1. What will the practical implication be for a property portfolio?
Participation in emissions trading would likely be handled by energy providers, with administration, transaction and direct costs of allowances being passed on to landlords and, ultimately, tenants in their heating bills.
This price shift would affect large landowners all the way down to private homeowners. The highest costs will fall to the owners and predominantly tenants of buildings with low energy efficiency using fossil fuel-based heating systems such as oil and gas.
Meanwhile, opportunities will arise for landlords producing on-site renewable energy. This prospect has not escaped one of the leading listed companies in Europe, who told JLL: “The real estate business can increasingly become its own energy supplier.” This is precisely what many real estate companies plan to do. Low carbon and renewable energy systems – such as photovoltaic panels, air or ground source heat pumps, and solar thermal water technologies – are likely to come to the fore. This could give landlords the opportunity to sell allowances themselves for profit.
Some EPRA members surveyed raised the affordability of new measures as a potential issue: “It is good and right that politicians set clear climate targets. However, these goals must also be achievable.”
A delicate balance is required to impose a cost that encourages behaviour change without penalising those with limited control or resources.
3. What impacts have the carbon schemes had outside of the EU?
Given the high level of uncertainty of the implications of ETS on the real estate industry, we have conducted a global investigation into whether there are similar mature initiatives from policymakers. The EU seems to be at the forefront, with just a couple of initiatives affecting buildings globally.
4. How will this affect value?
Earlier this year, JLL produced a valuation methodology paper entitled ‘Valuing Net Zero & ESG’. It sets out how sustainability trends such as investor and occupier sustainability targets, lending criteria, and increasing legislation might affect property values in the future.
As legislation such as the ETS increasingly raises the costs of occupying less energy-efficient buildings using fossil fuel-based energy, tenants will demand more from landlords. In the short term, landlords could therefore benefit from enhanced returns for providing energy-efficient stock to tenants, with renewable energy systems benefiting their occupancy rates and rents. In the longer term, particularly as carbon costs rise, occupiers and, therefore, investors are likely to down-value outdated insulation, heating and cooling systems that no longer make economic sense.
In my opinion, the impact of the ETS in isolation will, however, only represent a small turn of the dial in what is a much larger market shift towards energy efficiency and renewable energy. Indeed, heating is only a part of the carbon emissions created by the construction and operation of buildings, and heating bills are not the only driver for tenants and landlords to occupy and own more sustainable stock. Nevertheless, an ETS for buildings is a step towards an economy where the true price of carbon is reflected, and this will contribute to the move towards sustainability impacting real estate values.
This complex topic is likely to evolve as more clarity on the scheme is provided by the European Commission, and particularly over time as carbon prices rise. For me, rising carbon prices appear to pose the key threat. Forward-looking management of real estate should include scenario analyses to futureproof investments and derive the right strategies aligned with sustainability goals. To explore this further, JLL, in partnership with EPRA, are set to publish an extended white paper on the topic of ETS and carbon tax for buildings in Q4 2021, analysing valuation scenarios to illustrate the potential impact.