Real Estate in 2022 Making the transition to net zero a reality

A key theme for 2022 and beyond will be the ongoing decarbonisation of the built environment and how to make the transition to net zero a reality. This will require all stakeholders in the real estate sector to collaborate and pool skills and resources. So, architects, developers, contractors, investors, occupiers, lenders and all those in the wider supply chain all have a part to play when we are designing, constructing, financing, repurposing and retrofitting our buildings, towns and cities.

A failure to act now will mean that many investors and funders will find themselves with stranded assets which do not meet the required energy efficiency standards. Some of the key issues to consider include the impact on the value of properties which fall below energy performance standards, the risk of stranded assets, increased cost of borrowing, lending restrictions and higher insurance premiums, how required improvements will be funded, and what policy and financial frameworks are needed to support investment.

Any organisation which is serious about the climate-related risks and opportunities for their business whether owner or occupier will need to measure, assess and disclose energy usage and carbon emissions from their buildings and implement a portfolio-wide decarbonisation plan. This will require the real estate sector to improve its data gathering, governance and data processing in order to increase trust and to minimise false or misleading claims about green credentials. Of course at the moment gathering that information can be particularly challenging for occupiers and landlords.

Many investors now view climate risk as inseparable from financial risk. It is inevitable that a "brown discount” will increasingly be applied to buildings that fail against carbon targets. In real estate, we see two major challenges. The first is that, while there is great hunger to invest in, finance, build and occupy greener buildings, there is simply not enough of a pipeline: demand far outstrips supply. Secondly, there is a conflict between landlords and tenants over who is responsible for what, and who pays. This was vividly brought into the public consciousness after the tragedy of the Grenfell Tower fire, when the question over who was legally responsible to pay for the costs of remediating cladding was anything but clear.

Green Leases’ are a good example of where much greater collaboration is needed. They have been talked about for many years but in reality we still do not have a settled 'market' position for either existing leases or how to draft new leases. The balance of liabilities between landlords and tenants have been established in commercial leasing practice over many decades, but environmental performance and environmental improvements are a relatively new concern and the market has not yet set a satisfactory standard for the split of these costs.

The real estate sector is clearly making progress towards net zero in theory but we need to see more action in practice so that we see more positive steps being taken to improve the built environment in which we live and work. This may well create buildings that demand a 'Greenium' but at the same time will contribute to wider environmental and social benefits.