Below trend growth to continue
The road to decarbonising Commercial Real Estate.
In the top-end commercial real estate sector, everything changed in 2015, when the Paris climate accord effectively substituted the word “decarbonisation” for energy efficiency.
Until then, asset owners would pursue a five-star rating for the base building under the voluntary NABERS (National Australian Built Environment Rating System) code, and then welcome the blue-chip tenants as they rolled in.
“Owners would achieve a top NABERS score and say: ‘Ok, we’re done now,’ and consider making up any performance shortfall with the purchase of green energy,” AXA IM Alts Head of Asset Management in Australia Chris Willey said.
“However, with the world on a rapid decarbonisation pathway, it’s not enough to just achieve a five-star rating, cross our arms and be done with it.
“Carbon doesn’t have boundaries and we need to help decarbonise our customers (tenants) as well, which are our Scope 3 emissions (indirect greenhouse gas emissions from the use of a company’s products).”
French giant AXA Investment Managers, which had 824bn euro in assets under management (AUM) at December 2022, owns AXA IM Alts – a global leader in alternative investments – with 186bn euro in AUM, including 90bn euro in mainly private real estate.
It marked its return to Australian real estate in 2016 with the purchase of Sydney-based boutique fund manager Eureka Funds Management, and now boasts about $8bn in assets.
The other discipline of AXA IM Alts’ local operation is forestry after the $800m-plus purchase of 25,000 hectares of productive pine plantations in the Green Triangle region, which straddles the border between Victoria and South Australia.
The deal highlighted the group’s appetite for sustainability-themed investment, with radiata pine used as structural timber in residential housing projects instead of high-emissions steel and concrete which account for 14 per cent of global carbon emissions, according to Mr Willey.
Further, this substantial holding of pine plantations can offer potential environmental benefits through carbon sequestration.
Commercial real estate is sometimes portrayed as a sleeping giant in the climate change debate.
The Department of Climate Change, Energy, the Environment and Water has estimated the sector is responsible for 10 per cent of the nation’s total carbon emissions.
Awareness, however, was turbocharged by the Paris Agreement and its ambition to cap global warming at 1.5C, so energy efficiency was no longer seen as an optional extra.
In fact, it’s now a recipe for higher valuations and rental returns, achieved through lower carbon emissions and operating costs.
High performing assets also feature prominently on tenants’ requirements, adding to demand for space and aligning brand values.
AXA IM Alts pays even greater homage to decarbonisation because of its partial reliance on European capital, which must comply with strict taxonomy rules imposed by the European Union to govern the type of investments capable of delivering a low-carbon economy.
“We have clients who have an investment strategy for Australia and they are trying to determine the details of how local assets align with the EU taxonomy,” Mr Willey said.
“There’s provision in the Federal Budget to develop an Australian taxonomy, but if you don’t have a resilient, decarbonised portfolio, then you’re going to be considered a second-tier investment manager.
“If you want an elevator pitch, that’s our primary focus at the moment in the ESG space.”
“Is the building resilient? How does the asset perform with regard to changes in climate and frequency of severe weather events? What does this do to insurance coverage and pricing? How low can I get my carbon budget? How do I measure and assess embodied carbon and how I redevelop and refurbish assets”.
AXA IM Alts’ mitigation of climate risk has been an ongoing process for more than a decade, partly because of the keen awareness of its shareholder, AXA Group – a global insurer focused on returns but also with a healthy respect for risk.
While many of the AXA IM Alts platform’s decarbonisation targets mirror those of its shareholder, some are more ambitious.
For example, a few funds have targeted net zero by 2025, with the entire Australian portfolio on a 2035 pathway.
At this stage, the targets only relate to Scope 1 and 2 emissions – direct emissions from the building as well as indirect emissions, such as grid-scale electricity usage.
Scope 3 emissions associated with tenants are often larger than those of the base building (as owners have typically had a keen focus on reducing base consumption), and more difficult to measure and mitigate.
“At the moment, we are talking about Scopes 1 and 2, but we are also starting to capture data and measure Scope 3 emissions, which for us is principally tenant electricity usage,” Mr Willey said.
“This is the focus in the next few years, which means the whole debate switches to: ‘I’m less worried about how high you can achieve your NABERS energy rating; what I want to know is how you can decarbonise the whole of the asset.’”
According to AXA IM Alts, one of its investments has installed the nation’s largest rooftop solar system, generating 60MW of power at its jointly owned Moorebank logistics facility in south-western Sydney.
A similar project – albeit 191m above street level – was undertaken in 2017 at the premium, 101 Collins Street office tower in Melbourne.
While only a small contributor to overall energy consumption (about 1 per cent), on-site renewables are always assessed as part of a broader decarbonisation solution by AXA IM Alts.
Other decarbonisation strategies are also under consideration, such as introducing variable energy usage to chime with the greater availability of renewables in the grid.
A modern building’s chiller could be worked harder in the middle of the day when the grid is greener with a high renewables content, before allowing the building temperature to drift up by 2-3C when the grid starts to switch over to brown and black coal as renewables drop off.
“We are exploring the traditional focus that an office building has to be a constant 21.5C – maybe we work the building a bit harder on those hot summer days when the grid is green to reduce that set-point and then allow the temperature to drift up by a degree or two in the afternoon when the grid is fossil-fuel dominated.
“This in turn should encourage more investment in renewable energy generation.”
In its home territory of France and the UK in particular, AXA IM Alts is heavily invested in residential real estate, of which a large component is affordable and social housing in line with environment, social and governance commitments.
The AXA IM Alts local platform launched its Australian residential strategy last November with an affordable and market build-to-rent housing project at Westmead in western Sydney, in partnership with St George Community Housing.
NAB will provide a loan for the three-year construction of the 400-unit project, offering affordable housing to key workers alongside market rental accommodation.
Earlier this month, NAB syndicated part of its commitment to other lenders keen to get exposure to this loan.
AXA IM Alts Treasury Manager in Australia, Daniel Roland, said careful diligence was adopted to finalise the investment and funding structure because of the regulatory and tax issues, as well as the necessary concessions to make the project viable.
“The developer, who was a NAB client, was patient however they were eager to finalise the contracts and transact the property given the construction commencement was imminent,” Mr Roland said.
“NAB was a very important part of this first residential acquisition for AXA IM Alts in Australia, and we look forward to expanding and diversifying the portfolio into several thousand affordable units over time.”
The information contained in this article is based upon sources believed to be reliable but which have not been independently verified. Opinions or ideas expressed may not necessarily be those of National Australia Bank Limited (“NAB”) nor may they necessarily reflect NAB’s views or endorsement. This article is for informational purposes only.
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