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Capitalising on sustainability tailwinds

Rising energy costs may be causing pain for the property sector right now but could fuel its renewables transition. For investors, that creates opportunity says Joanna Turner, Canada Life’s Head of Property Research.

Energy costs have been front of mind for businesses and consumers alike since the second half of 2021, when rising demand and supply constraints started to push prices up. They received another jolt when Russia invaded Ukraine in February, creating uncertainty about oil and gas supplied from one of the world’s largest producers.

Property investors are not immune to higher energy prices. It affects developers, owners and tenants alike, but in different ways. While tenants tend to bear the brunt of day-to-day energy costs, developers and property owners also face higher bills.

For developers, it is the rising cost of everything associated with a project, from fuel to run machinery and materials to construct buildings – construction material prices, for example, reached a 40-year high in late 2021. For property owners like Canada Life Asset Management, higher energy costs come into play in value-add activity such as refurbishment and renovation projects, which is the focus of much of our asset management initiatives.

Looking beyond immediate headwinds

Undoubtedly, we are in the midst of a bruising period for developers, but if we look past the short-term pain points, there is opportunity in sight for property investors.

Elevated prices and the realisation of over-dependence on Russia for gas and oil supplies is injecting vigour into the transition towards renewable energy sources. This, paired with a range of international and domestic programmes targeting net-zero emissions, should expedite the sector’s progress in this area.

Related improvements such as energy consumption tracking, which the sector has admittedly been slow to adopt, are likely to accelerate, with SMART buildings now a more palatable option for the longer-term investor. New and emerging technologies to monitor the energy usage of buildings to assist in reducing it and making it more efficient, are already becoming more widespread and are likely to develop more rapidly in the future in response to the current energy crisis as the technology improves and the data and insights gleaned from it prove invaluable.

Over the medium term, we anticipate pressure from governing bodies to drive occupiers towards using more sustainable workspaces which, given the relative scarcity of net zero offices available, may present an attractive dislocation between demand and supply.

In the UK, while the government has committed to net zero by 2050, regional councils have been empowered to pursue more aggressive outcomes. This may force more property owners into action far sooner than forecast, although many ESG responsible owners and investors have already made public commitments and set tougher internal targets well ahead of the 2050 government target, both for reputational and social reasons, as well as commercial value-add ones.

While not a pre-requisite at present, the focus on a building’s BREEAM (Building Research Establishment's Environmental Assessment Method) rating will likely evolve into a more coveted statement, as companies seek to align with evolving ESG criteria and landlords seek to prove their ESG credentials to investors, occupiers and external benchmark providers such as GRESB (the Global Real Estate Sustainability Benchmark). Also, the new NABERS[1] rating system, which has just begun to be adopted in the UK from Australia, is also likely to evolve and improve the transparency and consistency of sustainability data standards as it offers a more holistic approach to the measurement of environmental performance of buildings and tenancies, including the indoor environment quality of a building or tenancy and its impact on the environment.

Future-proofing assets

At Canada Life Asset Management, we have committed to such measures, having published our Net Zero Carbon Roadmap last year in which we have committed to achieve operational net zero by 2030 across all our UK real estate assets for which we have direct landlord responsibility, and to material net zero by 2050, if not sooner. This would include all indirect Scope 3 energy emissions coming from our suppliers, contractors and tenants, as well as ourselves, which is more complex and difficult to quantify.

To achieve this, our new Roadmap outlines among others, detailed strategies for reducing carbon emissions on all of our property assets via our acquisitions, procurement processes, developments and refurbishment programmes, renewable energy provision and also in our reporting procedures.

In the near term, at least, we will be investing in the sustainability characteristics of the buildings across our portfolio. Materials are much more expensive right now, but we view the short-term pain of absorbing such costs as a means of future-proofing our portfolio to make it more sustainable and attractive to occupiers, thereby enhancing its value over the long term.

The move towards ESG is, seemingly, a one-way street, and with additional layers of regulation in the pipeline, buildings that fall outside of the relevant criteria will cease to be marketable as they become ‘stranded’ assets in the future, rejected by occupiers and lenders.

While some in the property industry have deemed the price pressures on energy and materials as adequate grounds for pausing development activity, we see value in proceeding where costs remain sensible and long-term increased property values will be targeted.

Pairing the expected increase in demand for ‘green’ properties with the dearth of existing buildings meeting new sustainability criteria and indeed, developers able to service that space, as investors with capital to deploy, we believe that by investing today, we are laying the groundwork to anticipate and capitalise on this rapidly rising demand, enhance the future value of our assets, while also contributing to a more sustainable, responsible built environment.

 

Important Information

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors.

No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at https://www.canadalifeassetmanagement.co.uk/

Please note that while Canada Life Asset Management Limited and Canada Life Limited are regulated as stated below, property management and the provision of commercial mortgages are not regulated activities.

Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Expiry date 30/04/23

CLI02096

[1] NABERS stands for National Australian Built Environment Rating System.