COP26 – Building change in real estate?

There were a number of key developments at COP26, including new funding commitments and the release of a comprehensive roadmap to net zero from the UK Green Building Council. We identify the core points from the UK Green Building Council and COP26 announcements below and consider what implications these will have for the real estate sector. 

1. Nation-wide retrofitting of existing homes

Around 50% of UK built environment emissions relate to existing housing stock, coming primarily from fossil fuel boilers. The Government expects 24 million of the existing housing stock of 27 million to require retrofitting to reach net zero targets.

What can we expect?

• The UKGBC therefore advocates embarking on an immediate national programme of home retrofit, focusing on making existing homes more energy efficient, cheaper to run and phasing out reliance on fossil fuels. 
• The Construction Leadership Council (CLC) and National Retrofit Strategy (NRS) produced a report for the UK government with ambitious targets to retrofit 97% of homes by 2040. 
• Policy will need to follow suit (although we would note that efforts to date have had negligible effect) – expect mandatory minimum EPC ratings to become more stringent (UKGBC suggests minimum C rating by 2028) and cut-off dates for sales of gas and oil boilers,. 
• Significant education and encouragement for behavioural change amongst homeowners will be necessary. Tax incentives have been suggested, including reduced SDLT/council tax rates for more energy-efficient properties and nil-rate VAT bands for refurbishments to improve energy efficiency.
• Increased logistical capability is fundamental in order to carry out the necessary works – the CLC predicts that 500,000 new professionals and trades are needed to meet demands over the next decade. 

2. Energy performance disclosure for non-domestic buildings

Around 20% of UK built environment emissions relate to non-domestic buildings and a significant proportion of these are from heating.

What can we expect?

• Policy surrounding heat efficiency will continue to become more stringent.
• Likely introduction of mandatory reporting requirements. This means greater accountability for assets as individual asset performance will be visible to the market. Performance-based rating systems for large office buildings (>1,000m2 ) are expected from May 2022. A recognised UK reporting standard would be welcomed by the industry.
• Introduction of fiscal incentives (either as penalties or discounts) linked to minimum performance standards.
• The UKGBC recommends making green lease clauses mandatory in all new business leases. Green lease clauses will be essential for landlords to be able to obtain the data required from their occupiers in order to meet their mandatory reporting requirements.
• Operational energy and carbon reduction targets for owners and occupiers.
• New EPC targets and wider policy changes may force proactive choices by tenants and buyers. For instance, public sector organisations factor in ESG performance as part of the procurement process. We expect private organisations to enhance their requirements in this regard too. Given this, owners and developers who offer carbon neutral or net zero buildings will likely be better positioned in the future market and will find finance more readily available.

3. Adoption of a design for performance approach

Current building regulations (Part L) and EPC requirements are not adequate for predicting or representing actual building performance. Too often there is a “performance gap” between design intent and building performance outcomes.

What can we expect?

• A shift in focus of Building Regulations to outcomes-led in-use performance metrics.
• Policies to encourage more sustainability in both choice of materials and design. This will likely take a variety of forms such as mandating greater reductions in emissions in Building Regulations and other incentives, such as lower SDLT rates and/or accelerated planning approval for more energy efficient developments.
• A requirement for new buildings to be designed to meet energy performance levels required to meet 2050 net zero targets, to avoid future retrofitting.

4. Whole life carbon measurements (WLCs) and agreed limits

WLCs are the emissions caused by a building over its life. Around 19% of UK built environment emissions come from embodied carbon from new construction and refurbishment. Whilst operational emissions are more easily reduced, there is no simple mitigation option for embodied carbon.

What can we expect?

• A regulatory policy framework for embodied carbon in new buildings, including mandatory measurement and reporting of WLCs and minimum standards.
• The idea of a circular economy was key at COP26, with reusing old buildings and repurposing of materials central. Policy likely to influence this is, again, changes to taxation and strengthening standards around the levels of carbon permitted in the production of certain materials.

5. National infrastructure investment based on the net emissions impact

5% of UK built environment emissions come infrastructure, but effective infrastructure is vital to the feasibility of a net zero economy.

What can we expect?

• Policy will likely push for greater focus on carbon capture technology, waste reduction, and some form of carbon pricing to limit the impacts of developments.
• Holistic approach - balancing the embodied carbon impacts of infrastructure investment with emissions reductions in other sectors, such as transport, through use of that infrastructure. 
• Strategic infrastructure investment in the industrial sector to facilitate decarbonisation of construction material supply chains, such as developing carbon capture and storage options for the concrete and cement sector.
• Carbon pricing policies to drive decarbonisation, including incorporation into NPPFs

Financial announcements

COP26 saw commitments from private and public sector stakeholders. On the public side, the UK Government announced the Urban Climate Action Programme is to provide £27.5 million in new finance to assist cities in developing countries green transition. This is alongside existing commitments that pre-date COP26.

In addition, the Glasgow Financial Alliance for Net Zero, chaired by Mark Carney, have pledged over $100 trillion in finance to push for net zero by 2050.

What can we expect?

• The impact on real estate will be significant, with it likely that finance will require ever-greater green commitments. This is already evident in the market. Finance will be a key driver in encouraging (requiring) the improvement of the green credentials of a property.
• Enhanced mortgage products for sustainable buildings, turning buyers and investors towards more environmentally sound properties.

Summary

COP26 saw significant commitments to change. The viability of decarbonisation in the real estate sector will remain contingent on the availability of finance and policy changes over the coming years but COP26 marks an acceleration towards net zero. This will undoubtedly leave a lasting impact on the real estate sector – which is necessary if net zero commitments are to be achieved.