ESG in Asset Repositioning: Enhancing Sustainability and Profitability in a Changing Market

Posted by Knight Frank Newcastle on 16th October 2024 -

As the commercial real estate market evolves in response to environmental, social, and governance (ESG) initiatives, asset repositioning has emerged as a key strategy for enhancing both sustainability and profitability. Asset repositioning, often associated with adapting existing properties to meet new market demands, is pivotal in aligning properties with ESG goals. This approach involves not just making physical changes to assets but also preparing them for future market demands, particularly in light of evolving regulatory requirements and stakeholder expectations.

Defining asset repositioning in the ESG context

Asset repositioning involves modifying existing properties to align more effectively with long-term sustainability goals and changing market demands. Rather than simply being a transactional decision, asset repositioning requires forward-thinking planning. It is crucial for landlords and property owners to ensure that their assets remain competitive and valuable throughout various market cycles, especially considering the increasing importance of ESG factors.

As highlighted in our recent Sustainability Series paper, Part 1: Defining a Strategy, one critical driver of ESG in asset repositioning is the need to meet regulatory standards. In the UK, the recent mandatory reporting requirements on embodied carbon for refurbishments and fit-outs, which came into effect on July 1, 2024, are a good starting point for companies to evaluate their repositioning strategies. This regulation helps create a level playing field for developers and landlords, encouraging them to consider the least environmentally impactful approach when making assets more desirable in the market. Additionally, it introduces an important consideration—whether to opt for deep retrofits or lighter touch refurbishments, based on the asset’s environmental footprint and market positioning.

Key ESG drivers in asset repositioning

Several key ESG drivers should be prioritised when repositioning assets to ensure a balance between sustainability and profitability:

1. Embodied carbon and energy efficiency
Companies must assess the carbon impact of their repositioning projects, starting with embodied carbon. This involves understanding the environmental cost of construction materials and processes and exploring refurbishment options that minimise environmental impact. In some cases, lighter-touch interventions such as upgrading lighting systems or engaging tenants in sustainability efforts can yield significant benefits without requiring major overhauls.

2. Energy use intensity (EUI)
Energy efficiency is a critical factor in ESG-driven asset repositioning. It is essential to focus on reducing the energy use intensity (EUI), which measures the energy consumption of a building relative to its size. Achieving energy reductions in line with industry standards, such as LETI or Paris Proof targets, ensures that the building remains compliant with evolving regulations and attractive to environmentally conscious tenants.

3. Transition to clean power
Repositioning assets must also address future energy sources, as the UK moves away from natural gas toward centralised electric systems for heating and power. Ensuring that assets are equipped to receive clean power—whether through energy networks or by securing green energy certifications—ensures long-term viability in a low-carbon future.

Developing ESG-focused repositioning strategies

Creating a clear strategy for ESG-driven asset repositioning requires careful alignment with both regulatory requirements and stakeholder expectations. This often involves bringing together a wide range of stakeholders, including landlords, occupiers, and investors, to ensure that ESG goals are integrated across the value chain. It is increasingly common for both landlords and occupiers to seek alignment between their corporate ESG commitments, making it essential for repositioning strategies to account for these overlapping priorities.

One of the key challenges in developing an ESG-focused repositioning strategy is understanding and planning for the long-term costs associated with these initiatives. Early planning, including phasing capital expenditures and forecasting the financial impact of ESG improvements, can help mitigate risks and ensure that assets remain financially viable over time. Additionally, tools such as the Carbon Risk Real Estate Monitor (CRREM) can guide companies through this process by providing insights into both short- and long-term risks associated with energy use intensity and carbon emissions.

Challenges and opportunities in ESG-centric asset repositioning

While ESG-focused asset repositioning offers numerous opportunities, it also presents challenges, particularly around balancing the expectations of different stakeholders. Occupiers, for instance, increasingly seek properties that align with their corporate ESG goals, and landlords must ensure that their assets meet minimum energy efficiency standards, such as EPC ratings. This dynamic can create tension, but it also provides an opportunity for landlords and occupiers to collaborate on repositioning strategies that enhance the sustainability of the asset while meeting occupier demands.

Another challenge is the consideration of biodiversity in urban repositioning projects. For example, many office buildings in cities feature flat roofs, which are often converted into terraces to meet occupier demand for outdoor space. However, this can negatively impact biodiversity net gain (BNG). In such cases, it may be necessary to replace green roofs with new vegetation elsewhere on the property or even purchase BNG credits to meet planning requirements. These kinds of challenges highlight the need for creative problem-solving when balancing ESG goals with practical constraints.

An example of successful ESG-driven asset repositioning can be seen in a business park near Southampton. The project involved preparing the asset for a potential future sale by assessing its current state and considering the upcoming regulatory and market changes that could impact its value. By evaluating the asset’s performance and aligning it with future market demands, the landlord was able to phase capital expenditures and reduce the financial burden of future regulatory compliance. This strategic approach allowed the asset to remain attractive to potential buyers while minimising long-term risk.

Long-term benefits of ESG-focused repositioning

The long-term benefits of ESG-focused asset repositioning are substantial. Properties prioritising sustainability are more likely to attract occupiers, secure longer leases, and maintain or even increase their value. By modelling assets beyond 2050 focusing on reducing energy use intensity, and achieving net-zero carbon emissions, real estate owners can ensure their assets remain competitive in the market for years to come.

ESG-focused repositioning also contributes to the overall resilience of investment portfolios. As investors increasingly prioritise ESG criteria, properties that meet these standards are more likely to retain their value and remain liquid in a rapidly changing market. Repositioning assets with ESG in mind enhances their investment appeal and helps keep real estate competitive compared to other asset classes, such as fixed income or commodities.

A forward-looking approach to asset repositioning

ESG principles will play an increasingly central role in asset repositioning strategies. By focusing on sustainability, energy efficiency, and long-term planning, companies can meet regulatory requirements, enhance profitability, and future-proof their assets for the changing market. Aligning these efforts with the goals of all stakeholders ensures that repositioning strategies are both financially and environmentally sustainable.

There is an urgent need for a retrofit revolution to meet regulatory requirements and evolving occupier demands. The first of our three-part sustainability series, Defining a Strategy, focuses on how to meet the commercial property retrofit challenge. Our research takes a deep dive into obsolescence and its impact and gives you practical guidance to formulate your decarbonisation strategy and drive property performance.

How can we support you with asset repositioning?

We have embedded sustainability and ESG practices into our business and share a committed need to address ESG issues and concerns. Our expert ESG Consultancy team guides clients through ESG considerations as they navigate current challenges and growing regulations. We help identify actions and opportunities for asset repositioning, creating practical and actionable strategies. Get in touch to find out how we can help you.