Logistics real estate is increasingly affected by the need for greater sustainability, but the pressure to raise the ESG standards on assets is coming from all directions.
“We’ve definitely seen a marked change, said Savills’ European industrial and logistics research analyst Andrew Blennerhassett at Real Asset Media’s event European Outlook 2023 – Focus on Logistics, staged recently at the London office of law firm TaylorWessing.
“There’s definitely significantly more interest in ESG-rated assets because occupiers want them and because investors want them in terms of their own ESG credentials.”
TaylorWessing Partner Christopher Turley agreed that “sustainability and corporate responsibility, are touching everything on the investment side,” whether raising funds, as institutional investors, and, increasingly, private investors. “They’ll be asking about sustainability criteria. If you work back from that, in order to attract or be most attractive you need to have sustainability at the forefront.” And he added: “It needs to be real, It can’t be a token gesture.”
Andrew Creighton, Head of Investment Management, Europe, Cromwell Property Group, said that the point has been reached where ESG is “absolutely central” to everybody’s investment strategies.
“In our world of investment management, when you’re looking at RFPs [request for proposal] to win new business, you cannot proceed to the next stage if you do not have a full and proper response to the various questions that are related to sustainability. You’ll get knocked out of any any opportunity. So I think that is that is absolutely critical.
Procuring green energy is now a basic requirement too. Creighton said that his company has blanket requirements across all logistics unit managed on behalf of clients that they have photovoltaic panels.
“Tenants have been pretty uninterested in talking to us about it, but now, funnily enough, they are more than interested and are knocking on our door.”
Will Prewer, capital markets UK, Ireland & EMEA for DHL Supply Chain, said one of the key factors for him is the ability to be gasless. Ground source heat-pumps are part of this ability. “Depending on the size, structure and volume of building, they’re a big power user, so you’ve got a situation where the power requirements for any estate, building, whatever, are going to be going up, not down.”
While buildings will be greener where power grids are under strain continuity and consistency of power can be a problem.
Photovoltaic panels can be part of the solution. “But in some geographies you therefore need a battery storage solution because you only have light for so much of the day. If you have a grey day in the UK you don’t generate that much power.”
Netherlands-based VerusSol founder and CEO Joost Leendertse concurred that securing power resilience is going to be key to being “green” and achieving ESG credentials, particularly where you can’t produce power yourself. “We are going to electrify more and more and I think we will be have to double the amount of electrification and it all needs to be green energy.”
There are limitations depending on location too, Prewer pointed out. “The availability of green power in some geographies just isn’t there yet which is again the reason for trying to create resilience. So it’s a cycle.”
Although all property stakeholders have accepted the need to adopt ESG principles, from a regulatory point of view there is “a looming deadline” said Blennerhassett, after which some assets may be deemed no longer fit for use.
“What we will potentially see is either that those deadlines will have to be pushed back while a substantial amount of stock is going to have to be retrofitted.”
There are several implications of this. The already limited supply in the market is going to be even more limited which “will have a substantial effect in terms of values and rents that those assets can achieve.”
Furthermore, retrofitting may not be straightforward. One looming problem is the shortage of labour with the specialist skills required for this sort of work. “Those occupiers and asset owners that haven’t looked to retrofit may find that they’re struggling to find the resources they need to actually get their assets up to that level.”