From Risk to Reward: Decarbonising Buildings in the Climate Economy

2024 was the hottest year on record, with global average temperatures at the surface of the planet exceeding 1.5°C above pre-industrial levels. Extreme climate events have been on the rise around the world, and it is anticipated that APAC will be more heavily impacted by climate change than global trends indicate.

The urgency of building decarbonisation and climate resilience

 

Climate change is increasingly impacting real estate, posing risks to asset values, operations and long-term viability. Whilst not yet impacting investors’ go/no-go decisions, it is influencing underwriting, insurance, and capital allocation. To mitigate potential losses and prevent asset stranding, early and coordinated adaptation investments are crucial. As the urgent need to decarbonise buildings and enhance climate resilience are amongst top priorities, several local landlords have taken their first steps on this front.

The economic opportunity in low-carbon buildings

One example is Nan Fung Group, who has set ambitious carbon emission reduction and net-zero goals according to the Paris Agreement. Billy Hui, Executive Director of the Hong Kong Property Division, Nan Fung Group, shares that

“We are proactively working towards net-zero by 2050. Having validated our science-based targets in early 2024, our plan is to reduce scopes 1, 2, and 3 greenhouse gas (GHG) by 46.2% by 2031 and 99.6% by 2050, for our Hong Kong property portfolio, as outlined in our SEWIT Report 2023-24.”

Such commitments reflect a proactive approach to managing climate change risk and ensuring business continuity. Low-carbon buildings offer reduced operational costs and increase asset value. Global studies have shown that light to medium energy retrofits can yield up to 40% in energy savings.

Additionally, AI technology can be used to optimise building systems. In a recent JLL project involving three managed buildings in Hong Kong and India, AI-driven analytics identified inefficiencies in UPS and chiller systems, resulting in 33% annual savings, projecting USD180k per annum.

As another first mover in the market, Hang Lung Group's 2023 Sustainability Report highlighted the financial risks of ignoring climate-related issues. These risks include higher operational costs, revenue losses from business disruption, premature asset retirement, and limited capital access.

Hang Lung Group recognises the opportunities in “increased market valuation” and “attracting high-value tenants”, through sustainability initiatives. This aligns with JLL’s finding that key tenants are increasingly prioritising sustainability measures and green certifications when selecting office space. JLL’s Sustainable Offices City Index highlights the urgent need for action, revealing a significant undersupply of low-carbon buildings in Asia. The market gap provides a competitive advantage to landlords who have already incorporated sustainability measures into their portfolio.

The need to unlock climate finance at scale

Despite the compelling economic opportunity for investing in building decarbonisation, a significant financing gap persists. This challenge is exacerbated by high interest rates and increasing tenant demands. JLL’s 2024 report revealed that commercial real estate owners in North America and Europe would require nearly USD2 trillion in debt financing over the next two decades to retrofit office properties and close the supply gap. Whilst the data for this gap in Asian markets is not available, it indicates the magnitude of the challenge ahead.

Whilst Singapore and Hong Kong governments have targeted policies to drive building decarbonisation efforts, collaborative financing models involving landlords and tenants are also essential. These innovative financial products and public-private collaborations are crucial for bridging the financing gap and enhancing the climate and business resilience of real estate assets across Asia.

As John Haffner, Deputy Director - Sustainability from Hang Lung Group shares,

“Real estate decarbonisation can be accelerated through policies that put a price on emissions and raise the cost of high-emission materials. In addition, advancing decarbonisation requires innovative forms of collaboration across the value chain.”

The perceived headwinds to decarbonisation in the real estate sector need to be dispelled. Low-carbon buildings can reduce operational costs, increase asset value, and meet growing occupier demands. It is indeed an economic opportunity, instead of a costly burden, that real estate investors and owners need to embrace, to safeguard the future value of their portfolios.

Contact JLL to explore the topic further at: https://co.jll/4iIow4p