Addressing stranded asset risk in real estate investment

Monday, January 23, 2017

The value of assets is vulnerable to factors such as environmental challenges, changing resource landscapes, technological innovation, changes in regulations and liability and evolving social norms. Such changes can result in the devaluation or non-performance of assets, thus making them ‘stranded’. This concept of ‘stranded assets’ has been prominently used to discuss the impact of climate change, such as the increased risk of natural disasters, carbon pricing and increasing affordability of renewables on large assets such as coal power stations. For instance, the Sustainable Finance Programme at the University of Oxford has produced extensive research focusing on this topic. 2016 saw a record number of oil and gas companies becoming insolvent due to competition from renewables, highlighting the economic impacts of this dynamic. At the same time investors are demanding data on such risks and how companies address them to inform their investment decisions, such as the recent Transition Pathway Initiative launched by asset owners and managers to assess how oil, gas and electricity companies are preparing for the transition to a low-carbon economy.

Real estate assets are also at risk of becoming ‘stranded’ due to changes in costs and regulation as well as increased consumer demand for better environmental performance. Assets such as offices, residential buildings and infrastructure are vulnerable to increased frequency of environmental disasters such as flooding and changes in regulation such as minimum energy efficiency requirements.

Moreover, there is mounting evidence that incorporating health and wellbeing concerns into urban planning and the design of buildings can increase productivity in offices and improve public health. A recent Greengage Health and Wellbeing Assessment of a large-scale community development and sports facility in Cambridge shows the substantial health and financial value of increasing sporting provision. This ability to show quantitative evidence for the value of incorporating measures to encourage health and wellbeing into assets sheds new light on something which until now has been a qualitative process. Such clear financial incentives suggest an increase in the demand for real estate assets whose design process adequately takes into account their long term social and environmental impacts, making them more profitable and secure investments.

Commercial and private tenants increasingly expect sustainability and health & wellbeing considerations to have been adequately considered in the design process of offices and living spaces. Research shows that tenants are willing to pay a premium for office spaces that are more environmentally sustainable. Real estate asset owners have reported that a mark-up of up to 18% can be charged for an office building that meets wellbeing criteria, when compared to an office that does not in the same location. There is a growing list of companies specifically focussing on sustainability, health and wellbeing in their choice of offices. Examples include Deloitte’s headquarters in Amsterdam, the head office of British Lands in London and the co-operative’s headquarters in Manchester. Incentives for these companies include improving productivity and attracting high quality job applicants. Sustainability and wellbeing features of buildings will thus be central to attracting and retaining high profile tenants.

Currently, there is a trend to better integrate health and wellbeing aspects into sustainability reporting. There are plans to better align the WELL Building Standard focused on health and wellbeing and BREEAM sustainability Assessments that are both utilised to systematically measure and certify the performance of individual building projects. Similarly, GRESB introduced a new Health and Well-being Module in 2016 to monitor how real estate companies and funds promote the health of their employees and, importantly, of their tenants, customers and the communities surrounding their real estate assets.

The UK Green Building Council initiated its Wellbeing Labs in 2016, an initiative that focusses on collaborative learning between companies investigating health and wellbeing in their offices. Greengage have been involved in this initiative, undertaking research to better inform how real assets can be better designed and managed to maximise occupier satisfaction and health. The work aims to assess quantitative data in three areas, specifically physical, perceptual and organisational to draw direct links between health and wellbeing considerations and the performance of an organisation. Understanding how people feel about their environment and comparing this to physical monitoring data and HR data on issues such as medical costs and complaints, allows tenants and asset owners to identify the most appropriate interventions. Findings from such research will enable asset owners and investors to make the right choices early on so that their real estate assets do not become prematurely unhealthy, undesirable and ultimately economically unsustainable.

The real estate sector needs to address this changing demand and focus on promoting health and wellbeing for occupiers, as well as better understand environmental sustainability (such as energy performance), to reduce the risk of assets becoming ‘stranded’ in the future.