Sustainability legislation, demand push Asia’s office sector to be proactive

Sustainability legislation threatens to make many office buildings obsolete, increasing the impetus for investors to implement strategies that proactively improve their office portfolios. That is one of the main takeaways from a recent podcast by Cushman & Wakefield, titled, “Is Sustainability causing obsolescence?” The podcast is the third installment of the company’s series, “Rethinking the Office Sector in Asia Pacific.”

Mika Kania, senior director of sustainability & ESG, APAC, at Cushman & Wakefield, discussed the challenges facing investors, as they seek to adapt to an environment where the ESG regulatory landscape varies notably from country to country but few global frameworks are in effect. Yet many countries have set decarbonization targets, so implications on real estate assets are significant. The built environment accounts for up to 40 percent of greenhouse gas emissions, said Kania, and governments will continue to implement further regulations, mandate more operational disclosures and place more restrictions on permitting for new constructions in coming years as they seek to lower the impact on the environment from buildings. Kania also said she expects incentives from government bodies for retrofitting existing buildings in compliance with ESG regulations will increase in the coming years.

Singapore touts one of the most robust ESG plans in the Asia Pacific region, said Kania. The country’s Green Building Masterplan has raised mandatory sustainability and energy-efficiency standards for both new and existing buildings. With the fourth iteration of the Green Building Masterplan, introduced in 2021, Singapore seeks to have 80 percent of its buildings (by gross floor area) green by 2030 and to mainstream Super Low Energy buildings (defined as achieving at least 60 percent energy savings, compared with 2005 building codes).

South Korea is also addressing its decarbonization goals through its Zero-Energy Building program, which enforces regulations for both new and existing public and private buildings to be more energy efficient. In Australia, disclosure has been a point of emphasis; owners of buildings in the country must have an up-to-date building energy-efficiency certificate or NABERS rating. Government bodies regulate which ratings are required for buildings in particular sectors and locations.

Looking at the office sector in particular, Gordon Marsden, head of capital markets, APAC, at Cushman & Wakefield commented on the significant dislocation and disruption in the sector over the past few years. In some cases, these disruptions have made investors “hold the real estate longer than anticipated.” Investors may need to refinance, leading to a lower loan-to-value ratio, and occupancy in the sector is down. Added to all these variables are the ESG considerations now becoming more heavily mandated by governments and demanded by buyers.

“Groups are thinking about these strategies. They’re trying to raise capital, and they really need to get out in front of some of the ESG and sustainability considerations,” said Marsden. Kania agreed, saying that it is highly valuable for investors to come up with a sustainability roadmap. “[Even] if there are not funds to do improvements in the near term,” Kania noted, “still developing a long-term roadmap, but being realistic about what is achievable in the short term. And even if you’re not making those improvements while you’re holding the asset, having that information for the next owner is valuable, and that’s what I’ve seen when talking to clients.”

Kania defines a sustainability roadmap as a targeted approach for evaluating which buildings to address in your portfolio, then developing a roadmap for improvements and staging investments. She discusses certain forward-thinking investors who are integrating carbon value into their financial modeling by applying what they call a green IRR to prioritize which assets are most at risk and in need of improvement.

Kania said it is “really important to consider strategies that are not only improving building performance, but that are also helping with tenant retention and attraction, initiatives that will be valued by future buyers, climate mitigation measures and current and pending regulations.”

It's critical to evaluate a building’s sustainability status during due diligence, said Kania. She lists a few questions for investors to ask themselves when evaluating a building, such as what are the risks or advantages of the asset? Does the building already have a sustainability roadmap in place?

“Are there realistic time frames for upgrades?” Kania added. “What makes the asset attractive to tenants? And then considering if you should be applying a premium or a discount based on their sustainability assessment as well.”

As decarbonization target dates of various countries approach, ESG regulations will become more ubiquitous and demanding, and buyers will require and seek out better ESG-outfitted buildings, said Kania. And returns do not need to be sacrificed, she noted. Energy efficiency saves money while reducing emissions, and the changing regulatory and incentive landscape will reward better sustainability-focused buildings more in the coming years. Highly rated ESG buildings will continue to be more highly valued in the future. Further, running good social and governance initiatives, such as hosting farmers markets or NGO groups on site, or offering broader tenant engagement programs, often increases the demand for those properties from buyers.