Investors outlining the importance of stability and predictability in UK real estate regulation received a warm welcome from Sarah Jones MP, Minister of State for the Department for Energy Security and Net Zero (DESNEZ), and fellow policymakers in a ministerial roundtable.
Key asks raised included the importance of regulation to level the playing field and to bring up the ‘dirty tail’ of inefficient buildings; more consistent data and KPIs to help unlock capital; and a system-level approach to facilitate access to renewables. Potential tax incentives, such as reduced VAT on retrofitting, were also suggested to facilitate action.
Investor recommendations were well received, with IIGCC set to follow up with a letter to the Minister outlining the key asks and reiterating their support.
Decarbonising the sector looms large on the minds of investors and policymakers alike. Commercial real estate is a strategically important asset class for IIGCC members, representing between 10-15% of institutional investor assets under management and some £918 billion for the UK economy, more than half of which is held by investors.
The UK Climate Change Committee reported that non-residential buildings account for 5% of UK emissions today, and that those emissions must fall 87% by 2040 under the Balanced Pathway of its Seventh Carbon Budget. Alongside the benefits and imperative of decarbonisation, a focus on the sector can support the UK’s growth mission and Mansion House Compact goal to unlock pension fund capital in UK private markets.
Direct investment into commercial property, the creation of new financial products focused on real estate decarbonisation, such as brown-to-green funds, and investment into companies in the supply chain that develop climate solutions can all support the government’s twin objectives.
Better returns
Investors stressed that in many cases, solutions already exist. This is notable in the mass electrification of buildings, where sustainable real estate already provides better returns. Since 2021, energy-efficient commercial property assets recorded a total return of more than 16%, compared to 11.2% for energy inefficient assets, CBRE reported in its latest Sustainability Index.
On the demand side, tenants increasingly expect energy efficient and sustainable buildings, which when delivered can lead to higher occupancy rates and potentially higher rental yields. Companies looking to decarbonise their operations are acutely aware of the material reduction in emissions that a more efficient estate can offer.
Real estate is long-term in nature and the regulatory environment should reflect this, investors explained. Stable and predictable policies with a clear direction of travel can help investment planning and financing in the sector. Regulation that is consistent, ambitious and enforceable can level the playing field, ensuring that frontrunners and laggards face the same expectations.
In particular, investors highlighted that more ambitious minimum energy efficiency standards that clearly outline the future pathway are essential. As is a clear roadmap for the phasing out of fossil fuel boilers.
Innovative tax policies can serve as an incentive for retrofits and low-carbon investments, helping to shift the market and support faster capital deployment. Reviewing capital allowances, reducing VAT rates for retrofitting, and reviewing ‘Contract for Difference’ strike prices to make renewable energy more competitive were identified as critical areas for review.
Data remains a key barrier for real estate investors, who would welcome better standardisation and clear, market-wide performance indicators to help unlock capital. Comparability is essential for the underwriting and benchmarking of sustainable commercial buildings.
Now is the time
A whole-of-government approach which includes DESNEZ, HM Treasury, the Department for Buildings and Transport, and the Financial Conduct Authority could support the development of consistent and interoperable sustainable finance metrics for the sector.
The forthcoming UK Sustainability Reporting Standards offer an opportunity to incorporate sector-specific components. Our recent paper, Aligning Real Estate Sustainability Indicators, can provide a basis for understanding the metrics most useful to investors. Ongoing Energy Performance Certificate (EPC) reforms provide a further opportunity to strengthen metrics and data collection, including primary energy demand and final energy use intensity.
Building on the warm reception from the government roundtable, we are preparing a follow-up letter to Minister Jones, outlining a clear set of policy asks in line with the above and reiterating investor support. In light of the Climate Change Committee’s recent recommendations, now is the time for the UK to capitalise on the real estate opportunity.
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