You’ve all spoken about regulatory change as a driver of climate-related stranded assets. Are there other factors at play?
Paul Greenhalgh: People are very aware of physical obsolescence, where the physical fabric of the building is degraded. There’s also functional obsolescence and economic obsolescence. It’s not just regulation that’s compelling landlords to improve the performance of their premises, it’s also occupiers.
MH: Legislative change is driving the agenda. There’s also increased levels of corporate governance: with top tier blue chip or listed companies under massive pressure from the boardroom and shareholders to drive better performance around environmental and climate factors. There’s increasing pressure from shareholders and investors. Then there’s uptake – if you are tenant or prospective occupier, do you want to be located in a building that’s got high carbon emissions? As a corporate entity this might mean you are not adhering to your ESG credentials.
KMS: While the built environment is taking steps to improve its sustainability, it is still fundamentally reliant on fossil fuels to support most of its functions. There is a lot of emphasis at the moment on the fossil fuel world and those who have investments in fossil fuels. There’s less attention on those assets that are reliant on fossil fuels downstream, where the built environment exists and a variety of other assets. If international governments really do take seriously the environmental concerns around reducing global warming, that reliance will be magnified quite starkly. The largest asset owners, managers, portfolio investors and institutions know that there’s an issue. They are just not too sure how they will fix it, because taking action has a variety of different implications. For those occupying or reliant on properties, there is also the sheer cost of energy to consider, which has also been further exacerbated by the geo-political situation between Russia and Ukraine. This just adds further impetus to making the built environment more efficient.
PG: There’s something about time horizons as well here. When you buy an asset, you’re buying the future, you’re not buying its history. Asset owners, managers and occupiers today are having to look into the future: when the legislation around emissions will start to bite, and whether it will be in the long, medium, or short term.
KMS: Because the risk of stranded assets is in the future, it’s not priced into most valuation models, it’s not priced into the book value of investment portfolios. As soon as the major institutions start altering their behaviour and focusing on this issue, it will bring into question the techniques of the market and the value of properties. I think that’s where a lot of the concern is in the market, especially among the big fund managers and big institutions. They want to act, they know it is an issue, but they know if they do change, it will have implications in the short term for the value of the assets in their portfolios. That connects into how they’re financed through debt.