The impacts of climate change on the real estate industry are complex. The Urban Land Institute and Heitman explain that the direct physical risks to properties, such as an increase in the frequency and intensity of extreme weather events coupled with both rising sea levels and global temperatures, highlight “the vulnerability of individual assets and locations – and potentially entire metropolitan areas.”1 These, combined with more indirect transitional risks, such as the economic, social, and regulatory changes needed to decarbonise assets, are driving urgency amongst real-estate leaders to be at the forefront of climate action2.

But strategic planning to protect assets against the impacts of climate change is just one part of the solution. With the real estate sector accounting for approximately 39% of global annual carbon emissions, operationally poor performing buildings not only hinder efforts to minimise climate change but may also significantly lose value3. This is why asset owners, managers, occupiers and investors must work to minimise the impact of buildings on the environment.

Operational or energy efficiency is reducing the emissions associated with the everyday running of a building. Measuring the use of electricity, natural gas, water and the generation of waste of commercial buildings and taking action to reduce that consumption is an area of continued focus for Cromwell. Building, tuning, maintenance, installation of solar, and replacement of inefficient plant and equipment are all opportunities to reduce consumption and emissions.

Occupiers are also playing a role in the sustainability of their leased spaces with many committing to their own ambitious net zero objectives requiring spaces that help to achieve those goals. As highlighted in research recently published by JLL, the emphasis is on the collaboration between landlords, investors, developers and occupiers to assist cities and governments around the world to reach their emissions targets.

Investors too are engaged with the move for buildings to achieve net zero emissions, with 74% of institutional investors now more likely to divest based on poor ESG performance4. Research by Deloitte shows that investors are engaged with ESG principles, seeking investments that deliver value, not just financially but more broadly for the people and environments impacted by the assets they’re tied to5.

Legislation is changing rapidly on a global scale, restricting the lease of energy inefficient buildings. But JLL go one step further and suggest that while net zero commitments are being set globally at varying levels of government, “the science is telling us that we need to push harder and with real urgency.”6

This push has significant ramifications for the real estate industry, requiring asset owners and managers to increase focus on the operational efficiency of their properties by adapting assets to improve efficiency7. This will ensure assets don’t become too expensive or worse, obsolete.

Tom Duncan, Cromwell’s Head of Research and Investment Strategy explains that while investing in increasing the energy efficiency of existing buildings might cost more money today, the industry consensus is that it will preserve the value of assets in the medium to long term.


"Occupiers now expect a focus on ESG because many have committed to net zero objectives."


Cromwell's 2021 NABERS SPI results

The National Australian Built Environment Rating System (NABERS) is a national energy rating scheme considered to be the most comprehensive in its reporting of the energy efficiency of office assets in Australia8.

With the Australian commercial building sector accounting for around 25% of overall electricity use and 10% of total carbon emissions nationally, improving a building’s energy efficiency not only reduces carbon emissions, but it also lowers energy bills, reduces operating costs and could attract higher rental returns and increase property value9.

NABERS rates office buildings’, hotels’ and shopping centres’ operational performance against environmental benchmarks by measuring the operational impacts on the environment in the areas of energy, water, waste and indoor environment quality. Performance in each category is benchmarked on a rating scale of one to six stars, with six indicating market-leading performance and one meaning very poor performance10.

Under the current system all commercial offices over 1000 square metres wanting to advertise for leasing or selling purposes must disclose their NABERS energy rating.

The Government Resource Efficiency Policy sets targets for government sector agencies to achieve minimum NABERS ratings, including for energy and water in office buildings. Importantly, to attract Government tenants, base buildings require a minimum NABERS rating of 5 stars for metropolitan buildings or 4.5 for regional sites.

The NABERS Sustainable Portfolios Index (SPI) is a more comprehensive overview of whole of portfolio performance as opposed to singular asset-based ratings. It provides publicly available analysis of 53 leading property portfolios across Australia, and this year the Cromwell Direct Property Fund (DPF) has been added to NABERS SPI for the first time.



Footnotes:
1 Urban Land Institute and Heitman, Climate Risk and Investment Decision Making, 2019
2 McKinsey and Company, Climate Risk and the Opportunity for Real Estate, 2022
3 McKinsey and Company, 2022
4 Ernst and Young, 2021 Institutional Investor Survey, 2021
5 Deloitte, The Impact of Social Good on Real Estate, 2021
6 JLL, Decarbonizing Cities and Real Estate, 2022
7 ULI and Heitman, Climate Risk Report, 2019
8 Money Management, Being a good NABER, 2022 https://www.moneymanagement.com.au/features/expert-analysis/being-good-naber
9 https://www.energy.gov.au/government-priorities /buildings/commercial-buildings, 2022
10 https://www.nabers.gov.au/, 2022