Real estate – green premiums and brown discounts



Property appraisal methodologies have been at the center of a recent series of reports and webinars from a UK-based consulting company. Carbon intelligence… In light of the targets for net zero carbon emissions by 2050, commercial experts see a gap between new green developments and older brown renovations.

In the UK, 70 to 80 percent of commercial buildings will be completed by 2050, which means retrofit will be an important factor in achieving zero carbon goals. It is understood that this will result in a discount in the valuation of these buildings to allow for upgrades to applicable standards.

New projects in the UK aimed at “protecting the environment” cost 10-15 percent more than buildings built to meet current regulations.

Green Premium

Sustainability professionals expect the green premium to become more measurable by 2050.

The green markup is an additional valuation or rental income related to the building’s environmental rating and sustainability performance.

Last year, the global real estate giant JLL Says They Have Identified Green Award in the heart of London.

JLL has compared BREEAM (Building Research Institute) certified Class A buildings to non-certified buildings. Between 2017 and 2020, the average markup for all buildings rated above unrated buildings is approximately 8%.

In addition, projects that meet higher BREEAM certification standards have a faster rental rate and therefore a shorter payback period for developers. An analysis of the rental rate of 120 schemes completed between 2013 and 2017 shows that higher BREEAM rated schemes tend to offer higher rental rates and have lower invalidation rates 12 months and 24 months after completion.

Finance distorts sustainability and ESG

The cost of developing a commercial project is just one facet of the valuation puzzle.

There is growing evidence that concessional financing is available for ESG (environmental, social and governance) compliant projects rather than minimum qualifications.

First, in UK, Green Savings Bonds and National Green Savings Savings and Investment Bonds will help finance the transition to a green economy by providing loans to certified projects. And second, investment funds with specific environmental mandates, or ESGs, will compete to fund the deals.

For example, GPE (Great Portland Estates PLC) signed a revolving line of credit linking the performance of the three ESGs to specific KPIs that would increase or decrease margins by 2.5 basis points based on performance.

Fractionalization and disintermediation

Recently, several steps have been taken to capitalize on the investment demand for ESG at the single building level. Balance sheet transparency and regulatory compliance within the portfolio were key. ESG compliance can be uncompromising, leading to compliance issues across sizable multi-billion dollar funds.

Professionals saw the path to ESG requirements by breaking portfolios. Individual building blocks or stand-alone projects are easier to evaluate and validate over their lifetime.

Several ideas contribute to this bottom-up approach, including the creation of the International Property Stock Exchange (IPSX) and the introduction of property tokenization using blockchain technology.

Birmingham PO Box – First IPSX List

IPSX is the world’s first regulated stock exchange dedicated to the initial public offering and secondary trading of publicly traded companies that own one institutional grade real estate asset and several physical assets.

The main advantage of IPSX is that it provides easy-to-learn transparency by focusing on the performance of individual buildings. Fund managers with high ESG barriers can be more willing to build an ESG-compliant portfolio through increased transparency.

There is only one ad currently on the IPSX market, but there are signs that more listings are coming soon.

Real estate tokenization offers small investors access to specific assets and also increases liquidity. Some of the liquidity comes from abandoning the intermediation of traditional organizations such as the transport industry.

Like IPSX, tokenized assets can be aggregated and managed according to established investment objectives. As long as the underlying assets are presented as separate units or stand-alone and managed projects, investors should be able to set their priorities.

Skepticism of carbon credit

The availability of carbon offset shopping has overshadowed the definition of buildings in need of a “brown discount”. ESG auditors and investors have been skeptical in recent years about the true impact of carbon offset and green washing.

Carbon Intelligence argues that offsets alone will not provide the fast and deep decarbonization needed to prevent the worst impacts of climate change and limit warming to below 2 degrees. They do not diminish the company’s exposure to the transition risks that it will face as it adapts to a zero-carbon economy. Let’s say companies rely on purchasing carbon credits to achieve zero emissions. In this case, it will send misleading signals to investors seeking to reduce risk and decarbonize their investment portfolios.

If the market discounts carbon offset within estimates, investors will move to an earlier extension. The dark green renewal trend may be the only sure bet for committed ESG investors.

Smart buildings

Buildings need to be more precise and less wasteful if they are to meet the growing demand for ESG investment. Carbon Intelligence believes this will be critical to adding intelligence to projects that will track and adjust their operating environment.

Brent Cross Redevelopment, London

Argent Land’s £ 5 billion Brent Cross project will leverage smart technology through a partnership with Vattenfall using state-of-the-art heating and cooling systems.

The area’s planned 6,700 new homes and three million square feet of new office, retail and commercial space will be served by 8 MW heat pumps, which provide more than 80% of the site’s total heat demand. The pumps will be designed for indoor cooling in summer and heating in winter.

In Australia Lendlease’s International Towers Sydney at Barangaroo have been recognized as a leader in the global office sector. For six of the last seven years, Lendlease’s portfolio of offices is considered the most sustainable in the world.

In Barangaroo, Lend-Lease uses Open Building System Integration Platform (OBSI) based Aviva software that integrates systems and business processes in three towers. Because it is an open data platform, OBSI serves a variety of stakeholders including tenants, building management teams, design and commissioning teams, and contractors as it is an open data platform. User interfaces and dashboards are optimized for different users based on their role, which simplifies interaction and allows them to efficiently manage exceptions. More importantly, tenants have easy access to real-time data and control from one location with one login and one GUI.

COP26 Expectations

The UK seeks to bring countries together to agree on a comprehensive, ambitious and balanced outcome that provides coordinated action to combat climate change and addresses critical issues related to the United Nations Framework Convention on Climate Change (UNFCCC). Kyoto Protocol, but Paris Agreement.

In essence, COP26 in Edinburgh will seek to finalize the rules for fighting climate change.

Governments will be invited to subscribe to protocols related to carbon markets, deadlines for fulfilling obligations to reduce emissions, minimize losses and, which is important for managers of commercial projects, global climate finance after 2025

If COP26 succeeds, both developers and investors will finally have a framework to measure their ESG goals and performance metrics.


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