Monday morning, October 8th, we were shaken by the IPCC report on limiting global warming to 1.5°C. Later the same day, Munich’s annual EXPO REAL kicked off and gathered some 45’000 professionals representing the European real estate ecosystem. 700 acres of Messe München were filled with organisations searching targets for their capital, and others showcasing investment opportunities for the liquid assets.
Following the recent years’ trend, yields are reaching an all-time low in the Nordic real estate market as investors from across Europe are increasing their activity up North.
Sub-par properties’ lockdown
While there’s an unforeseen amount of money on the table looking for home, part of the market suffers from an undeniable structural mismatch. Outside central business districts, technologically sub-par properties are in a lockdown: outdated building technology drives the operating expenses up, adding pressure to increase rent levels.
In turn, poor indoor climate conditions in the premises and high rents make these properties low-occupancy headaches. The vicious cycle is set:
- Current owners aren’t willing to invest in the property’s building technology since the cashflow is compromised.
- Tenants refuse to pay the high rents for poor conditions they’re being offered.
- Potential buyers are cordially saying no to opportunities where the top-line tanks, the NOI, net operating profit doesn’t perform and capital expenditure needs are evident, yet difficult to quantify in a reliable way.
- Nothing gets done and the assets keep deteriorating, technically and financially.
Energy refit for comeback
How does all this link to the IPCC report?
First, the real estate sector is accountable for up to 40% of the consumed primary energy (see e.g. Bonde & Song, 2013). Without impactful measures in the energy efficiency of the built environment, there is practically no hope of reaching the indisputably critical CO₂ emission targets set by the Panel.
Second, shedding light on the situation, there’s a three-letter acronym that answers both questions on the table: reaching the emission targets and liberating the poorly kept properties from the profit-preventing lockdown. The magical acronym? MWh, the megawatt hour.
Depending on how a given energy unit is produced, each MWh carries a specific CO₂ equivalent – e.g. for electricity in Finland, 89 kgCO₂ per MWh on average.
Megawatt hours also make up a dominant portion of a property’s operating expenses: 30–40% on average. In reverse, decreasing consumed megawatt hours will contribute to both i) lowering the carbon footprint as well as ii) improving the NOI of a property. Taking a proactive stance towards renewing building technology and gaining energy savings is often the decisive move that nudges a property off the vicious cycle and turns it into a marketable property again.
Can we afford missing out on two-digit returns?
The IPCC results should hence be seen in a very different light in the real estate sector.
While the other industries are asking whether they can afford the cuts in CO₂ emissions, in real estate we need to ask ourselves can we afford not cutting?
By starting with the profitable energy renovations, we are already greatly contributing in the positive progress demanded by the IPCC while doing it in a financially sustainable way. This approach in itself will take us a huge leap forward:
Our company LeaseGreen, which is leading the smart refit work in the Nordic markets, triangulates that in Finland alone, there are opportunities worth more than 1 billion Euros on an annual basis for energy efficiency projects yielding a minimum of 10% annual return.
There is no need to wait for the regulators to force us take action. The IPCC and investor targets are already in line.
Personally, I want to warmly thank all the business partners and new contacts I had the pleasure to engage with at EXPO REAL. The discussions were fun, refreshing and meaningful, and reassured me that we’re on a right track making impact together.
Jonni Ahonen works as a Director at LeaseGreen, leading the Real Estate Investor customer segment. You can contact him via email@example.com or +358 50 301 3589.