2 min read 26 Jan 22
It’s now a familiar fact that real estate accounts for nearly 40% of the world’s overall carbon emissions. A large proportion of this is generated by the energy used to light, heat and cool buildings. Hence, current regulatory focus on operational carbon, and industry bias towards new, highly energy efficient buildings, which can command rental premiums.
But less attention has so far been paid to embodied carbon, generated during a building’s construction or major renovation through the extraction, transportation and use of materials. These emissions can take several decades to recoup, even with the radical energy savings new buildings can offer, baked in. New buildings may therefore reflect optimum performance, and can create positive social value, however the threshold for demolishing and rebuilding existing buildings is likely to become higher.
The direction of travel for regulation of embodied carbon is yet to be clarified, but the impact on the real estate industry could be consequential. While an emphasis on new buildings could indirectly erode existing property values and dampen the impetus to plough capex into older stock, taking into account the carbon produced throughout a building’s lifespan may shift the goal posts.
Deeper carbon reductions will be needed across the spectrum in order to limit global warming to less than 1.5C above pre-industrial temperatures, with embodied carbon set to represent a larger proportion of emissions as buildings become more operationally efficient.
Meeting this target is likely to require a more comprehensive approach to buildings’ carbon emissions, with the UK Green Building Council (UKGBC) calling for the mandatory measurement and reporting of buildings’ whole life carbon, as part of its Net Zero Whole Life Carbon Roadmap for the Built Environment1.
Stimulus therefore looks set to rise for the renovation of older office stock in UK and European cities, some of which faces potential obsolescence as occupiers become increasingly discerning about the quality of their space. The planned tightening of Minimum Energy Efficiency Standards for UK real estate in 2023 is already providing momentum.
Buildings inherently require capex over the course of their life, and with portfolios likely to become increasingly asset management intensive, investors will need to embed sustainable development practices in their processes – including thoughtful choice of materials – in order to combat the associated embodied carbon. Circular economy principles are likely to be a key element in this – whether reusing steel or repurposing local paving slabs, for example.
Creating a sustainable development framework, combined with enhanced reporting, could potentially justify fiscal incentives such as VAT reductions for refurbishments, and we believe will be increasingly fundamental to investment performance as the race to net zero advances.
1 Net Zero Whole Life Carbon Roadmap for the Built Environment - UKGBC - UK Green Building Council
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