Up to now, sustainability has hardly been an issue when acquiring or leasing a logistics property. This is changing – which poses a number of challenges for the real estate sector, writes Stephan Riechers.
Logistics properties used to be one thing above all: functional. Tougher climate-related legislation, surging energy costs and increasing calls for decarbonisation from tenants, their customers and investors are now bringing sustainability into sharp focus in the warehousing sector.
According to a study by Bulwiengesa, the analysis firm, the proportion of logistics properties certified as sustainable is rising steadily. It’s a simple calculation: long-term value retention and stable income will no longer be possible in the future without sustainable adaptation.
The latest report from the Intergovernmental Panel on Climate Change pulled no punches: if we don’t protect the climate, there will be no future. And time is running out. To achieve the ambitious goals of the Paris Climate Agreement, member states are likely to take even stronger action over the coming years, especially with regard to CO2 emissions.
That action could be tied to sanctions if property holders fail to develop their portfolios in accordance with the relevant pathway. Regulations to this effect have already been adopted in some countries.
At the same time, more and more big companies, including investors, tenants and customers of logistics service providers, are pushing for a stronger commitment to combating climate change because they want or need to improve their sustainability credentials. Supply chains will get greener overall, without doubt. Anyone who misses the boat risks being left with “stranded” properties for which there is no demand and no market.
Buildings are a key factor as the logistics sector transitions to sustainability. But what makes a logistics facility sustainable? A property with one of the established sustainability certificates is not necessarily energy efficient, nor is it automatically on track to hit net zero carbon by 2050.
The importance of efficiency
As part of the EU Action Plan, the Taxonomy Regulation provides a set of rules, currently primarily around ecological objectives. When it comes to real estate investment – whether acquiring a new property or investing in an existing portfolio – the focus needs to be on energy efficiency and greenhouse gas emissions over the entire life cycle. The use of recyclable materials is also becoming increasingly important in the context of remodelling and demolition.
The logistics property of the future will, above all, be efficient, and not just in terms of operation. Energy consumption in warehouses is relatively low compared to other property types. It is thus particularly important for the logistics side to be planned, built and managed efficiently. Pick-by-voice and stacker control systems, for example, can be deployed to achieve lower error rates, fewer empty journeys, faster picking and greater productivity, which all contributes to sustainability.
‘Supply chains will get greener overall, without doubt. Anyone who misses the boat risks being left with “stranded” properties for which there is no demand and no market.’
Stephan Riechers, Union Investment
Issues here range from efficient lighting to insulation and heating, modern warehouse systems, charging points for electric vehicles and on-site energy production via solar panels, and combined heat and power plants.
Their large, flat roofs make logistics facilities ideal for solar installations, but investors and owners face significant obstacles around tax and regulation if they want to operate the panels themselves, rather than letting the tenant do it. Without alternative energy concepts, it is almost impossible for a logistics facility to achieve zero carbon, so policymakers need to address this issue.
Demand for logistics properties is high, but supply is limited. As such, investment in development projects has been on the rise for several years, partly because it only takes an average of one to two years to construct a warehouse. However, the EU Taxonomy criteria must be taken into account for logistics buildings from 2021, assuming investors and developers want to stay in the green race. For many logistics projects, implementing the taxonomy is challenging, because facilities are frequently constructed on well-connected greenfield sites away from cities.
Ecosystems and biodiversity
One of the environmental targets set out in the Taxonomy Regulation is the protection of ecosystems and biodiversity. If the land to be built on has moderate soil fertility or better, development falls under the “Do no significant harm” rule and is not taxonomy compliant. No compensation measures are possible and there is no retrospective remedy either.
Regardless of how energy efficient the new build is, it will never be considered taxonomy compliant. Accordingly, building on or investing in greenfield sites will become less attractive or will at least not count towards sustainability. A soil survey is definitely essential ahead of any investment.
Brownfield sites, by contrast, become more attractive because no permeable land is lost and the technical infrastructure is mostly already in place, along with transport links to what are typically urban surroundings. On the other hand, there is often a remediation requirement and land prices are generally higher. The pros and cons should be weighed up carefully.
The social taxonomy is likely to be of limited importance for logistics facilities, and indeed for commercial real estate in general, although the specific criteria have yet to be defined. The initial draft mainly deals with affordable housing. Having said that, logistics properties can still meet the ecological criteria and be included as a taxonomy compliant building when calculating the overall taxonomy compliance of a financial product.
Stephan Riechers is head of investment management logistics at Union Investment Real Estate