Net Zero: today's canary in the coal mine ..

Focusing on the right risk at the right time is a critical function of commercial real estate asset management. Much of recent market commentary has concentrated on the subject of unexpected interest rate increases but is it right to focus on that risk now or might that issue, in a wider investing context, have dissipated long ago?

Rate rises, and all their consequences, have been an elevated key risk for some time, obfuscated to some extent by two-handed economists. Nevertheless they make the significant market activity of the past 24 months all the more difficult to comprehend. Management of interest rate risk should already be in hand, but for some that canary was ignored and, we say, that canary is dead ..

What of today's canary? What might the reactions of Haldane's sentinel portend as it approaches the coal face? Is another canary at risk?

For those not familiar with what is often considered to be only a metaphor, canaries were used in coal mines, for over seventy five years, to detect the poisonous gas carbon monoxide before it got to dangerous levels, killing the miners. The birds were particularly useful as an early warning system because the huge amounts of oxygen required for flight relied on their physiology which draws in oxygen both when inhaling and exhaling, making the birds extremely sensitive to airborne gases.

Continuing with the metaphor, it's apt that it is another gas, carbon dioxide, that sits at the heart of the dangers (and opportunities) to real estate which should be at the forefront of investors' minds.

The risk we refer to is decarbonisation of the built environment and the methods by which governments and occupiers will achieve their required outcomes: government from the perspective of meeting commitments to international agreements to global net zero carbon targets via the introduction of local laws and regulations, and occupiers who will need to comply with these new laws, but also increasingly who want to meet their own ESG/net zero commitments to decarbonise their whole supply chain, including the operation and performance of buildings.

The bulk of the industry have, and continue to write about these risks, the very complex details of which are not the subject of this short article. Rather our point here is to highlight that decarbonisation is not now a remote risk, either for owners of existing assets or for those contemplating new acquisitions. Approaching legislative and regulatory responses are changes which need to be managed now rather than kicked optimistically down the road as might have been the case with interest rates.

Investors and asset managers need to look now at the impacts decarbonisation is likely to have on prospects for future occupancy and value, not to mention the moral imperative to help the fight.

Theoretically, the approaching market should present some good opportunities, but before buying think twice, breathe twice...

Tascott & Co | November 2022

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Tascott & Co was established to provide clients with informed and independent views, based on sound risk analysis, on all aspects of commercial real estate investment and financing. In 2019 Tascott became a manager itself and completed its maiden transaction. Today we help investors assess, acquire and manage commercial real estate.