How the Real Estate Industry Can Fight Climate Change

Australian and Japanese REITs are adopting solar panels as core to their investment plans

By Victor Yeung, Chief Investment Officer, Admiral Investment

Climatologists have long warned that one effect of climate change is that the severity and frequency of typhoons will increase as the average temperature of the oceans rises.  In September, Typhoon Mangkhut became the strongest typhoon to hit Hong Kong in over four decades.

While there were no casualties, economic losses included one Grade A office building, which had at least 100 window panels blown out, and one development project lost its construction crane.  Hundreds of thousands of Hong Kongers also lost productivity over the following few days as it took time to remove trees and other debris from roads.

At the time, around the world, nine hurricanes or typhoons were active, which was an unusually high number. While climatologists have often cautioned the public not to equate single events to general trends, Typhoon Mangkhut and its kind serve as a reminder that climate change can have disastrous consequences.

On October 6, 2018, the International Panel on Climate Change (IPCC) released a special report in support of a global response to keep global warming to less than 1.5 degrees Celsius above pre-industrial levels. Energy production and use is the largest source of greenhouse-gas emissions, and our industry is a significant energy user. According to the U.S. Environmental Protection Agency (EPA), the sector is responsible for approximately 50% of greenhouse gas emissions and about 75% of electricity consumption.



Hong Kong’s Energy Consumption

Using Hong Kong as an example, according to the “Hong Kong Energy End-Use Data 2017” report published by the Government’s Electrical and Mechanical Services Department, residential and commercial activities contribute 21% and 43% of overall energy usage respectively.  Of all residential usage, 25% is air conditioning, and 6% is lighting.  And of all commercial usage, 25% is air conditioning, and 12% is lighting.  Thus, air conditioning is approximately 15% of all energy usage.

Hong Kong is subtropical with temperatures regularly registering above 30 degrees Celsius during the summer, and thus some level of air conditioning is desirable.  However, well-designed real estate assets can help conserve energy. In fact, we are seeing REITs and other real estate investors adopting strategies to cut energy use.

Since the United Nations drafted the Principles for Responsible Investment in 2006, over a thousand institutional investors have adopted the document introducing environmental, social and governance considerations into their investment framework.  Other related schemes, such as the recently passed UNEP- Finance Initiatives, target directly  environmental issues.  In some economies, these policies have encouraged companies to proactively mitigate energy consumption, since weakened support from institutional investors has implications for stock prices.

Green-Tech Is Financially Viable

After a decade and a half of development, green technology has advanced so that it is now financially attractive.  The most notable example is solar panels, which in some locations have a payback period that is as short as five years.  This means that the rate of return can be as high as 20%, which is generally an attractive investment for real estate operators.  This is perhaps why we have now seen Australian and Japanese REITs adopting solar panels as core to their investment plans. Shopping mall owner Vicinity Centres, for instance, has embarked on a A$78 million expansion of its solar energy roll-out, creating the largest such commercial property programme in the country.

Some advancement is not necessarily based on technology. For example, green features are also being adopted as owners renovate their assets. A well-designed canopy can bring natural lighting in a mall and reduce lighting requirements. Air-conditioning ducts with a wider diameter reduce air friction and thus the energy required to cool a building.

Often, these design features do not include additional renovation costs, so that energy saved is net-positive for the landlord.  The fact that some green technology and techniques are saving money and enhancing equity returns is the nudge the industry needs. Events like the nine concurrent hurricanes in September serve as a reminder as to why green technology is important. The growing suite of available technology will also improve the cost structure for those landlords that are willing to invest. This will ultimately derive financial benefits for shareholders.

About the author:

Victor Yeung writes regular columns for various news media in Hong Kong, Singapore and Taiwan, and he is a co-host of a REIT commentary segment on Hong Kong’s Now TV.  He has written one English and three Chinese books on REITs and other real estate topics.