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Asset Management

Climate change: a risk and an opportunity for the real estate market?

Climate change poses both significant risks and unique opportunities for the real estate market. Discover how industry leaders navigate these challenges and embrace sustainable solutions in our in-depth analysis.

The Intergovernmental Panel on Climate Change (IPCC) released a concerning report in March 2023: scientists delivered a final warning that without immediate and massive efforts, limiting global temperature rises to 1.5°C will be beyond reach. “Really, it’s a call to arms,” says Peter Thorne, one of the authors.

At the same time, regulators are introducing reporting standards, governments are passing emissions-related laws, investors are making net-zero commitments, and employees and stakeholders are demanding eco-conscious action.

Virtually no industry or portion of society is left untouched by global warming, and urgent action is required. But how does climate change impact the real estate market ? We explore the risks and opportunities below.

Property sector and global warming

As per the landmark 2015 Paris Agreement, governments agreed that global emissions should reach net zero by 2050. But that transition involves transforming how we live, produce, consume and travel.

Real estate accounts for approximately 39% of global carbon dioxide (CO2) emissions, so the sector must decarbonise if it’s to meet eco targets.

That creates new market responsibilities, opportunities and challenges, including revaluing and future-proofing property portfolios, and homebuyers and tenants demanding more sustainable buildings. McKinsey & Company suggests three actions property players can take to make the transition smoother.

1. Incorporating climate risks into valuations

These include physical and transition climate change risks: examples range from floods, rising sea levels and fires to technology, regulations and consumer behaviour. They impact a building’s operations and value – directly and indirectly.

As we move towards a net-zero world, real estate players must evaluate which assets will be affected, by how much, in what ways, and how to respond. Achieving that requires better climate intelligence, including:

  • enhancing analytical capabilities to assess the impact on revenue, operating and capital costs, and capitalisation rate risks;
  • understanding and quantifying exposure and opportunities by prioritising risks and modelling physical hazards and their projected changes.

2. Decarbonising assets and portfolios

Decarbonising a building’s ecosystem involves understanding available methods, plus their costs and benefits. Options include the following:

  • Low-carbon construction
  • Building retrofits to improve energy efficiency
  • Upgrades to heating, cooling, and lighting

Where possible, improvements should be made to existing structures by:

  • quantifying baseline emissions;
  • identifying potential ways to decarbonise, plus cost/return on investment;
  • setting targets spanning business, investor, stakeholder and regulatory goals;
  • tracking decarbonisation progress and collating supporting evidence.

3. Developing new revenue streams

Meanwhile, new build developers should factor the environment in via green and sustainable architecture, materials and design. By doing that, they attract more investment and tenants.

As the global economy forges ahead with decarbonisation, real estate actors should also consider introducing appealing on-site services like electric vehicle charging stations and smart sensors.

Getting ahead of the climate transition curve

Savvy real estate players are already making relevant eco changes: introducing better climate intelligence, exploring decarbonisation options, and differentiating themselves by investing in green buildings.

Considering real estate drives 39% of CO2 emissions, the sector will play a vital role in transitioning towards net zero and reimagining how we live our lives.

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