Commercial real estate: long income investing in a net zero carbon world

It is estimated that real estate accounts for approximately 40% of global carbon emissions. As a result, when the UK government set a target of net zero carbon (“NZC”) by 2050, it is fair to say that the real estate industry was presented with a larger challenge than most.

For real estate investors buying commercial property let on 15 years+ leases, as we do at Fiera Real Estate, the ability to manage this transition is limited.  Much of the responsibility for achieving sustainable goals falls outside the control of the landlord. Under the terms of a standard full repairing and insuring lease, all day-to-day responsibility for a building rests with the tenant, giving landlords limited obvious scope to deliver on the agenda.

Notwithstanding these challenges, more pro-active and committed landlords have been able to make meaningful progress – with those that are now leading the way in this hugely important area being rewarded with increasing investor capital allocations and greater underlying asset liquidity.

Helpfully, most large occupiers are typically multi-national publicly listed businesses with a similar institutional shareholder base to the underlying pension schemes investing into so called “long income” real estate funds.  This ensures that key stake holders are typically aligned.  For such large corporates, the ESG agenda is equally important to them as it is to real estate investors.

At Fiera Real Estate we have been leaders in sustainability for the past two years, with ESG firmly embedded at every stage of our investment process.  To illustrate this point, our UK Long Income Fund achieved GRESB Green Star status in 2021 whilst our fourth Opportunity Fund placed first within its European GRESB peer group. The following represent some of the key initiatives which are now in place to ensure NZC status well ahead of the official government target date of 2050:

Net-Zero Carbon (NZC) Portfolio Pathway – In 2021, Carbon Intelligence was appointed as the Fund’s NZC partner. In addition to their support in the creation of a NZC pathway and target date, they provide the Fund with on-going verification throughout implementation. This verification of the pathway and data provides confidence in the monitoring and implementation of a NZC target.

Net Zero Asset Audits – As part of our NZC pathway, we have instructed NZC audits on the portfolio’s largest site contributors (by emissions) The audits will provide specific recommendations for each site, the impact of those recommendations on the building’s carbon footprint and the likely costs of each recommendation.

Data Collection – One of the biggest challenges we face in pursuing net zero is understanding how buildings are currently performing. Due to the nature of a full repairing and insuring lease, nearly all the energy consumed within the portfolio is procured directly by the tenants. To better understand the asset-level interventions necessary to achieve operational net zero carbon, we have partnered with tenants and Etainabl to implement automatic data collection software within the portfolio. Energy and water data is transferred direct from tenants’ utility providers to our team, allowing us to report regular and verified performance data.

Renewable Energy Project – In parallel to the development of our NZC pathway, we completed a portfolio wide solar PV feasibility study to identify the opportunities for renewable energy. We will install PV at three properties this year, with five more scheduled for 2023. This sustainable solar powered energy will be sold to our tenants, providing a return on our capital investment as well as saving over 5% of our total CO2 emissions.

Climate Risk – We have adopted the MSCI’s Climate Value-at-Risk (CVaR) to measure and monitor asset level physical and transition climate risk, including resilience to global warming.

Focus on Best in Class Buildings – Fiera Real Estate, through its eight, part owned local operating partners in the UK, is uniquely placed to drive the ESG agenda on new development projects.  A number of these have been acquired by our UK Long Income Fund.  Early involvement and collaboration between all key stakeholders (we as funder, the developer and the tenant), has ensured the design and specification exceed increasingly ambitious sustainability goals. 

In short, there is much work to be done across the real estate sector to manage the journey from one of the largest global carbon emitters to NZC.  The transition has begun, and time is of the essence.  Fiera Real Estate is leading the way and the prize is worth fighting for. 

Managers that can excel in the field of sustainability more generally will be rewarded with financial out-performance.  Knight Frank, in their recent Global Cities report identified that this could be by as much as an 8-18% value premium for ESG exemplar assets.  However, the rewards are much greater for managers who can achieve sustainability excellence leading to growing investor allocations, continued  growth in AUM as well as potential out-performance.  The stakes could not be any higher.