Real estate in 'sweet spot' for climate impact investing
The real estate sector is experiencing a significant shift towards sustainability, driven by a combination of regulatory pressure, changing tenant preferences and the urgent need to decarbonise the built environment, which is appealing for asset owners's keen on sustainable investments.
Evidence of that comes from investors like Rest Super, one of Australia's largest superannuation funds, which recently made a cornerstone investment in Fidelity International's newly launched €200 million ($214 million) climate-focused real estate fund.
"Real estate is in a sweet spot for climate impact at present," Barry Chung, head of private asset specialist sales for Asia Pacific ex Japan at Fidelity International, told AsianInvestor.
The climate fund's strategy is underpinned by market dynamics and trends reshaping the real estate investment landscape.
Rest
“With logistics properties trading at attractive rates and demand for energy efficient facilities growing, we believe the strategy will drive rental yields and property values that should translate into strong financial returns while helping to speed up the path to a carbon neutral economy,” Andrew Lill, chief investment officer at Rest Super, said.
REPRICING OPPORTUNITIES
The logistics real estate sector is undergoing a significant repricing, which Fidelity’s Chung attributes primarily to interest rate trends.
"Brown logistics buildings are currently trading at an attractive entry point, 20-30% below peak valuations in 2022," he said.
Addressing concerns about occupier retrenchment, Chung noted that growth in manufacturing, retailers, as well as supply chain resilience measures, have partially offset any reductions in demand.
This dynamic presents a compelling opportunity for investors to acquire assets at attractive valuations and reposition them to capture the growing demand for sustainable, energy-efficient buildings, he said.
"Through comprehensive refurbishments, investors can create modern, high-quality, sustainable warehouses that are capable of being operated at net zero carbon," Chung explained.
"The aim is to significantly increase their capital value, capturing the accelerating demand for green buildings."
DEMAND EXCEEDS SUPPLY
Fundamentals underpinning the climate-focused real estate investment thesis notably include the growing demand for sustainable real estate and the limited supply of such assets in the market, according to Chung.
Fidelity Internaitonal
"Between growing demand for green space and insufficient supply of that space mean the occupier dynamics and capacity for rental growth are extremely compelling," he stated.
"The significant reset of pricing since 2022 means there are opportunities to take advantage of motivated sellers who may be forced to accept higher yields as a premium for liquidity in what is a sluggish transaction market," Chung said.
"The key enabler therefore is unlocking the capital to finance the transition of the sector."
REGULATORY TAILWINDS
Climate-focused real estate investment strategies are also supported by the regulatory environment and the shifting preferences of corporate tenants.
Chung expressed confidence in the long-term viability of this approach.
"The regulatory trends supporting our climate impact strategies are unlikely to change course - in fact, the regulatory bodies in Europe are 'doubling down' on their decarbonisation plans," he said.
Beyond regulatory compliance, market-driven dynamics are increasingly shaping tenant demand.
"We are seeing evidence that tenant demand is moving in the same direction," said Chung.
"The years by which large corporates are pledging to be net zero carbon have come down from 2040/2050 down towards (and beyond) 2030. Knowing that these targets are not achievable without considering the spaces and buildings they occupy, we see this as a tailwind for our climate impact strategies."
As more corporations commit to ambitious net-zero targets, the demand for sustainable, energy-efficient logistics spaces is expected to surge.
"Climate-focused real estate investment strategies are well-positioned to cater to this growing demand, providing investors with an opportunity to align their capital with the transition to a low-carbon economy," Chung said.