and the British Property Federation, the categories of Investors, Owners and Occupiers each have different needs, different starting points, and different information and data requirements. To add to the challenge, the current landscape of retrofitting is complex and fragmented, time consuming and expensive, and not scalable to meet the retrofit numbers required.
This all adds up to organisational inertia, deferred decision making, with an increased the risk of stranded assets, delivering point solutions rather than retrofit at scale.
The solution is coordination and data sharing between Investors, Owners, and Occupiers creating a significant opportunity to address this complex challenge.
Owners and Occupiers are overwhelmed with options and solutions – the majority are stuck in pilot territory, delivering one project and one building at a time. They do not have the full picture of the decarbonisation potential of their property portfolios, and the investment required – whilst trying to mitigate stranding risk based on unreliable EPCs. Political uncertainty with policy and the watering down of regulations create a shifting sand territory for all. The business drivers and challenges for these stakeholders also vary significantly as the incentives, benefits and pain points are split across the three:
A: Investors – Lending Banks
- Drivers: TCFD and PCAF stringent compliance and reporting requirements – requiring robust data and desire to grow the green lending portfolio in a demonstrable way.
- Challenges: Don’t have the skills inhouse or the time frames required to assess each building technically for Net Zero at the point of financing or refinancing. An arm’s length approach, with either EPC ratings or bespoke consultants providing assurance to manage transition risk, is time consuming and expensive. What’s needed is a simple and reliable way to assess stranding risk and manage transition risk that is data driven and arm’s length.
B: Owners and Landlords
- Drivers: Higher property values in a tough market, efficient and favourable financing facilities, commanding the best rental values, maximising operational revenues, and minimising voids.
- Challenges: Increasing need to mitigate stranding risk. Plus, don’t pay the utility bills, so don’t benefit from the ROI.
C: Occupiers and Leaseholders
- Drivers: Low operational costs – utility bills. Carbon reduction – high environmental and energy ratings (evident in the prime end of the market) – as the carbon emissions from the rented buildings are now the Occupiers’ Scope 1 and 2 emissions – the buildings they occupy help deliver their Net Zero goals.
- Challenges: Lease lengths and conditions can be a barrier to investment in the buildings, tending to focus customers on short-term interventions only.
The role of data and data sharing is key in addressing these drivers and challenges. There is a huge opportunity to use data as the golden thread at the convergence of the three key stakeholders to help break down barriers and enable decarbonisation at pace.
- Coordination in sharing this data across Investors, Owners and Occupiers needs to be digital and seamless to accelerate the pace of risk evaluation for every deal or refinancing activity, to deal with the volume across the investors’ lending books. It requires trust, governance, transparency and security.
- Investors need data to make financing and refinancing decisions. The metrics required need to be simple and effective to drive investment decisions at pace, whilst ensuring the continuing value of the property and maintaining the required Loan-to-Value ratios.
- Ability to measure and verify the emissions reductions from the retrofit activities – again this needs to be delivered digitally and seamlessly, aligned with international protocols such as IPMVP.
So, what is required in the industry? A call to action
Factoring environmental and carbon performance into property pricing can be a positive incentive, going beyond the negative pricing driven by stranding risk. Anecdotal evidence from the prime end of the market suggests that lease holders are willing to pay a premium for better performing buildings.
Property valuation structures are currently regulation-driven valuations of commercial real estate, in addition to the location, age demographic and the fit out of the property. CRREM (Carbon Risk Real Estate Monitor) and EPC (Energy Performance Certificates) tend to be used by investors and asset owners as the barometer of compliance and future stranding risk. NABERS (originally an Australian standard), is starting to gain some traction in the UK.
There is an urgent need to integrate carbon and environmental performance into commercial property valuation mechanisms and the customer psyche. Just as upgrading properties to a high fit-out standard commands higher valuations, premiums on better environmental performance need to be the standard in the market.
Investor Lending mechanisms and processes require streamlined data acquisition and sharing. Enabling digital solutions for retrofit options analysis needs to be integrated into the real estate lending process. And this must happen at an accelerated pace, a more granular level, provide transparency, and be reliable – thus providing robust market mechanisms that finance decarbonisation.
This will also provide reliable compliance data that is measurable and verifiable. The Bank of England’s report on Climate-related risks and the regulatory capital frameworks (2023) recommends effective risk-management controls within firms to reduce the quantum of capital required for future resilience.
Final thoughts: When it comes to action, the perfect is the enemy of the good!
Coordination and collaboration are required across the entire value chain of players to deliver Net Zero. We have a limited timeframe to deliver maximum impact, and this is an opportunity to go beyond regulation to drive faster decarbonisation, by developing positive financial and valuation metrics to enable commercial decisions and secure the future of the industry.
Whilst we may not have the perfect data, the perfect regulation, or the perfect valuation structures, we also don’t have the luxury of time. The need to collaborate across stakeholders with a common vision has never been greater, and the good news is, it is possible, we have the technology, a plethora of digital tools, and innovators driving and challenging the established business models.
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