As published in Property EU on 08 March

With future valuations at stake, there has never been a better time for landlords to engage with occupiers and aim for net zero carbon – semantic discussions aside.

In the second of a series of three live events, Property EU’s Green Roadshow reached Amsterdam on 25 April. The intimate, ‘theatre in the round’ debate brought together five experts from across Europe to discuss where the real estate industry has reached on the road to net zero. Participating firms included Catella Residential Investment Management, Savills, Hollis, Redevco and LaSalle Investment Management.

The main conclusions of the lively discussion included the need for consensus on key terms relating to environmental, social and governance (ESG) matters, the importance of a pro-active approach, and how engaging more effectively with occupiers to understand their goals can result in a win-win situation for landlords.

Terms unclear

To open the discussion, the panel was asked whether there is even now a consensus on what exactly net zero means when it comes to real estate. The answers were refreshingly honest, but hardly encouraging.

‘I’m not sure from my point of view that there is a consensus today,’ said Alexandra Chevalier, fund and transaction manager of the Catella-Elithis fund at Catella Residential IM. ‘First, what are we talking about? Operational carbon, embodied carbon? If you look at regulation, we’re mostly still on operational carbon, but embodied carbon is starting, notably in France with the new RE2020 regulation on new construction.’

Indeed, Chevalier argued that there isn’t even agreement on what ‘net’ actually means. ‘I think that sometimes we forget that there is a pathway to net zero, which is first to avoid, then limit and maybe at the end you can compensate,’ she said. ‘But we have already some investors saying they don’t want to see any compensation because they want to be able to compare different funds and see what we are achieving on the first two steps.’

It was a point that had Iris Kampers, associate, ESG and sustainability lead, at Savills Nederland nodding in agreement. ‘I don’t even think everyone agrees that net zero means net zero carbon,’ she said. ‘Some people just talk about net zero energy and some talk about greenhouse gas emissions as a whole. We do need to be more focused on the pathway towards it.’

Deepshikha Mittal, ESG Associate at Hollis, added: ‘Different types of organisations have very different definitions of net zero. If I think about certifications, for example, if you’re doing a new build, they’re only concerned in your projected consumption, but it doesn’t take into account operational energy. However, when you’re thinking about existing buildings, they talk about operational and how you can make it better.’

Others disagreed with the premise of the question, arguing that there is a danger of getting too bogged down in semantics at a time when the need to crack on with getting emissions down is pressing. ‘I think there’s too much talking about definitions anyway,’ said Martijn Horsman, sustainable development manager at Redevco. ‘We need to come down to zero carbon, so it’s more about coming down to zero offsets. I think it’s really hard to get there and we need to challenge design teams to get to the maximum. That’s basically what I do. I put thresholds that make consultants nervous. If they don’t come back with questions, then I know that the threshold was too low.’

However, it was broadly agreed that shared industry definitions would be useful, not least to allow investors to compare like with like when making decisions. ‘There is no consensus and clearly we all need to work better at it,’ said Brett Ormrod, net zero carbon lead, Europe, at LaSalle Investment Management.

‘We owe it to our investors and the industry at large to be able to say “this is what it means and this is what we all believe in”. I get sick of these definitions, and we need to come to a consensus very soon on this because we actually need to get on and do things, as opposed to debating these definitions.’

At present, there are multiple organisations working on what they hope will become the shared industry definition, which makes it hard to see how that consensus will emerge. ‘It is difficult,’ Ormrod commented. ‘I think there’s a bit of a wait and see approach. I think we need to find the best one that works and we need to try and rally around that standard.’

Collaboration required

Quite apart from issues around defining terms, the panellists were also keen to highlight the need for closer working between landlords and occupiers. After all, if a building’s owner only takes responsibility for the shared areas of an office block, for instance, any carbon saved will be minimal.

‘I think we need to change the way that the industry thinks about the landlord/tenant split,’ said Ormrod. ‘We need to break down the barriers. We need to be a lot more engaged with our tenants and that’s a massive focus for LaSalle in the next couple of years – speaking to our tenants, putting out surveys and understanding how we can be better landlords.’

The point is that companies need to take at least some responsibility for the emissions generated by their customers and supply chains or what are known as scope three emissions. ‘Ultimately, our scope three emissions associated with our tenants are between 85% and 90% of our emissions,’ Ormrod added. ‘So, they are a massive part of both the challenge and solution.’

For those occupiers that don’t take a proactive approach –indeed, may not particularly care about their carbon footprints – Ormrod said that he used think that there was a limit to what real estate owners could do. No longer. ‘How I now approach it is that it’s about different people within different organisations,’ he said. ‘It’s about unlocking a conversation with the right person within that organisation.’

