Growing focus on sustainability in real estate

The real estate industry is increasingly taking action on sustainability as the world wakes up to the impact of climate and environmental change.

A call to action

A growing sense of urgency around the very real environmental threats facing the world has seen the real estate sector’s drive towards sustainability gain significant momentum, with little sign that this has slowed as a result of the pandemic.

Whereas the focus for many firms just a couple of years ago was on defining environmental, social and governance (ESG) goals, the emphasis now is on putting concrete action plans in place to achieve them. In a poll of attendees at a recent Barclays webinar examining sustainability in the sector, 50% said they have a sustainability strategy or action plan in place, while just over a quarter are working on delivering one in 2021.

This trend is illustrated by participation in the Global Real Estate Benchmark for Real Assets, which benchmarks sustainable performance of portfolios, which has increased 22% since 2019, as companies increasingly seek to provide data-based evidence of progress on sustainability.

We’ve also seen a number of recent successful planning approvals and completions of major net zero buildings, such as British Land’s 100 Liverpool Street.

This growing focus on sustainability in the sector is being driven by three key factors: changing stakeholder and occupier demands; a fast-evolving regulatory landscape; and clear evidence of related commercial opportunities. In our recent webinar poll of real estate professionals, half said regulatory change is the biggest driver of their sustainability focus and over a third cited commercial opportunity.

Changing stakeholder expectations

More and more investors are making net zero pledges and evaluating the assets they buy through an ESG lens.

Due diligence on property portfolios often now involves long-term modelling of climate change-related risks and investors are increasingly factoring in capital expenditure requirements to ensure buildings meet sustainability goals, given their importance in influencing the price and desirability of assets.

On the occupier side, driven by net zero strategies and changing employee and stakeholder values, tenants are now more likely to take sustainability into account in letting decisions. Recent research^ by Jones Lang Lasalle found assets with an EPC rating of A/B benefited from a 10% rent boost, while those rated BREEAM Excellent or Outstanding saw a 14% increase.

The impact of ESG themes on capital and rental values is likely to accelerate the trend towards real estate firms publishing sustainability strategies and taking action at portfolio level to ensure their assets remain attractive.

Those that take action will undoubtedly gain commercial opportunities, as highlighted in our recent report on How sustainability grows value in the real estate industry.

Evolving regulation

There are now more than 550 ESG-related regulations in force as part of a rapidly evolving regulatory landscape.

This includes the current focus on EPC ratings, with all leased commercial buildings having to reach a carbon usage rating of higher than ‘E’ by 2023, with plans to push that up to ‘B’ by 2030 under consultation.

Recognising that EPC ratings aren’t always the most efficient tool for measuring carbon footprints, the proposed introduction of the Australian star rating system NABERS for buildings larger than 1,000m2, is also being considered by the UK government. Already in force in Australia for a number of years, NABERS has helped deliver a 23% drop in carbon usage in the buildings it’s been applied to.

Regulatory change is encouraging more real estate businesses to collect and analyse energy use data – often liaising closely with tenants or issuing green leases – to gain a better understanding of ‘whole building’ energy consumption and develop capital expenditure and investment strategies that ensure their assets are ‘regulation-ready’.

The impact on finance

The growing influence of ESG factors is being increasingly reflected in the lending and debt capital markets. In 2020 43% of the US$484bn in ESG bonds issued globally were green bonds and we’re seeing growing numbers of real estate firms issuing bonds to align their finances with their sustainability strategies, providing access to deeper pools of debt capital and more attractive pricing.

In the loan markets, global green and sustainable loan volumes grew 34% year-on-year to US$201bn in 2020, with real estate businesses receiving 13% of all green and 8% of all sustainability linked loans (SLLs) globally.

We expect more listed and institutional businesses to look to SLLs to link their funding terms to progress against net zero carbon targets in the future. And we anticipate increasing demand for green-purpose loans to help firms acquire, build and retrofit assets and build more sustainable portfolios.

How we can help

As a long-term, active supporter of the real estate sector we have already delivered £32bn of green finance against our target of providing £100bn by 2030, through SLLs and green purpose loans.

We have acted as joint book runner and ESG adviser on a number of green and socially linked bonds and expect to increase our activities in this area.

We look forward to supporting our clients as they purse their strategies to meet the sustainability challenges and opportunities facing them.

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