If you’ve had your eye on the news over the last couple of weeks, you’re bound to have seen coverage of the COP26 global climate summit taking place in Glasgow. The headlines this week range from frustration to outright anger – personally I can relate to this feeling of frustration.
Listening to politicians make grand promises, set ambitious goals and targets, but then completely fail to deliver on, or implement the necessary changes to meet them drives me crazy. I guess we shouldn’t really be surprised but it has become obvious to me that something terrible is slowly approaching us and yet we continue to do nothing. Its a little like that old story of the frog slowly being boiled alive.
Politicians seem to make a habit of talking up plans to achieve carbon neutrality by 2050, but then follow that with an official signing of a new bill that supports the coal and oil industry, or removes tariffs or some other contradictory activity. I do appreciate these are often no-win scenarios for the politicians involved, but its maddening nonetheless.
We all need to be doing a lot more to improve our environmental credentials, and thankfully the corporate world is really starting to take action and get behind the initiative. This is becoming impossible to ignore – at a recent meeting with our bank the conversation was almost entirely dominated by ESG and what our strategy was to enhance our ESG (‘Environment, Social and Governance’)
If you’re currently working with large corporations and you’re not already heavily focussed on ESG, you could find yourself in trouble very soon. In the discussions I am having with larger corporate occupiers you could be forgiven for thinking ESG is literally the only thing they’re thinking about or spending money on right now.
So what does all of this mean to the property industry? Well, quite a lot actually. I read this article recently that says half the world’s fossil fuel assets could become worthless by 2036, which could in turn trigger an 11 trillion-dollar asset crash in terms of prices. Should this happen we re looking at a 2008-style financial crisis! I don’t think its a stretch of the imagination to include older, less efficient buildings in that potential value collapse.
Whether you believe this is all the hype or not, I think it’s inevitable that the concerns of big business will soon trickle down to small and medium sized businesses and investors. When it does, I believe housing and residential investment be in the cross hairs just as much as the large commercial assets. Why? Well because the reality is, those grand promises and ambitious carbon goals currently being set by politicians will never be achieved without a very significant impact on the property sector.
I’ll say it now – if you have little or no interest in investing in your buildings to reduce their emissions and make them more energy efficient, then prepare for their value to collapse too. Not very long from now potential buyers will have to grapple with the possible cost of upgrading these old assets and build those figures into their financial plans.
2036 might seem a long way off, but take my word for it, that is right around the corner in investment terms. I was involved in a commercial carparking business for years, we built the building and created a 35-year lease, which at the time felt like a half century away, but 22 years went by in the blink of an eye and suddenly there were only 13 years left. In that time attitudes toward city centre parking had shifted negatively and the value of the business fell accordingly.
I am starting to see similar things in the various commercial portfolios that I manage – from there being little or no interest in energy efficiency pre-pandemic, it has become a massive focus today. It seems the way the business world adapted during the pandemic, has shown that radical adjustment to daily human behaviours is not so difficult when required, and climate action is definitely required.
Here in Ireland the Government recently launched their €125 billion Climate Action Plan 2021. One of the initiatives that caught my eye was the National Retrofit Plan which seeks to retrofit 500,000 homes with low emission heating systems and improved insulation standards to bring them to a minimum B2 Building Energy Rating (BER). The figure of 500,000 is required to meet the carbon footprint goals in the plan.
This means replacing gas central heating and oil burners with brand new heat pumps, at an estimated cost of €28 billion. This is going to be an uphill battle: in just the last 12 months over 18,000 homes were retrofitted in Ireland, but of that figure only 4,000 of them were bought up to B2 standard, so those other 12,000 houses will still require additional retrofitting.
The kicker is that the majority of these costs will have to come from individual owners and the private sector: only 1/3 of the estimate €28 billion cost will come from the public purse. This is a major red flag to me – I feel the only way these ambitious targets will ever be achieved is via the carrot and stick approach. The carrot will be the offer of grants to cover a portion of the cost, but the stick will no doubt be some kind of penal tax based on the carbon footprint of your home or property.
You might think this is unlikely to affect you, but remember 40% of all Green House Gases come from the real estate sector. My advice: start putting some money aside now or start an investment programme to upgrade your buildings. There may be grants, financial aid and a loan scheme, but they won’t fund all of the costs so don’t wait around for someone else to write the cheque.
In the long run, we as landlords need our buildings to be far more efficient, because I can see a point, not so far away in the future, where you simply won’t be able to rent your property if its below a certain BER or energy efficiency rating. In all probability higher taxes will be passed onto tenants, who are obviously going to want to find cheaper, more efficient homes and workplaces to rent.
However it’s not all doom and gloom. Energy efficiency schemes are going to create a lot of new jobs, a lot of new qualifications and a lot of new business opportunities. Here at EastPoint we’re working to make us a net zero business, which is an exciting challenge. The future is bright – just make sure you’re a part of it.
Book your place in my free weekly training workshop over at the Property Investor Roundtable.