The complexities of turning buildings from ‘brown’ to ‘green’

December 20, 2023

The transition of older assets into modern sustainable buildings is an essential task on the road to net zero – but it is not without complications.

Brownfield and greenfield land were common concepts in geography lessons across secondary schools in the UK in the 2000s. Knowing that brownfield land would require extra work to make it suitable for development, while greenfield land was ripe for construction – though at some cost to the natural environment – was a staple of knowledge for teenagers studying the subject.

Similar terminology is now in widespread use across the real estate sector when it comes to existing buildings – with ‘brown’ assets being not fit-for-purpose and ‘green ones’ being future-proofed due to their sustainability credentials. With approximately 80% of buildings that will be standing in 2050 already built, there will be huge focus on turning these ‘brown’ assets ‘green’ to achieve the EU goal of net zero by 2050.

Increasing awareness of brown to green is reflected in PATRIZIA’s Client Survey 2023. Some 85% of the 120 investors who responded believe brown-to-green development will increase over the next 12 months, of which nearly a quarter expect a significant increase. At the same time, two out of three anticipate an uplift in capital expenditure (capex) and refurbishment, reflecting growing focus on value creation through hands-on asset management.

“There is now a growing legislation framework driving this,” says Dan Williams of PATRIZIA. “The EU sees renovating buildings as essential to avoid climate catastrophe and is pushing for energy efficiency in the sector and backing it with funds from the European Green Deal. Then you have 27 national governments setting their own targets for energy reduction, so momentum is building.”

Accelerating the transition from brown to green

As head of real estate development UK & Ireland, Williams is involved in retrofitting significant projects, including The Louise – a 24-storey landmark office in Brussels. As part of the project, scheduled to be finished by Q1 2024, the whole facade and all mechanical and electrical equipment are being replaced. The extent of the sustainable refit has attracted international law firm Clifford Chance as the building’s anchor tenant when it opens.

Williams explains that the green push is primarily to reduce the energy used in buildings. As an example, he points to regulations that mean, from next year, UK landlords cannot rent non-residential property if it holds an Energy Performance Certificate (EPC) with an F or G rating. This has been in effect for residential since 2020.

The Louise office block in Brussels is being retrofitted, including a new facade, and has attracted Clifford Chance as anchor tenant

The consequence is that buildings could become stranded – that is, they will fall victim to ‘brown discount’ (a loss in value due to not being ESG-compliant) if left untouched. Less energy-efficient commercial real estate, coupled with rising energy prices, will become difficult to let and sell, leading to reduced rental income and asset value.

“That is having a major impact on value,” Williams comments. “We’re seeing discounts already, and that will keep getting wider the closer we get to 2050.”

Greening a building

There are many ways a building can be made greener for little cost. One is to procure more green energy sources or distributed green energy, such as by installing rooftop solar panels, or via a power purchase agreement with energy producers. However, there are other relatively inexpensive ways, such as refurbishment and retrofitting works, which can include converting to LED lighting, adding heat pumps, or installing a smart energy control system.

A combination of approaches is often adopted, but upfront costs and costs associated with disruption to occupiers can be significant when more fundamental changes are required. The main reason buildings owners baulk at retrofits is economics.

Williams explains that most of the energy used in buildings goes out through the roof or the walls, which means projects may need to consider replacing the facades to obtain greater energy efficiency – which can be costly.

“Ironically, by replacing the facade for greater thermal efficiencies, you also lose embodied carbon, which is a negative,” he notes.

Questions on embodied carbon

Arguments swirl around embodied carbon. While buildings have become more energy-efficient to run, large amounts of energy are required during construction – which means vast quantities of carbon are emitted. Embodied carbon emissions include the materials and construction processes throughout the lifecycle of a building and eventually demolishing it, such as transporting waste and recycling it.

“You can end up with weird circular arguments concerning embodied carbon,” says Williams. “Yes, we should be reusing buildings, we shouldn’t be knocking them down, but the question arises: if you can’t reuse them, what do you do with them? This is particularly relevant when there is a housing crisis across Europe.”

‘Yes, we should be reusing buildings, we shouldn’t be knocking them down, but the question arises: if you can’t reuse them, what do you do with them?’

Dan Williams, PATRIZIA

He expects many offices will, for example, become redundant. With offices left semi-empty after the Covid-19 pandemic, on top of structural changes in working methods through the digital transformation, investors are reluctant to invest in retrofitting a building if it doesn’t tick all the boxes on property fundamentals, such as location.

The issue is complicated by the fact that office blocks were often not built with longevity in mind. The average life span was expected to be 25-30 years. As parts and equipment, such as air conditioning, lifts and windows wore out, landlords often opted for demolition over refurbishment.

Against the backdrop of net zero targets, property owners and developers need to again look at the impact of construction and redo calculations concerning refurbishment and construction. When developers are looking to construct, says Williams, they need to consider the longer term – up to 100 years, which will also impact costs.

Impact on investors

There’s no doubt the ESG imperative is understood by investors, with nearly 90% of PATRIZIA’s surveyed clients stating they collect and use the ESG data from their real estate investments. However, the uncertainty of going green is having an impact on investors’ decision-making. Williams says many investors will now not go near a building that does not have a particular rating. Other property owners want to avoid the capex of a major upgrade, so they seek to offload, especially as the pricing has been discounted.

He argues that this creates opportunities. “Despite reports to the contrary, the office market is not dead – but it is changing,” he states. “You can now buy good buildings in terms of location, but they need money spent on them to make them more ESG-compliant.”

PATRIZIA is involved in a number of significant refurbishment projects. Apart from The Louise, they include the transformation of a historic hotel at Tagus Square in Lisbon, a tower in Frankfurt, offices in the City of London and the redevelopment of a complex of listed buildings on 32,000 sq m in Berlin-Lichtenberg.

Williams says the company has experienced an uptick in redevelopment pitches in the past four months. A number of existing and potentially new clients have buildings with upcoming lease expiries where significant capex is needed to match new tenants’ expectations in terms of environmental standards.

“The beauty of us having an in-house development team is that most investment managers don’t offer this service,” he comments. “It’s been a real positive when we talk to clients because PATRIZIA can cover asset and fund management, fund services and development all-in-one and clients appreciate that.”

Brown-to-green strategies

Williams says PATRIZIA is convinced that decarbonising buildings will make them more sustainable and be the main route for future-proofing assets. Historically, many within the real estate sector perceive climate-related risk as a negative, something that costs money, detracts from the value and reduces the lifecycle of assets.

“We believe, and many clients agree, that brown to green is an opportunity to add value and to extend the lifecycle of the asset, and for them to become more compliant with their ESG targets and to improve their ESG credentials,” he says.

The results of the PATRIZIA investor survey also support a stronger focus on asset management, with the results showing a shift in strategy and risk appetite, with debt, value-add and opportunistic ranked as the top three strategies where investors expect to increase allocations most over the next five years. These views underline a general trend towards modernising European real estate stock.

“We believe in the opportunity to move brown into green,” says Williams. “It is one of those rare examples where there is a strong investment case and, at the same time, it will make a real difference to cities, particularly with the climate crisis warning lights flashing already.”

Author: Guest View