2021 was hopefully what will be seen in retrospect as a landmark year on the path to a decarbonised global economy. We have addressed many of the issues and trends in our Ten Trends for a Zero carbon world.
COP26, the 26th UN Climate Change Conference, which brought world leaders to Glasgow in late October was dubbed as the ‘starting line for the rest of the decade’. Several considerable milestone commitments were agreed across the 197 parties, contained within the Glasgow Climate Pact. This new deal builds on the agreements of previous conventions including the Paris agreement and Kyoto protocol, as well as stipulating new pledges to end deforestation by 2030, ‘phasedown’ coal and inefficient fossil fuels, and requests that signatories revisit climate pledges in 2022 (rather than 2025).
Even with the commitments put in place, Climate Action Tracker estimates that global temperatures are currently on track to increase by 2.1°C if all pledges and targets are met. While this is in excess of the 1.5°C and 2.0°C globally agreed limits, the urgency of the situation means that focus now needs to be placed on ensuring that existing commitments are achieved while further requirements continue to be planned out. Tackling the climate crisis requires action now.
The green wave
In the lead up to COP26, the UK government produced the Net Zero Strategy, building on the ten-point plan laid out in 2020, as a roadmap for achieving net zero greenhouse gas (GHG) emissions by 2050. Within the strategy, around £26 billion of public funding is scheduled to wide-ranging schemes from electric vehicles and heat-pumps to nature restoration and miniature nuclear reactors, while an additional £61 billion was sought from the private sector.
UK businesses are also understanding the need to adapt to the changes required – in most cases acting before expansions in government guidance to remain ahead of the policy curve, which in addition to the environmental benefits. This provides an opportunity to grab headlines through an aspirational point shown to be of increasing importance to consumers as well as cashing in on the ‘sustainability premium’ that is emerging with regards to both customer and talent.
Of the FTSE-100, the UK’s largest companies, 55 have established net zero targets, with just under half of these ascribing scienced-backed plans.
By 2023, however, the Net Zero Strategy stipulates that all large companies in the UK will be required to disclose their plans for achieving climate targets, with an expert panel in place to assess and ensure their viability. It’s not just large businesses, we are seeing more focus from SMEs on leveraging their ability to meet targets1. Regulation on this will continue to intensify in order to drive compliance and will have an impact on all businesses.
Revamping real estate
Accounting for 38% of total emissions, the built environment is a key target on the road to net zero. The UK government has already begun stoking evolution within the sector through policy. Minimum energy efficiency standards (MEES) for non-domestic properties came into effect in the UK in 2018, requiring commercial buildings to hold an energy performance certificate (EPC) grade E or above to be leased.
In 2023, this will expand to all non-domestic properties, regardless of lease events, while 2030 will see MEES increase to an EPC grade B. This is no small task. We estimate that the 2023 deadline will affect 59,000 properties across England and Wales, rising to a staggering 88% of all UK commercial property for the 2030 deadline with considerable and expensive changes required to get up to code.
The built environment accounts for 38% of total emissions
With a view toward these standards, as well as individual climate goals, we are already seeing the impact of MEES on property values. Our analysis has shown that better EPC grades correlate with higher rental incomes and longer tenancies. The introduction of MEES are strengthening this trend, with sub-standard stock which does not hold an exemption, risking becoming stranded in the near-term.
NUMBER OF EPCs BY GRADE
In addition to MEES, the UK government is also consulting on introducing the National performance-based policy framework. This would require annual reporting on the actual energy consumption of a building, rather than the theoretical assessment offered by EPCs, similar to the NABERS scheme in Australia, helping to close the ’performance gap’ between planned and actual energy efficiency. While the policy is not yet in place, we anticipate it coming into effect by 2023, with office buildings the first in line.
From the ground up
As the standard for existing buildings become more stringent, future buildings are also coming into focus. There is already evidence that demand for sustainable buildings not only significantly outstrips supply but dominates rental tones in the top end of markets.
Aligned with their net zero carbon targets, occupiers, investors and landlords are pushing the envelope further in terms of utility and environment. A number of investors, including Blackrock2, Clearbell3 and Prologis4 have been very vocal on the issue being an essential, and not a ‘nice to have’. Taken with the decreasing cost of sustainable materials and construction methods, these factors are driving a business case that ensures projects are low carbon, with the most ambitious of developers already looking to deliver net zero carbon developments.
SHARE OF TOP DEALS WITH HIGH BREEAM RATING
It is not only the energy performance of buildings coming under the microscope, but their power sources too. With the coming of age of the internet of things and 5G-enabled just about everything, there is an increasing need for data centres.
Combined with the ongoing expansion of the electric vehicle (EV) fleet, the energy sector in the UK and beyond needs to undergo a substantial transformation to meet the future demand with renewable resources, in line with the net zero outlook. Currently, peak demand is too high to service with renewables alone.
The nature of solar and wind power means that supply isn’t driven by demand. There is a growing need for the storage capacity of the national grid to take in energy when the wind blows and the sun shines, ready to power homes and cars when required. Batteries will therefore play a critical part in the UK’s move toward net zero – from EVs providing domestic energy to Balance Power’s 30MW battery facility in North Tawton, Devon.
The decarbonisation of real estate is essential – and creates significant risk and huge opportunity. Incoming increases to MEES presents a considerable chance for the construction industry to retrofit much of the built environment. Forward-thinking hands-on investors are looking to improve environmentally underperforming assets while proptech companies are likely to take centre stage in the move to understand the real-time energy efficiency of buildings with the rollout of the National performance based policy framework. Innovators ready to bring the latest in sustainable building techniques will be in high demand as construction and development decarbonises. The UK’s car industry is set to spark back into life as new domestic gigafactories help to fuel the EV expansion.
Sustainability is bringing change – and this is just the beginning.
For more insight into the way real estate is evolving for a zero carbon world, please read here.