Net Zero Carbon and the Circular Economy: Impact on Value

Emily Chadwick, part of the valuation advisory team at JLL explains why failing to consider the opportunities presented by sustainability trends now, property owners and developers risk losing out.

State of play

The property industry is at a tipping point on its path to a sustainable future.

This year the government set in motion amending the 2008 Climate Change Act to increase our carbon emissions reduction target from 80% to 100% by 2050. At the UN Climate Summit in September, the World Resources Institute launched the Zero Carbon Buildings for All initiative. In the same month, JLL was the first property consultant to announce ambitious net zero targets for 2030. By the end of September, 23 major property owners became signatories of the Better Building Partnership’s Climate Change Commitment.

With increasing velocity, the industry is hurtling towards a legislative and governance landscape where sustainable buildings are the new normal. Targets have been set, and now the reality of the task is upon us. At JLL, we are already advising clients on Net Zero strategy, and the Circular Economy. This new horizon presents an interesting value opportunity for first-movers. By failing to consider the opportunities presented by these sustainability trends now, property owners and developers risk losing out.

Top of the agenda: Net Zero

Net Zero is the key sustainability trend to have risen up the agenda in 2019. At its most simplistic, it means only producing carbon emissions during the property lifecycle which can be mitigated in equal amounts. Ideally this entails reducing emissions through resource selection and reduction, and the use of renewable energy. Of course, the only way to truly prevent construction emissions is to not build anything at all. There is therefore an acceptance that carbon offsetting is necessary to achieve net zero in many cases.

The UK Green Building Council has published a Net Zero Carbon Framework which encompasses both new developments and existing stock, considering carbon in construction and operation. The Framework currently only considers part of the picture. In order to assess the impact of the whole lifecycle of property, maintenance, demolition, and material re-use will have to be incorporated in the future.

Low carbon and net zero carbon developments are already being targeted by some of the UK’s most prominent developers. Lendlease’s Elephant Park is aiming to go further than net zero and be climate positive by 2025.

For investors, considering the sustainability credentials of a building could generate higher returns and reinforce future occupational demand as tenants further prioritise sustainability and the triple bottom line.

For tenants and house buyers, the running costs of occupying a net zero building will be significantly lower. From a corporate perspective there are obvious CSR benefits of occupying net zero in-use space, which align with increasingly stringent corporate targets. Increased demand from tenants for what is currently non-existent stock in the UK could drive higher rents and sale prices for first-movers towards net zero development.

We also consider that sustainable buildings will maintain their value better over time. Every building has an expected useful life before refurbishment or redevelopment is required in order to realise its highest value. It is likely that sustainably constructed buildings will approach this low-value point at a slower rate. The increased rate of obsolescence of a property as a result of a lack of sustainable features can be referred to as sustainability risk.

There has also been evidence in US REITs that green-certified buildings are more resilient against market-wide shocks, showing reduced exposure to systematic risk in the market and wider economy. This could translate to net zero buildings in the future.

Given increased occupier and investor demand, and reduced risk over time, there is a sound argument that a net zero building could maintain a higher value, for longer, with less price volatility.

Moving towards a Circular Economy

Net zero carbon is arguably the industry’s first step towards a circular economy. The circular economy is a solution to the current state of play where demand is increasing for limited resources, many of which are used just once before becoming waste. According to research by McKinsey, over the past 20 years resources more than doubled in price, and over the past 30 years, the annual price volatility of resources tripled. In addition, 59% of UK waste in 2018 was waste from construction, demolition and excavation. We are paying more for materials as demand outstrips supply, and yet still wasting a vast amount of materials, and therefore, money.

The circular economy seeks to extract more value out of the resources we use, keeping them in circulation for longer. As opposed to a linear economy where we extract materials, use them, then dump them, the circular economy seeks to ‘close the loop’ by reusing, repurposing, remanufacturing or recycling materials. It also means maximising the current value of assets by using them to their full capacity. Research shows that European office space is unused for 60% of working hours. Outside of working hours that space is normally empty. This is a wasted opportunity to create value that circular businesses will seize.

Teaming up with the Ellen McArthur Foundation and Arup, JLL have been investigating circular real estate investment models. Consider, for example, a building constructed such that it can easily be converted between commercial and living uses. When the property is in need of refurbishment, or simply when one market outperforms the other, it would require less capital expenditure to convert it rather than demolish and rebuild. This property can then achieve its highest value, without lengthy void periods and the high costs of reconstruction.

Seizing the opportunity

Considering the business case for Net Zero and the Circular Economy for your assets is a clear opportunity to create value. With the commitments that have been laid down by the government and the industry, combined with the pressure on businesses and individuals to consider their impact, there can be no doubt that demand for sustainable buildings is here to stay. We predict that in the future there will be a discount to assets which do not meet higher sustainability standards. For the moment, pioneers in this field who seize this opportunity could reap early rewards.

Adapted from an article first published in EG on 19 November 2019.

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