JLL’s Ali Ingram is one of those capital flow and sustainability experts real estate consultants increasingly see as a must. They’re across the value proposition of sustainability and increasingly the physical threat of climate. Fail to get the cookies lined up and the result might be not so much a brown discount as an illiquid asset that fails to sell.
Ingram’s got views on the fast rising importance of adjacency between energy infrastructure and industrial property, defence assets grudgingly making their way into acceptable investments and far more.
When JLL’s Ali Ingram joined our briefing interview on Tuesday, ahead of our event Show Me the Green Money on 3 June, it was soon after coming off another interview about retrofitting buildings – this time with a leading global business publication.
As writers from a business publication with a powerful reputation (you can probably guess which one) there’s no doubt they’re well versed in the inexorable force driving the ESG trend – climate change and the urgent need to reduce carbon emissions. And that a major way to do this is by keeping our existing buildings and saving as much embodied carbon as we can.
Ingram was on the call because she understands the economic and investment drivers the journalists needed to land in order to give weight to both the investment and asset management logic underpinning the trend.
And because she has a global perspective, Ingram has spent the past 16 years focused on capital market flows in real estate, in Singapore, Hong Kong, Tokyo, Shanghai and the UK, focused on Europe, before coming back to Australia 12 months ago.
It’s why we invited her to share her views on the big global investment trends that will inevitably drive green business, at our next leaders forum, Show Me the Green Money.
So what exactly did the publication ask her about retrofitting?
“They want to know about return on investment (ROI) and my answer is always, ‘until it’s reflected in the value, no major capex decisions are going to happen’.
“I like the word retrofitting because it encompasses more than sustainability, it is simply about ensuring assets stay in line and up to date with what ‘top quality/core’ looks like.”
This is where the value of transaction evidence comes into play. And JLL, with its “giant” data base of real estate deals can add weight to the rhetoric in ways that can’t easily be dismissed.
“We know sustainability is great, it’s what tenants want,” she says.
“But without the high level insights you get from our sustainability leasing experts, such as Connor McCauley,who sits in our Sydney office or Kirsty Draper who sits in the London office, and who can explain why a tenant left a building (or chose it), or that they had to put a put a break clause into the lease that says the landlord needs to degas the building, you’re kind of just talking about very high level trends.”
In London there have been some dramatic examples of how the growing demands for sustainable buildings play out.
One case was a major property transaction in London worth around $A1.25 billion that nearly came unstuck because of sustainability. The buyer was a German insurer and well into the exclusivity process, started to question the operational energy and carbon performance of the building as a key investment driver.
“There are buyers who point-blank don’t want to buy a building that has gas in it. Even if the costs of electrification are not much. They don’t want to do the work…If they’re a core investor, they don’t deem that a core building.
In the end the deal was saved with a deduction for the capex (capital expenditure) of replacing the gas boiler and discussions around tenant usage. Another issue around tenant behaviour could have been averted with tighter green lease clauses, she notes.
But the failure to get things right is not just about best practice, says Ingram.
“This is real; it’s going to start impacting your exit value.” Never mind what the so-called “brown discount” might be. That’s very difficult to predict, but what could be a more powerful decision maker is overall liquidity.
“There are buyers who point-blank don’t want to buy a building that has gas in it. Even if the costs of electrification are not much. They don’t want to do the work.
“If they’re a core investor, they don’t deem that a core building.
Globally the risk of flooding is starting to be considered in a growing number of transactions. In Asia, with tourism properties on the beach in Thailand or in the Maldives, it’s nearly all of them.
“But it is difficult to say, oh the evidence is that this or that buyer didn’t participate because of the gas, and therefore you have a 10 per cent discount in price.
“It’s hard to really show what that market discount is, it is much more nuanced than that, so we just bring up case studies.”
UK leads on sentiment for sustainability
She’s seen investment committees constantly ask the hard questions around sustainability in fact the UK is a global leader in the space.
Amidst this there is a great enthusiasm for Australia’s NABERS energy rating system, where the British version of the tool measures the whole building, while in Australia it’s a landlord tool, measuring the base building.
Ingram loves NABERS and says its Australian benchmark analysis is something the Brits would love to have.
One of the benefits is the widening gap between 5.5 star rating and above. “Every time we do this analysis it keeps widening; so the outperformance of 5.5 stars and above is right there.”
Physical climate risk is on the rise
But overall, in the Asia Pacific, sustainability still has a significant element of box ticking. That will change, she says, as physical climate risk becomes more apparent.
Investors, financiers and insurers will start to add more weight to this and sale prices will be affected.
Globally the risk of flooding is starting to be considered in a growing number of transactions. In Asia, with tourism properties on the beach in Thailand or in the Maldives, it’s nearly all of them.
She shares another example – of a shopping centre with flood risk (she won’t say where) where two investors walked away from the deal. In the end, the property ended up in the hands of a “less institutional” buyer, but at a 15 per cent discount on pricing.
Ingram had a lot more to say – on the US political landscape and the language of sustainability that has been shoved underground; and the enormous rise of industrial property’s appetite for energy and its adjacency to energy demands and solutions. Which is only just beginning and will cause ramifications for asset values globally.
Another deal over a data centre with flood risk could not find a tenant and it didn’t sell at all. Climate risk expands beyond the physical asset into catchment areas and surrounding infrastructure.
“When you talk about transition risk, such as decarbonisation, it’s about a capex cost, or buyers not wanting to do the work. But when you talk about physical risk, the asset can very, very quickly become illiquid.
“And people don’t forget climate disasters – like the Brisbane floods.” (They do eventually forget but it can take about 10 years, she adds).
Insurers are clearly big players in the climate risk space, but Ingram says there’s a strong point of view in the industry that says they are not pricing in the impact of climate anywhere near the level they should.
Others, such as AXA and Marsh have joined forces with Link REIT are jumping onto the opportunity with offers of 11 per cent discount on premiums for properties that are climate risk assessed, creating “targeted resilience investments”.
A far less attractive response has been the potential rise of a new asset class – disaster shelters or short-term housing – that emerged after the Californian fires. Another boom was outdoor storage for the rebuilding that ensued.
Ingram had a lot more to say – on the US political landscape and the language of sustainability that has been shoved underground; and the enormous rise of industrial property’s appetite for energy and its adjacency to energy demands and solutions. Which is only just beginning and will cause ramifications for asset values globally.
Oh, and how ESG investors are viewing defence assets now in the new world order of geo-political uncertainty.
Make sure you get your tickets here and ask Ingram all the other questions we missed!