The time has come for a carbon-neutral approach to real estate. A series of macroeconomic and pandemic-fuelled factors have combined to make this a natural choice for real estate tenants, landlords and investors in the last 18 months.

As the effects of climate change intensify, pressure is growing for the world to step up efforts and reach the target set by the 2015 Paris Agreement to limit global warming and achieve net-zero carbon by 2050.

Within the UK, non-domestic buildings account for around 18%[1] of the country’s total emissions, which means real estate owners and investors have a huge part to play in achieving that goal. According to Carbon Trust, a leading UK-based environmental and sustainability consultancy, carbon emissions from UK commercial property must be reduced by at least 80% if the country is to reach net zero emissions.  

IMPROVING ESG PERFORMANCE

At the same time, companies that occupy these buildings are under pressure from investors and civil society to improve their environmental, social and governance (ESG) performance. And, of course, the pandemic has changed the way people work, shop and spend their leisure time, forcing companies to rethink their real estate needs and adapt their spaces to make them safer and more attractive for employees and customers.

The conclusion is clear. Real estate markets are undergoing a period of rapid change and their direction of travel will inevitably be towards net-zero carbon emissions. Against this background, industry pioneer Columbia Threadneedle has been partnering with Carbon Trust and key developer Stanhope since 2010 to create a comprehensive framework for delivering carbon neutral assets in one of our UK real estate strategies.

WHY THE TIME IS RIGHT

Disruptions caused by the pandemic have created attractive opportunities to acquire real estate assets and refurbish them to create modern, energy-efficient workplaces in the UK, where we manage some £8 billion ($11 billion) of real estate assets[2].

Currently, we are seeing limited competition to acquire institutional-quality assets in the UK that require active management to unlock value, and we believe ‘core-plus’ and opportunistic properties are currently mis-priced. This is especially true since the UK market is at an inflection point, with economic recovery under way and gross domestic product forecast to jump 7% this year[3].

These favourable market conditions provide a strong tailwind for our carbon neutral approach. Columbia Threadneedle concentrates on refurbishing buildings to bring them up to 2050 standards, because it is quicker, cheaper and less risky than redevelopment. Retaining building structures also results in significantly lower carbon emissions overall. Newbuild properties have embedded carbon – the carbon created in building them – whereas with existing assets, it can be assumed that the carbon is already spent.

BOOSTING ENERGY EFFICIENCY

The key element of our refurbishment blueprint is to improve energy efficiency through measures such as LED lighting, the replacement of gas for heating purposes, improved energy controls, installation of CO2 sensors to gather data on energy use, rainwater harvesting and provision of charging points for electric vehicles. Upon project completion, occupiers receive ongoing support from Carbon Trust experts to help them minimise their energy costs and carbon emissions.

We have also been working with Stanhope, a leader in sustainable development techniques, to reduce carbon emitted during the construction phase. Stanhope played a key role in the creation of the Building Research Establishment Environmental Assessment Method (BREEAM) accreditation system in the 1990s and is a founding partner of the UK Green Building Council. Wherever possible, our refurbishments use recycled and sustainable materials such as carbon-negative carpet tiles and airlite paint.


Following our refurbishments which included an upgraded façade, full mechanical and electrical (M&E) replacement and car parking spaces removed in favour of cycle bays, this building in Richmond London fetched an ungeared internal rate of return internal rate of return of close to 52.4% over a period of 16 months (based on values calculated from asset purchase in April 2013 to post refurbishment in August 2014. Past performance is not an indicator of future returns). For illustrative purposes only.

Finally, where remaining carbon balances must be offset to achieve net zero, we use Gold Standard or Verified Carbon Standard projects such as the Tropical Mix Reforestation project in Panama.

DELIVERING VALUE TO ALL STAKEHOLDERS

Columbia Threadneedle’s carbon neutral approach to real estate is designed to deliver value to all stakeholders. As an asset manager and landlord, we can directly control only a small proportion of emissions – far more are generated, for example, by the business activities of our tenants. By making carbon neutrality the most attractive option for all stakeholders, we can create the right conditions for everyone to work together.

The risks are serious if we do not collaborate: the value of low-performing real estate assets will suffer as demand for them declines and new regulation threatens to make them obsolete. However, if we can plot an effective route to carbon neutrality, we will protect and enhance their value. Our refurbishments will modernise them, delivering more attractive and sustainable workplaces with lower running costs that comply with the toughest environmental standards. This will help our tenants and investors to improve their own ESG performance, delivering wider benefits to society. For investors, our approach should translate into higher occupancy, fewer voids, higher rents and enhanced capital values.


Our refurbishments can modernise properties and deliver more attractive and sustainable workplaces for our tenants. Above is the reception area of an East Central London office building, before and after a refurbishment project managed by Columbia Threadneedle. For illustrative purposes only.

ENHANCING ASSETS, RETURNS AND ENVIRONMENTS

We have already witnessed the effectiveness of our carbon-neutral approach to refurbishment. For example, we undertook an extensive refurbishment of a 41,000 sq ft industrial warehouse in the UK, where we upgraded the perimeter wall insulation, fitted double-glazed rooflights and LED lighting, installed charging points for electric vehicles and provided cycle bays and shower facilities to encourage green commuting. The building’s energy performance certification (EPC) rating improved from D to B and it was leased on completion for a 10-year term with a 33% rent increase. Its capital value was lifted by more than 46%[4] within six months from pre- to post- refurbishment.

New double-glazed rooflights, LED lightings and EV charging points are just some of the few upgrades that we installed at this warehouse, achieving a capital value uplift of more than 46%. For illustrative purposes only.

Overall, our refurbishments to date have all achieved BREEAM “Excellent” ratings along with an average improvement in EPC ratings from E to B. Once occupied, their energy intensity is 24% lower than the typical 2019 level calculated by the UK’s Better Buildings Partnership.

This is the kind of performance that all commercial real estate assets will need to achieve if the global drive to reach net-zero carbon by 2050 is to succeed. Before long, a carbon-neutral approach to real estate will no longer be the exception – it will be the industry standard.

UK real estate at Columbia Threadneedle Investments

Columbia Threadneedle Investments is a significant and experienced manager of UK commercial real estate. Established in 1994, our UK real estate team consists of over 70 property experts, with an average of 19 years continuous group employment. To find out more, visit our website or get in touch with us at [email protected].

Columbia Threadneedle Investments is also a co-sponsor of AsianInvestor's Family Office Investment Insights event to be held on September 16, where we will explore investment opportunities in the US real estate market, using our unique data-driven investment approach. 
 

Important Information:

For Professional and/or Qualified Investors only (not to be used with or passed on to retail clients).

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

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Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.


[1] Source: Digest of UK Energy Statistics; BRE.
[2] Source: Columbia Threadneedle Investments, as at 30 June 2021.
[3] Source: IMF, World Economic Outlook Update, July 2021.
[4] Source: Columbia Threadneedle Investments, based on values calculated from pre- to post-refurbishment, Q1 19 to end Q2 19. Past performance is not an indicator of future returns.