How can commercial real estate achieve sustainability at scale?

20th June, 2024 | No Comments

Some of the best returns available in commercial real estate involve sustainability upgrade projects, according to Davina Rooney, CEO of the Green Building Council of Australia (GBCA), who discussed the risks and opportunities around sustainable finance for property at the recent PFA 2024 Conference on the Gold Coast.

An important starting point for sustainable finance in the property sector is to follow the risks, and Ms Rooney said the World Economic Forum’s Global Risk Report provides an interesting backdrop. “As we’ve followed this report over the years, it has become clear that six out of the top 10 risks come down to sustainability.

“The long-term trends and long-term risks consistently come down to climate action, resources/circularity, and health and wellbeing.”

Some key statistics regarding the built environment’s role in climate action include the fact 39% of global emissions relate to buildings, with energy demand forecast to increase 50% by 2050, according to Ms Rooney. “Resources efficiency is another big issue. Buildings are responsible for 50% of global material use. Climate impact, energy use and resources efficiency will become more of a policy and global finance issue.

“Another aspect to the sustainability megatrend in commercial buildings is the sharper focus on health and wellbeing which is driving the creation of more healthy spaces to work.

Ms Rooney said these megatrends are important for unlisted property fund managers as their business is to bet on the future and the most substantive risks in the future come from this area – conversely, there is opportunity for buildings which achieve high ratings for environmental performance, for example via GBCA’s Green Star program, or NABERS.

Ms Rooney said a recent EY report noted 100% of tenants surveyed had ambitions in sustainability. “The report noted that the more sustainable assets provide stronger returns. These concepts will be fundamental to any deal you are looking at.

“If you design to high standards and ensure there’s a quality assurance process the benefits will follow.

“From a residential perspective, research by the Bank of England has found efficient houses are worth more, and people tend to default less often on these homes.”

In commercial property, retrofitting for sustainability is a pressing concern. “A big current challenge is how to electrify existing buildings. This is not an easy process to achieve in an existing building, and it takes a long-term capital plan to deal with it.

“Sustainability is moving quickly from being diagrams on pages to featuring in lease clauses – we are seeing more government requirements to meet sustainability. For example, from 1 July 2024, any building worth over $7 million will be required to  meet sustainability benchmarks..”

Green financing deals including green bonds will be critical for sustainable refurbishment, according to Ms Rooney. “We need to double the rate of refurbishing in Australia. How are we going to do that? Get some of the green finance deals behind it.

“There’s a lot of money to be saved if we get this right. For example, an efficient electric home should save around $1000 a year in running costs. But the key question is how do you simplify these upgrades so it’s accessible to the broader market?”

GBCA published a practical guide to green finance in Australia – Unlocking the Value: A Practical Guide to Sustainable Finance in the Australian Real Estate Sector. “This much needed practical guide was created to demystify and then deepen the understanding of sustainable finance within the Australian real estate sector.”

“We hope to see it facilitate a more efficient adoption of sustainable finance mechanisms so we can continue to drive better environmental outcomes.”.”

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