From his perspective, Horsman said that engagement was also about understanding the priorities of companies working in different parts of the economy. He pointed out that for some retailers, emissions from their properties could amount to just 2% of their total footprints, once scope three emissions are factored into the equation. ‘They are working on their supply chains, so actually the products that they sell,’ he said. ‘That’s where they are putting their efforts in for sustainability, knowing the energy use in the stores is only 2-3% of the challenge.’

In addition, Horsman said that his company had to work hard with smaller companies such as food and beverage operators, which are finding life particularly tough and the moment and are often focusing on merely keeping their heads above water. ‘It’s really the smaller SMEs that struggle with it because they sometimes have high energy demands, for instance if it’s a snack bar or cafeteria or something like that,’ he said.

‘They use a lot of energy and sometimes only gas or mostly gas, and we want to take our assets away from gas. They often say that they just want the lowest energy prices, that they have had two years of the Covid-19 pandemic and are now having to deal with an energy crisis. They say that they simply can’t pay the bills anymore. But they will turn to renewable energy when there is a good solution and we are looking into that.’

Occupier engagement 

In her experience, Kampers said that occupiers are often just as enthusiastic about sustainability as landlords and investors, both from an environmental and social perspective. ‘I think we need to keep track of the fact that it’s not just about energy and I find that a lot of occupiers are more ambitious, for instance, on social sustainability,’ she said.

‘It’s not just about energy and it’s also not just about the landlord having to say to the tenant or the occupier ‘you have to do something different’ because sometimes it’s the occupiers that are more ambitious. It’s our job to ask the right questions and to tap into that passion. Sustainability shouldn’t just be about legislation and compliance; it should also be about having a passion to do things in a more sustainable and better way.’

Chevalier added: ‘These are the tenants who are enhancing the value of our assets. So, I think it’s really important to think about their needs; how they see their future as a company or as residential tenants. That’s how you probably create sustainable value in the long term for your portfolio. Of course, there is not one answer, but that’s how we try to think when developing our portfolio.’

Valuation consequences 

From a purely property perspective, it was also agreed that important steps have been made in terms of how environmental sustainability at least can be factored into the valuation process – although there was also a consensus that further change is required. ‘People want us to value a building with the assumed energy level that they’re going to acquire,’ said Kampers.

‘I think that’s already sort of a direction that we’re taking and the questions only keep piling on. People really want to know what the value of sustainability and sustainable buildings is both from a landlord perspective and an occupier perspective. This makes it tricky to do the valuation correctly because you can’t put most of the things that occupiers do into a valuation. But I think we’re already doing more there than people might necessarily know.’

According to Mittal, many investors are already factoring the sustainability profile of buildings into their decision making when it comes to acquisitions, including whether the capex required to bring an asset up to scratch is something they are willing to stomach. ‘They know that it will cost them this much amount of money and some then decide not to go with an asset because they’ve decided that they don’t have the resources to invest in it at the present time,’ she said. ‘That happens a lot in our due diligence phase.’

It also has to be said that not all developers and landlords have signed up to the net zero agenda. Clearly, the companies represented on the panel take their climate responsibilities seriously, how representative they are of the wider industry – and particularly the non-listed sector – is an open question. As one panel member put it: ‘One of the questions I get still get from clients is what happens if I don’t comply? So that already paints the picture. Not everyone is quite there yet.’

So, while many real estate companies are comfortably ahead of government regulations when it comes to decarbonisation, many others are not. According to the panel, it will therefore be necessary for legislation to be tightened up significantly if the industry as a whole is to play its part in hitting the net zero by 2050 target. ‘I think governments and particularly the European Commission are trying their best to catch up, but it’s difficult,’ Ormrod said. ‘As we’ve discussed, even as industry experts it’s still very difficult for us to define what net zero carbon is. Now, try applying that to the whole economy. You’re talking about businesses of all shapes and sizes; you’re talking about agriculture and heavy industry. It makes it even more difficult. Hopefully, we’ll see changes to the regulation that promote investment into transitioning assets and not just rewarding assets that are already sustainable.’

Kampers added: ‘It’s always the case with legislation that it follows the trends rather than sets them. It’s the same with any change. It’s always a very small group of innovators at the beginning, which is what we’re seeing now as well. I think legislation is more of an indicator that the larger part of the population is adopting new thinking.’

Overall, the panel members in Amsterdam were upbeat. However, they also made it very clear that as an industry, real estate is very much at the start of the journey to net zero. Positive steps have been taken, but there is still a long, long way to go.