Commercial real estate investors, developers and owners are embracing the move towards more efficient and eco-friendly commercial buildings, helped along by growing government mandates globally. Countries like the United Kingdom have been setting the pace when it comes to ESG-focused initiatives and now other countries are starting to follow suit. So how are commercial real estate companies approaching these initiatives?
In this episode of The ChangeMakers in CRE, Michael Gillon, National Portfolio Manager & Head of Retail Management at Bayleys Real Estate in New Zealand, discusses how international CRE companies are adopting ESG initiatives and the impact of ESG-focused government mandates.
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How the UK paved the way with ESG
Michael Gillon has over 20 years of experience in real estate. Having worked across New Zealand and the UK, he has seen how different markets have approached ESG.
The UK, in particular, has been a leading market in driving tangible actions to develop more efficient and environmentally sustainable commercial buildings. According to Michael, one of the reasons behind this has been the introduction of government mandates for buildings.
Properties in the UK are now subject to Energy Performance Certificates, which set out the energy efficiency rating of a property and contain recommendations for ways in which the efficiency of the property could be improved. If a particular property fails to meet the standards, you cannot perform a transaction on that property.
Here’s a helpful explainer from The Financial Times on how new regulations may lead to property assets becoming ‘stranded’ if they don’t comply.
“The UK was far ahead, and a lot of that has got to do with the mandates around Energy Performance Certificates. Essentially, each unit or each building will get a rating based on its energy performance.
It will range from an A, B, or C, right down to an F and a G. Essentially, you can't do a transaction on a building or a unit with an F or a G rating. That prompted many landlords to take stock of their portfolio and identify which buildings were at risk of potentially becoming stranded assets."
The impact of government mandates
Government mandates are beginning to be introduced worldwide, accelerating the focus on ESG in CRE.
Australia has its NABERS rating program, while the US is starting to introduce new laws to help reduce carbon emissions from buildings. One of those is Local Law 97 in New York, which puts carbon caps on all buildings above a specified size as part of a plan to drastically reduce the city's carbon emissions.
By 2024, these buildings will have to comply with new greenhouse emissions caps or face a fine. Alongside these mandates, there is growing internal pressure from the boards and shareholders of institutional investors to meet ESG targets.
Michael believes a global standard on every property will help ensure uniformity of ESG initiatives and avoid confusion.
"It'll be good to have a global standard. For the moment, for those larger institutions, you've got the GRESB rating, the Global Real Estate Sustainability Benchmark, and a lot of that is investor-led. So there's pressure from internal stakeholders or shareholders to get a GRESB rating, so you can benchmark against your peers and see how you're performing.
And that's quite a holistic tool to an extent where it's not just focused on energy and utility usage, like the NABERS one. It also considers risk assessments around climate resilience, to looking at tenants' satisfaction surveys, and how you're treating the occupiers of the space within your building."
The environmental impact of a property now undoubtedly influences investor interest and occupancy rates. Michael believes that will also shift how properties are managed as there is greater awareness on continuing to meet ESG benchmarks and ensuring buildings are operating in a sustainable way.