Asia Pacific asset owners are just beginning to grapple with decarbonization and how to factor transition and climate risks into their valuations; even so, some markets and investors are already ahead of the pack. This topic was discussed as part of a recent ULI Asia Pacific webinar, part of a series looking at decarbonization.
ULI Europe CEO Lisette van Doorn opened by introducing C Change, a ULI-led program to mobilize the European real estate industry to decarbonize. Achieving decarbonization by 2050 requires an annual renovation rate of 2 to 3 percent of total stock. Globally, renovation rates have been underperforming. An initial focus for the C Change initiative is to focus on the transition risk of decarbonization and how to factor that into real estate valuations. The C Change program was also a topic of conversation at the recent 2023 MIPIM industry conference.
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While Asia Pacific is lagging Europe in its consideration of decarbonization and transition risks, the picture in the region is very similar: a multiplicity of standards and approaches, a valuations industry getting to grips with the concept, and a few market leaders beginning to integrate sustainability considerations in their valuations. Panel moderator Calvin Kwan, head of sustainability and risk governance at Link Asset Management, said: “The question is not whether we act, but how we act. We need to collaborate and bring many stakeholders together to meet these challenges.”
The presence of European investors in Asia Pacific real estate funds and their demands regarding sustainability is both an opportunity and a challenge for Asia Pacific investment managers, said Mark Cameron, head of sustainability, Asia Pacific, at Nuveen Real Estate. However, regulation in the Asia Pacific region is also an important driver.
“We are taking a more serious look at things like internal costs of carbon, especially as we start to see more and more jurisdictions in this part of the world bring in carbon taxes; Singapore and others are moving towards taxes or emissions trading systems (ETS).”
Singapore introduced a carbon tax in 2019 at an introductory level of S$5 (U.S. $3.75) per ton, rising to S$25 (U.S.$18.75) next year, projected to reach S$80 (U.S. $60) by 2030. At present, the charge is only levied on industrial facilities emitting 25,000 tons (2,2679,619 kg) a year or more, but the expectation is that the tax will be more widely applied over time.
“We are starting to have more discussions about how we internalize that cost of carbon,” said Cameron. “We will position ourselves for a market where you have to report it and also to increase the viability of decarbonization projects as well. So that internal cost of carbon is a big focus.”
As part of the C Change research, ULI Europe members have flagged that transition risks will have a significant impact on valuations. Valuers in Asia Pacific are somewhat behind, said Danny Mohr, head of valuations, Asia Pacific at CBRE, largely because transactions have been less impacted by sustainability considerations.
“If the market is not doing anything, it’s very hard for valuers to do something,” said Mohr. “However, the amount of discussion and thinking about how we could do things around the valuation space has escalated in recent months in the Asia Pacific region. For example, we’ve recently received our first [request for proposal from a client around sustainability and valuation.”
The occupier market is an important driver of sustainability in real estate, Cameron and Mohr said. Occupier demand for sustainable assets has increased across all sectors and geographies. In Australia, for example, certain environmental standards must be met to secure government tenants, said Mohr.
Some asset owners in Australia have moved ahead of the market in using a pathway to net zero or a certification improvement plan in their marketing when selling assets. Cameron said: “So they are ahead of the market in saying, here is our clear disclosure of the expected liability into the future. That is a really interesting approach.”
Markets such as Australia and Singapore are becoming more attractive to investors thanks to their sustainability regulations. Cameron said: “Markets where there is a clear regulatory or technical pathway give us that much more clarity, therefore it is much easier for underwriting. So certain markets become more favorable if you’re thinking about transition risk and being comfortable in transition.”
There are also differences in sectors; Cameron pointed out that the net zero carbon expectations for a Southeast Asia logistics fund would be very different from a core Australian office fund.
The capital expenditure to improve a building’s energy performance or to set it on a net zero pathway is another factor to be considered and some investors are beginning to accept lower returns today to secure the long-term viability of an asset.
However, elements such as a net zero pathway also raise questions for valuers and asset owners, said Mohr. “The only real way to get a building down to net zero is with offsets. But where is the value which comes from that sitting? Is it sitting in the real estate? Probably not, it’s probably on a corporate balance sheet somewhere.”
