Investing in Operational Real Estate
Real estate, which accounts for about 39% of global CO2 emissions, is an increasing focus as governments and investors across numerous industries, including real estate and private equity, prioritize sustainability in policy and purchasing. Emissions from buildings themselves, and from the energy sources that power them, account for about 90% of the overall emissions from the sector (with the remainder coming mostly from materials used in construction).1
Real estate investors that take stakes in more sustainable assets, especially those powered by renewables (in particular, electricity generated by wind, solar, and hydroelectric technologies) could capture significant upside. Sustainable assets are more likely to meet environmental regulations and may be eligible for government subsidies. They can be more energy efficient, which could lower the cost of operating them (especially from an overall life-cycle perspective). And they often command a premium from consumers who value greener options.
To maximize the opportunity, real estate investors should consider implementing an operational real estate (ORE) strategy focused on renewables.
ORE involves linking returns to the operational performance of real estate assets to capture higher margins than would be available from leasing alone. Investors pursuing ORE in renewables would ensure their assets are powered by renewable energy, often by partnering with third parties with expertise in sourcing and operationalizing renewables.
The benefits could be significant, particularly for investors that are are able to differentiate their assets and managers that are able to develop a track record at driving adoption of renewables across portfolios of real estate assets — positioning themselves at the center of the global transition away from fossil fuels.
The case for taking an ORE approach to renewables
Low-carbon assets often command higher rents and attract higher-quality tenants compared to traditional real estate assets. According to data firm Deepki, real estate professionals in the UK reported a green premium of 16% to 25% on their low-carbon properties.
Investors can unlock significant additional value through operational strategies that enable or optimize use of renewable power. That could involve a range of activities, such as managing the process of incorporating renewables into new or existing assets, securing reliable and affordable access to renewable power sources, or managing ongoing renewables operations.
Landlords, developers, and managers that adopt an operational approach not only keep the value that would otherwise go to others but often may create opportunities that would not otherwise be available. There may be few opportunities to invest in low-carbon assets for those not willing to help create them. Moreover, investors that develop expertise in renewables can scale the benefits by deploying their capabilities across portfolios of assets.
Demand for sustainable buildings and energy-efficient operations will continue to grow as governments and industries strive to achieve net-zero targets. Operational real estate investors that focus on renewables can position themselves at the forefront of this trend, aligning with market expectations and ensuring their ability to comply with evolving environmental regulations and standards. By demonstrating their commitment to ESG concerns, they can strengthen their long-term relevance with a range of stakeholders while developing new competitive advantages.
Incorporating renewables and securing supply
Here we highlight four approaches operational real estate investors can take to integrate renewables into their assets, secure access to power from producers, and lock in favorable power prices.
- Incorporate renewables into existing or new assets. Investors can retrofit existing assets to enable them to generate their own energy using renewables, often by installing solar panels. When developing new buildings, they can incorporate renewables infrastructure from the outset, optimizing power generation systems to meet specific sustainability goals.
- Locate new buildings near renewable sources. By locating properties near wind farms, solar farms, or hydroelectric facilities, investors can tap into these sources directly, reducing transmission losses and potentially benefiting from favorable pricing. This will not only help them secure access to renewables but also strengthen the environmental credentials of their assets, raising their appeal to tenants who prioritize sustainability.
- Negotiate long-term supply agreements. Landlords and large-scale tenants with multiple stores or offices could enter into power purchase agreements to buy electricity directly from renewable energy providers, often at a fixed rate over an extended period. Thus they can secure consistent supply and reduce their exposure to volatile energy markets. Negotiating favorable terms can lead to long-term cost savings and enhance the financial viability of integrating renewables.
- Collaborate with energy producers. To secure supply and lock in favorable prices, landlords and tenants could enter into partnerships with power producers to establish private wire agreements, enabling them to connect their properties directly to renewable energy sources through a private grid. They could also partner with power producers to expand renewable generation capacity by contracting in advance to purchase power from newly developed sources.
The opportunity cuts across sectors
We are at the beginning of a global energy transition that will eventually require the majority of real estate assets to be powered by renewables. Virtually every sector can benefit from making the transition now. Here we highlight four areas to give a sense of the breadth of the opportunity.
- Data centers. These energy-intensive facilities are critical to the global economy. Recognizing the sustainability imperative, operators increasingly aspire to source all their power from renewable sources. Their efforts include adding solar panels to their properties, purchasing power from renewable generators, and exploring innovative approaches such as geothermal energy.
- Offices. There is increasing investor appetite for 100% electric, net-zero buildings that are highly sustainable. Globally, well-known companies such as Amazon, Vodafone, and BNP Paribas are leading the way by ensuring that the electricity consumed in their warehouses, offices, and shops comes exclusively from renewable sources, and many are being recognized as leaders in sustainability indexes.
- Electric vehicle charging. Demand for convenient and reliable charging infrastructure is rocketing as adoption of electric vehicles grows. Real estate investors that install charging stations at their properties can provide a valued service to clients and enhance their sustainability profiles. Those with renewable generation capacity on-site can sustainably power the charging infrastructure themselves, providing a comprehensive and sustainable solution for users. Investors could also consider taking a stake in electric vehicle charging networks, which will have to be built out at an accelerating rate as the world transitions from cars powered by fossil fuels.
- Hotels. Major hotel groups are setting net-zero targets, and they are increasingly turning to renewables, such as solar panels, to power their operations. By embracing renewable energy and implementing sustainable practices, hotels can enhance their market competitiveness, appeal to environmentally conscious guests, and contribute to the overall transition to a low-carbon economy.
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The real estate sector is critical to the global transition from fossil fuels to renewable energy sources. By operationalizing renewables in real estate, investors can maximize the efficiency of their assets, increase their margins (including capturing a “green premium”), meet evolving environmental regulations, and position themselves at the forefront of a long-term trend toward sustainability.
 “Global Status Report for Building and Construction 2019,” International Energy Agency (2019).