SUSTAINABILITY IN FOCUS
Green Real Estate Funds:
Providing a Future-Fit Portfolio while Reducing Carbon Emissions
This case study provides a roadmap derived from sustainable real estate funds with direct holdings. The author describes how to actively manage properties of an investment fund based on a strat- egy that has provided attractive financial returns over the years, while successfully reducing carbon emissions.
Step 1: Energy monitoring and optimization – focus on renewables and district heating
The first step to reduce recurring operational costs, energy con- sumption and the carbon output of the portfolio is monitoring the properties. Figure 14 presents the annual energy consumption and CO2 output of selected properties. The analysis is based on account- ing data for commercial properties from J. Safra Sarasin Swiss and European real estate funds.
At J. Safra Sarasin, the following observations were derived from the monitoring of properties with a focus on renewable energy and energy efficiency solutions:
- Commercial properties are electricity intensive, while residen- tial properties are heating energy intensive. Thus, our main focus for commercial properties is to improve electricity, light- ing and ventilation, while for residential buildings it is on effi- cient heating systems.
- Proper time frames (e.g. minimum usage during the night or weekends for office space) and reconfiguration of the ventila- tion and heating pumps may save up to 15% of total energy consumption.
- Expected and actual consumption levels may vary. We identify inefficiencies by benchmarking all properties, based on the previous year’s consumption and on design values or energy certificates. E.g., this let us identify electricity pumps that were not properly configured and were subsequently optimised.
- Gas heating systems are CO2 intensive and eco gas solutions often more expensive than natural gas. Therefore, we prefer heating solutions not based on fossil fuels, such as heating pumps or district heating.
- District heating is efficient, and the proportion of renewable energy consumption within district heating has increased. This is, in our view, the most promising solution to decrease CO2 emissions, while also supporting the local economy.
By assessing a real-estate portfolio in this detailed manner, funds can better implement an active management strategy, compare their real-estate assets, and identify which assets to concentrate on in order to improve the portfolio energy consumption and CO2 out- put levels. Only then is an investor well equipped to move to step 2.
Chart 1: Real Estate Asset Carbon Emissions And Energy Usage Monitoring
Step 2: Sustainability strategy & upgrades – focus on automation, ventilation and lighting
Under the Energy Efficiency Directive, EU countries must draw up long-term national building renovation strategies. Switzerland’s Federal Council has also developed the Energy Strategy 2050, which focuses on increasing renewables and energy efficiency. We thus anticipate that regulators in Switzerland and Europe will tighten their codes for existing buildings. Future measures will include revised energy efficiency directives and energy audit obligations for investment funds.
To align with this expectation, a standard 10-year maintenance plan is implemented for properties with low energy ratings (chart 2). Given that massive energy savings can be achieved by retrofitting existing buildings, the plan below is key to a successful transition to low-carbon real estate.
Chart 2: Standard 10-year Maintenance Plan
- Short term measures – quick wins (1-year time frame)
- This category focuses on simple optimisations with low investment costs, taking into consideration the feedback from build- ing and operational experts. We also invest in the automation of the property, which results in energy and carbon output optimisation.
- Medium term measures – higher efficiency (5-year time frame) In this phase, the investments focus on selective technical upgrades of infrastructure that is close to the end of its life cycle. The optimizations concentrate on lighting systems and local units from the ventilation or the heating system.
- Long Term Measures – Capex Intensive
- Commercial properties with a low energy rating and no long-term upgrade plan are bound to one-time high capital expenditure (capex). Property funds often face the dilemma to either sell the property at a discount before the main rental contracts expire, or to enter into an extended refurbishment programme. Under such a program, measures focus on a complete refurbishment of the infrastructure, internal space and shell of the building.
In conclusion, at J. Safra Sarasin, we integrate the above elements on three levels during our investment process. First, by sourcing and selecting the right investments, i.e. properties that are suitable for implementing the above strategy. Second, during acquisition and due diligence, we use the above elements as a framework to create cost/return-based scenarios for the next ten years on a property level. Finally, with active management throughout the lifecycle of the property, in combination with lease expirations or lease renewal options during the holding within the funds. This consistent methodology has, over the years, provided longer lease terms and higher rental levels, resulting in higher property valuations. We believe that future-focused real estate funds can play a key role in the transition to a carbon-neutral future and that a long-term approach helps investors stay ahead of future challenges.