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Green assets a growing trend in real estate

·6-min read

(Credit: Samuel Isaac Chua/ The Edge Singapore)

SINGAPORE (EDGEPROP) - Green assets are likely to see growing demand from investors, says M&G in its global outlook report, highlighting major trends currently influencing global property investment. “The result is likely to be a growing value divergence based on asset quality and occupiers’ sustainability demands. This means tenant-landlord relations will also be redefined on the road to net zero, requiring unprecedented levels of cooperation,” it says.

The focus on green real estate has taken flight in Asia Pacific, and is now “gaining a lot of momentum”, says Richard van den Berg, fund manager, Asia, at M&G Real Estate, in a panel session discussing Asia Pacific’s real estate outlook for 2022.

“I think the whole Covid impact has made people realise how important it is to live and to work in a safe and healthy environment,” he says. This has played out in terms of demands for requirements like high-efficiency particulate air filters, better ventilation and crowd control measures in workplaces, for instance.

“In Asia, the ‘green revolution’ will provide significant opportunities for investors, particularly through the financing of eco-friendly projects and the delivery of renewable energy and associated manufacturing and construction projects,” says M&G.

These can be seen through initiatives such as Singapore’s CleanTech Park and South Korea’s Pangyo Technovalley 2, which offer investors opportunities to tap into clean-tech growth and the longer-term structural changes relating to ESG through direct investments in real estate facilities, highlights the firm.

M&G says that buildings with inferior environmental, social, and governance (ESG) features are likely to come under increasing pressure. On top of that, “asset managers will face a balancing act of delivering ESG enhancements and the need to weigh up short-term costs versus medium- to long-term performance benefits”, it adds.

CBRE also forecasts that there will be tighter ESG requirements in the future. “With more countries pledging to reach carbon neutrality between 2030 and 2060, occupiers are under pressure to comply with ESG standards on sustainability disclosure,” it highlights in its market outlook report.

“This year will see companies exercise more scrutiny in selecting offices based on sustainability and wellness features as well as landlord ESG performance,” it adds, noting that “green leases, energy audits and resilience will feature more prominently in leasing portfolios”.

The guidelines around hybrid working are also likely to impact the office sector. “While occupiers would like to secure cost savings by using less space, they hold concerns about the potential impact on productivity, engagement and corporate culture,” says CBRE. “The challenge for occupiers will be how to redefine the role of the office while accurately gauging space utilisation and creating an agile office network for a far more dispersed workforce.”

(Source: CBRE Research, January 2022)

Office expansion set to rebound

In Asia Pacific, CBRE expects that most offices in the region will reopen in 2H2022. So far, Hong Kong, South Korea and Taiwan’s traffic in office districts have already returned to pre-Covid levels, according to Google Mobility Index data. It believes that Asian firms will most likely return to office-based working. The initial response from North Asia showed that despite the spread of Covid-19, most companies have continued working in-office, although with limits on occupancy or team rotation.

New Grade-A office supply in Asia Pacific is projected to rise by 15% y-o-y to almost 67 million sq ft in 2022, marking the highest total in over a decade. With almost half of new supply located in China, cities like Shanghai and Shenzhen will experience a supply peak in 2022, notes CBRE. However, most supply pressure will be in non-CBD areas, which accounts for 90% of new space.

CBRE also forecasts that leasing activity is projected to rise in Hong Kong, Japan and Australia, although demand in South Korea and Singapore will be limited by new supply.

There will also be flight-to-quality relocations, which will comprise a “major driver of demand” this year, it adds. This is attributed to an emphasis on sustainability and wellness.

To that end, CBRE advises office landlords to invest in smart and green buildings, including retro-fitting older stock. New ESG requirements should also be met, by embedding sustainability features into each stage of a building’s life cycle, such as planning, design, construction and operations.

To cater for a component of flexibility and uncertainty, landlords can explore incorporating flexible spaces into their office portfolios and creating partnerships with co-working operators, adds CBRE.

Bright spots for select retail

Although the pandemic drastically accelerated the use of e-commerce, there seems to still be room for brick-and-mortar stores. One such need is through the requirements of omnichannel sales and delivery. Physical malls play the part of fulfilling online orders, as part of the “click and collect” model. To that end, many online retailers are partnering with physical retailers to improve the customer experience and goods returns are increasingly being processed in physical retail assets, observes M&G.

CBRE expects there to be more focus on experiential retail. “With the shift to online consumption during the pandemic having come at the expense of physical retail, retailers and shopping centres must differentiate their experience to lure shoppers back to brick-and-mortar stores,” it says. Approaches that can be used include rolling out promotional events, expanding display areas, setting up more thematic stores and implementing new F&B concepts that could attract shoppers.

M&G forecasts that the retail sector could be reaching a “turning point’’ in its cycle, citing early signs of growing capital values and improved sentiment in some parts of the market. “As the economy recovers, retail rents may stabilise or even grow, moving forward, potentially prompting the return of yield-hungry investors,” it says.

However, CBRE cautions that while recovery is expected to continue this year, expansionary momentum will be led by selected outperforming street shops and malls. “Secondary retail — even those properties located in core locations — are unlikely to undergo further rental cuts along with tenant outflows,” it says.

It expects that China and Hong Kong will see retail rental growth speed up from last year, but remain in the low single digits. Meanwhile, high street shops in Taipei and most Australian CBD retail districts are expected to undergo a further rental correction in 2022, albeit at a milder rate. This is expected to continue amid high vacancy and a lack of international students and tourists, but a quick turnaround could be expected once international travel resumes, it says.

Looking ahead, although CBRE believes the retail leasing market will continue favouring tenants this year, it expects that “the tide will gradually turn as landlords adopt a risk-sharing approach to leasing involving the wider adoption of turnover rent clauses and more fit-out subsidies and tenancy improvements”.

Among general retailers, pop-up stores and those with shorter leases will continue to gain traction as this would allow them to test consumer response, while landlords would be able to refresh their tenant mix more regularly, points out CBRE.

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