Can real estate rise to the net zero challenge?

13 June 2022

In previous article for Professional Paraplanner, Ruairi Revell, head of Real Estate ESG (Core Plus & Value Add Funds), abrdn, raised the issue of getting real estate to net zero. Now he looks in detail at the scale of the challenge in the UK.

It’s encouraging to look at the headline net zero goal – the UK has a target to reduce emissions from the built environment by 50% by 2030 from 1990 levels – but dig down into the detail and this becomes a very challenging task. Without a step change from policymakers and the entire real estate sector, it will not be achieved in time.

Buildings and construction currently account for 25% of the UK’s emissions.  Since 1990, these emissions have decreased by approximately 30%, largely driven by the decarbonisation of electricity generation as opposed to improvements in building-level energy efficiency. For the built environment to contribute to the UK Government’s objective of net zero by 2050, emissions from this sector must drastically reduce in the coming decades. But business as usual forecasts, based on the existing policy response, fall well short of this. [1]

Some of the reduction needed will come from the decarbonisation of heat and further decarbonisation of the electricity supply. But given that less than 1-2% of the UK’s total building stock each year is new build and an estimated 70% of the total 2010 building stock already standing will still be in use in 2050, the most meaningful emissions reductions will need to come from “deep retrofit”, or in other words, holistic upgrades to fabric and building services that deliver significantly improved efficiency.

The decarbonisation of heat is likely to be primarily achieved by replacing fossil-fuel heating with heat pumps. Currently, less than 5% of energy used for heating British homes and commercial buildings is from low-carbon sources. As a result, heat pump installations in the UK need to reach 600,000 per year in the 2030s, from today’s level of 30,000 per year. Can supply chains scale up quickly enough? And do we have the required skills? To get to net zero by 2050, we need to phase out gas cooking by 2040 and 70% of all non-domestic buildings need to be heated by heat-pumps by 2045 with the balance on hydrogen, heat networks or resistive heating. The UK’s policy mix does not currently incentivise change on this scale.

A refurbishment which de-carbonises a building meaningfully can have a capital expenditure premium of 10-20% (and sometimes more) compared to a conventional refurbishment. In our experience, ‘future-fit’, low-carbon assets appeal to occupiers and investors both in commercial and residential sectors. So, for some buildings, the extra outlay can be easily justified on the basis that the improved specification will attract a premium and protect the building against obsolescence in the future. Improvements in the climate technologies available for buildings and their affordability will help in the coming years, but deep retrofit is unlikely to be commercially viable for a subset of buildings, especially without a policy-mix that incentivises the necessary action on a level playing field.

The challenges of reducing emissions from building operation are clear, but in most conversations on built environment decarbonisation, there is still an elephant in the room:  ‘embodied’ carbon – all the emissions created by extracting, manufacturing and transporting construction materials. Embodied carbon can account for 60-70% of a building’s emissions over its lifespan and accounts for 20% of UK built-environment emissions. Although there are some efforts to address embodied carbon, progress has been slow and it remains largely unmeasured and unregulated.

Clearly, a consequence of  deep retrofit at scale will be increased embodied carbon as we invest in existing buildings. But making use of existing structures instead of a knock-down and rebuild approach is much less emissions intensive. So, it’s all the more important that there is a coordinated approach from industry and policymakers to shift the emphasis to the measurement and reduction of ‘whole life’ carbon, not just the operational phase.

Combining all these issues, there is an almost overwhelming challenge ahead. But the cost of inaction is enormous, not just in financial terms (more than 80% in net book value and 75% of floor area for global real estate is at high risk from the physical impacts of climate change), but also in human terms. Action by policymakers, developers and investors is crucial as the IPCC has already warned that any further delay means we will miss the rapidly closing window of opportunity to secure a liveable and sustainable future for all.

[1] UKGBC Whole Life Net Zero Roadmap, 2022

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