Real Estate Debt And Sustainability

A new report from two executives at Aviva Investors, the global asset manager that is part of the UK-based Aviva Group, looks at real estate debt as a way to play the transition to a low-emissions or even a no-net-emissions world.

Real Estate Debt and Sustainability

One key source of value here is that the market has thus far been inefficient. That is, as the authors say, “the impact of climate change is not always accurately reflected in real-estate values.”

Market participants, after all, cannot readily assess the likely impact of unimplemented climate regulations and then factor that impact into long-term risk-return assessments. Rather, participants (and by inference the market as such) deems assets “good,” as for example a building that scores well on environmental measures regarding its lighting, its HVAC systems, etc., will get points for its owners from their investors. The “sustainable” building will sell at a premium and another (“bad”) building will sell at a discount. But this is a very crude process, consistent with pricing anomalies.

A Return to the Inexorable?

In much of the developed world the pandemic has caused the rise in carbon dioxide emissions to go in reverse in recent months. But now, as vaccines are rolled out, and as over the months to come the distributions methods will likely improve, the previously inexorable rise in emissions will return, and with it “climate change will again rise to the top of the global political and corporate agenda.”

The authors of the Aviva report are, Gregor Bamert, head of real estate debt, and Stanley Kwong, ESG associate director, real assets. Real assets—both buildings and infrastructure—are central to the carbon emissions issue. Bamert and Kwong point out that 39% of energy-related global carbon emissions come from buildings or construction, according to the World Green Building Council. The operational emissions alone account for 28%.

The authors point out that investor concern about such emissions isn’t “merely” a matter of investor desire to continue living on this planet. It also involves an aversion to “stranded assets.” The fear is that a building not up to Best Practices will become a stranded asset, with nobody wanting to rent or to buy it. Accordingly, banks are becoming averse to lending money to the owners of such buildings.

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