As the world moves towards net zero, real estate managers must ensure their portfolios keep pace with the green transition or face the threat of being left holding a stranded asset timebomb. Will Turner, Director – Fund Services, at JTC Group looks at how to turn risk into opportunity.
More than half of the companies in the real estate universe are at risk of failing to achieve the climate change mitigation targets, which leaves property managers facing the prospect of severely devalued portfolios.
Recent industry research reveals 30% of commercial real estate mangers across Europe report their assets are currently stranded, meaning their portfolios hold buildings that are losing value due to poor energy performance .
And that picture is set to worsen with nine out of ten commercial real estate managers predicting that at least 20% of their assets are at risk of becoming stranded in the next three years.
Sustainability legislation, including the Energy Performance of Buildings Directive and the Environmental Act, is putting real pressure on property managers to overhaul their portfolios or be left holding billions of pounds worth of Real Estate that is no longer fit for purpose and significantly devalued as a result.
At the same time new safety regulations such as the Building Safety Act (BSA), which came into force following the Grenfell Tower disaster, demand property owners adhere to stricter performance and safety standards, particularly in relation to high-rise developments with a residential component.
The BSA means all high-rise property owners will be required to manage building safety risks, with clear lines of responsibility during the design, construction and completion of all buildings with a residential element.
They must demonstrate that they have “effective, proportionate measures in place to manage building safety risks in the higher-risk buildings for which they are responsible”. Failure to do so may result in criminal charges.
The BSA is also clear that owners and developers in many cases will need to meet the costs of fixing properties they have (or have had previously) an interest in, where deficiencies against current regulations are identified. This even extends to defects that are historical in nature and may have been compliant at the time of construction
All of which adds to the chances of real estate managers being left with stranded assets.
Retrofit, renovate, repurpose
There are ways to mitigate that risk, and we are helping real estate managers with innovative strategies that are returning stranded assets into profitable enterprises.
New funds are emerging which are targeting stranded assets that can be repurposed, retrofitted or redeveloped.
For example, obsolete commercial buildings offer huge potential to be converted into residential properties that help meet the government’s commitment to build 1.5 million new homes over the next five years, while offering long term returns for investors.
Repurposing existing stock is cheaper, more efficient and better for the environment, and these buildings are usually served by existing infrastructure, making it a more viable option than starting a development from scratch.
It is no surprise then that UK’s real estate market is proving an increasingly attractive option for overseas investors who recognise the current attractive pricing point; the relatively politically stable environment following the recent general election; and the opportunity to hold long-term assets that meet their ESG criteria.
Commercial real estate managers are facing a tough time getting their portfolios up to the standards required by legislation and industry regulations, and increasingly expected by prospective occupiers as part of their own ESG criteria. But what appears a costly exercise may actually prove to be a highly profitable one if managers are able to think outside the box and plan for the long term.
JTC can support real estate managers with a suite of services to complement their strategy from both a corporate and fund administration aspect through to ESG reporting.
To find out more about how JTC can help real estate managers, please contact Will Turner – [email protected]
