UK Real Estate Market Outlook 2023
Failure to act on sustainability will have immediate and tangible impacts in 2023. Mandatory disclosure requirements and high energy prices will incentivise urgent action from both investors and occupiers. Improving data will provide greater insight into how sustainability is affecting value, allowing better informed decisions on the issue.
- More mandatory disclosure requirements will be introduced in the UK. They will aim to prevent greenwashing and direct investment towards more sustainable practices. New requirements include mandatory net zero transition plans.
- The changed energy price environment is set to continue throughout 2023. Despite six months of energy bill support from the Government, high prices will create strong incentives to improve energy efficiency. Sustained high gas prices will make onsite renewable energy sources more attractive.
- A better understanding of the value of sustainability features will be established, as sustainability data is increasingly integrated into asset valuations. This will allow increasingly accurate measurement of how green features can protect against value depreciation and insulate assets from transition risks.
- Greater scrutiny of net zero buildings will occur as demand increases and more come to market in 2023. Despite net zero guidelines, there is a lack of transparency and verification for net zero assets and currently no formalised certification process.
- There will be a renewed focus on physical climate risk after the record temperatures and wildfires of 2022. Forecasting, adapting to and insuring against physical risk, will become increasingly important for both investors and occupiers.
The need to act on sustainability will become more urgent
In 2023, the focus on sustainability issues will intensify. The forces of disclosure regulation and high energy prices will accelerate sustainability action across the UK real estate industry.
The changed energy price environment
High energy costs will incentivise energy efficiency, regardless of disclosure or other regulation. Buildings with greater energy efficiency or using onsite renewables, will be insulated from the worst of the price shock.
Occupiers that may not have prioritised sustainability in the past will demand improved energy efficiency to keep bills down as prices remain high.
Figure 7 shows that gas prices are expected to stay elevated long after Government support with energy bills, which could end in April 2023. Acting sooner rather than later to increase building efficiency will create lasting benefits for occupiers in the form of reduced bills.
Figure 7: Historic and forecast UK gas prices
Source: OBR Forecast, 2022
What does a net zero building look like?
The emergence of more net zero buildings on the market in 2023 will spark discussion about defining and verifying net zero status, both at the asset and portfolio level. Questions around ‘net zero ready’, how to accurately measure embodied carbon, the formalisation and transparency of carbon offsets, and whether net zero should be certified, will come to the fore. Attention will be especially focused if disclosure requirements result in more capital being funnelled towards net zero buildings.
More sustainability disclosure requirements
Disclosure aims to prevent greenwashing and direct capital towards more sustainable practices. In 2023, the market will begin to see how large companies and financial institutions plan to use real estate to reduce climate-related risks and reach net zero by 2050. The effect of such disclosures on investment will start to emerge. Upcoming requirements include:
- TCFD – Mandatory for the largest UK-registered companies and financial institutions. The first annual reports incorporating mandatory TCFD disclosure are due in spring 2023
- Net zero transition plans – Planned mandatory disclosure for all UK financial institutions and listed companies in 2023. The exact date is currently unknown
- SFDR Regulatory Technical Standards – Extension of existing SFDR disclosure applying to financial market participants based in the EU or marketing their products in the EU. New mandatory reporting templates will be introduced in January 2023. Unless marketing their products in the EU, UK companies will not have to disclose under this framework. However, it will affect EU investor attitudes towards UK real estate
Increasing sustainability data in the valuation process will allow better interrogation of the costs and benefits of green building features. Particularly, insights into how such features can protect assets from value depreciation. Whether this leads to a rush to install green features remains to be seen. Whatever the outcome, landlords and investors will be better equipped to make informed decisions on the issue.