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Zero carbon is the buzzword in the industry, with the UK becoming the first major economy in the world to pass laws requiring net zero greenhouse gas emissions by 2050. To this ambitious end, all future developments and, importantly, existing buildings will have to take significant strides towards reducing energy consumption.
Some investment managers may hear this and balk, envisioning a world where investment in zero carbon technologies at their assets is prohibitively expensive. This is far from reality. It would be a mistake to consider energy efficiency as divorced from other contributors of a high-performance, high-income yielding asset. Energy efficiency projects confer many additional benefits of interest to investment managers, including improved tenant satisfaction and health and wellbeing, and risk mitigation for the asset – all of which improve the asset’s bottom line.
As an example, consider improvements to the building fabric through high performance glazing or insulation upgrades. Such an improvement reduces energy costs and could increase the asset’s net operating income and therefore market value. A less often reported benefit is that a tighter building fabric is simply more comfortable, fostering spaces that increase tenant productivity, happiness, and health. Accordingly, these two elements – efficient operation and thermal comfort – de-risk elements of obsolescence allowing investment managers to maintain high occupancy at the asset with quality tenants that secure rental income.
Mitigate against future costs
Investment in zero carbon interventions also improve the resilience of the asset and minimise risk. Reducing an asset’s energy consumption mitigates against energy price fluctuations and futureproofs investments against regulatory and market changes, such as the plan under consultation to increase minimum UK EPC ratings from E to B by 2030.
This is therefore a call to action to invest in zero carbon interventions that prioritise enhancement of the occupant experience. Some key asset level strategies include maximising indoor air quality through adequate ventilation and filtration, improving thermal comfort with right-sized HVAC systems, creating tighter building fabrics, installing green infrastructure, and maximising natural daylight opportunities to attune light levels with occupant circadian rhythms.
In concert, these interventions not only position the asset to be zero carbon, but also contribute considerable value to the asset. It is well known that zero carbon interventions confer savings that will result in a larger return over the life of the project. Less well known is that research indicates that a zero carbon building can be constructed with no added upfront cost compared to business-as-usual construction.
“A zero carbon design with minimal upfront costs and additional savings through the asset lifecycle is simply a smart investment”
A meta-analysis completed by the US Green Building Council, Massachusetts, entitled “Zero Energy Buildings in Massachusetts: Saving Money from the Start” suggests that, with an integrated design team working towards a zero carbon goal, a cost transfer is possible where the increased cost for a higher performing building envelope is balanced by less costly, simplified mechanical systems. Such collaboration therefore results in little or no additional capital cost for whole-building zero carbon developments.
Hence, a zero carbon design with minimal upfront costs and additional savings through the asset lifecycle is simply a smart investment. Cost savings are further amplified by the price of carbon, projected to increase owing to increased demand and constrained supply of offsets. Asset business plans and investment financial models should increasingly account for the lifecycle benefits associated with projects supporting zero carbon ambitions.
Gaining competitive edge
These interventions are also crucial for getting ahead of legislative requirements that will soon make business-as-usual construction obsolete. The Carbon Risk Real Estate Monitor is a tool developed especially for the EU and UK commercial real estate sector that forecasts the carbon emission trajectory that real estate portfolios will need to follow in alignment with Paris Agreement targets (below 2°C of warming from pre-industrial levels). The CRREM model can therefore be used to quantify potential real estate investments at risk of poor carbon performance and hence obsolescence owing to failure in meeting future market expectations.
The pathway to zero carbon is an ambitious challenge, but also a wonderful opportunity that should be embraced. Targeting an asset towards zero carbon is not just good for the planet – it is crucial for remaining competitive in the marketplace.
This article was originally published by Estate’s Gazette
