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In 2024, UK real estate’s transition towards net zero will accelerate. This will be increasingly reflected in asset pricing. The role of infrastructure in supporting the real estate transition will become increasingly important and biodiversity will emerge as a priority issue for developers.

Key Takeaways

  1. Upgrades in energy efficiency and other sustainability features will be increasingly costed into asset values. There will be a period of price discovery as the industry improves its understanding of sustainability CapEx costs and relative investment performance for more sustainable versus less sustainable assets.
  2. Mandatory disclosure requirements are evolving, with more likely to be introduced in the UK, including TPT Transition Plans. Both occupiers and investors will need to understand how to gather the relevant data and disclose correctly under these frameworks if they are to attract capital targeting sustainable activities.
  3. The power grid will become an increasingly important barrier to real estate decarbonisation and renewable infrastructure investment. Understanding where and when grid capacity can support rising supply and demand will be critical to investment decisions.
  4. Physical climate risks to buildings and infrastructure will be of growing importance to occupiers, investors, and lenders. Questions around insurability and business disruption from climatic hazards will come to the fore and will increasingly be considered in lending decisions.
  5. Regulation and disclosure will begin to turn to nature and biodiversity. After a delay, Biodiversity Net Gain regulation will be enforced from January 2024. Meanwhile, the new Taskforce on Nature-related Financial Disclosures (TNFD) will aim to direct investment towards activities with nature positive outcomes.

Price discovery for less sustainable assets

In 2024, as the risk and cost associated with less sustainable assets becomes clearer, price discovery is likely to accelerate. This will not occur in all sectors and markets, but asset classes which are more complicated to upgrade and are experiencing weaker occupier demand will likely see a growing divergence in asset value and performance between more and less sustainable buildings.  

As price discounts for less sustainable buildings become more pronounced, some will become increasingly attractive to value-add and opportunistic investors seeking to upgrade building sustainability credentials. 

Sustainability disclosure requirements  

Disclosure aims to prevent greenwashing and direct capital towards more sustainable practices. In 2024, the UK Government and the FCA will make decisions on which additional disclosure frameworks will become mandatory for UK listed companies.  

CBRE expects the IFRS S1, IFRS S2, and TPT Transition Plans to become mandatory, with reporting potentially required as early as 2025.  

Both occupiers and investors should use 2024 to become familiar with these requirements and prepare the resources and data needed to report on them. Using existing guidance to report on these requirements voluntarily before they become mandatory could be beneficial, as seen previously with the roll out of Task Force on Climate-Related Financial Disclosures (TCFD) requirements.

Figure 6: Forecast of UK electricity demand

Source: Climate Change Committee, Sixth Carbon Budget

Energy infrastructure and decarbonisation

The net zero transition depends on the replacement of fossil fuels by predominantly zero carbon electricity.  Figure 6 shows how the transition will lead to a 70% increase in electricity demand from UK real estate, and a 119% increase across the economy by 2050.  

To prepare for this demand, 2024 will see increasing infrastructure investment to modernise the power grid and bring new renewable energy sources online.  2024 will also see delays to some real estate developments, renewable energy projects, and electric vehicle infrastructure unable to connect to the power grid, which is already at capacity in multiple locations.  

Understanding physical climate risks 

2023 broke global temperature records, raising concerns about the increasing frequency and severity of extreme weather events. 

In 2024, occupiers, investors, and lenders will accelerate their efforts to understand the physical risks to which they are exposed, not only in terms of damages to buildings, but also the disruption to surrounding infrastructure and communities which affect building and business operation.  

Research suggests around 40% of UK commercial property is underinsured. Therefore, many building owners and lenders may be more exposed to the financial risks of physical hazards in 2024 than they realise.  

Nature and biodiversity 

Developers in England will be required to comply with Biodiversity Net Gain (BNG) legislation from January 2024. Developers should pay special attention to the availability of local biodiversity units, without which meeting BNG requirements will be more challenging and expensive.  

Guidance on reporting corporate nature-related risks and opportunities was published in Q3 2023 by the TNFD. In 2024, how widely these voluntary disclosures are adopted will become apparent. TNFD disclosures are likely to increase the focus on the biodiversity impacts of existing assets and portfolios, whereas BNG legislation focuses solely on new developments.