A sustainability shift in real estate?

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Sustainability has become increasingly important in all aspects of finance and business, and the real estate sector is no exception. While sustainability used to be about building environmentally sound and energy efficient buildings, the focus is shifting to a more sustainable use of buildings and repurposing. Technological innovation also plays a large role in creating a more sustainable industry, and the industry seems to be the driving force behind this.
3. desember 2019

Written by Senior Lawyer, Sofia Bjørck and Associate Eivind Virik

An industry responsible for 40 % of the global energy consumption

The real estate sector is responsible for approximately 40% of the global energy consumption and 50% of the use of our natural resources.[1] Numbers in Norway correspond with global levels. The real estate industry has a clear negative impact on our climate. Energy consumption and the emission of greenhouse gases are high. Building materials are damaging for the environment and construction requires transport which contributes to these negative effects. Both the industry and the authorities are now taking action to meet politically agreed climate obligations, among others the Paris Agreement and the United Nations’ Sustainable Development Goals.[2]

What is the sustainability shift?

The industry has focused on reducing the negative impact on our climate for years. The main focus has been on reducing the energy consumption of buildings. This has also been a focus area for Norwegian authorities. In 2007, a new building code introduced stricter regulations regarding energy consumption and energy sources.[3] The requirements have since become stricter[4]. Environmental certification systems such as BREEAM NOR have become more important, but mainly related to construction, energy etc. However, improving existing buildings have not been the focus.

The United Nations Environment Program points to the need for a shift of focus from sustainable construction to the sustainable use of buildings[5].  The current conversation seems to be revolving more around how to plan for longevity, and to reduce the need for construction and use of building materials. Thus, we are seeing an increased interest in the repurposing of buildings and materials being used in construction. There is also an increased focus on technology and solutions designed to make the use of buildings more environmentally sound.

Who are the driving forces behind sustainability in real estate?

Global authorities and Norwegian authorities are focused on sustainability, and there is broad political consensus on the need for climate positive action. However, more sector specific legislative measures are yet to be developed and implemented, and at present is largely the private sector who is pioneering actual change. According to the United Nations Environment Program[6], the main drivers are SRI (Sustainable, Responsible, Impact)-oriented investors, project developers, buyers of rental assets, tenants, financers, fund managers, and environment legislators.

In Norway, large property developers and property owners like Entra and Skanska[7][8] are taking action to reduce carbon emissions. There are also trade organizations that work with the private parties and towards the authorities. Technological innovators play a large part in making operation and management of buildings more efficient. Several government entities and organizations are working towards sustainability, and sometimes in collaboration with the industry, like the Bygg 21 initiative.[9] However, there are currently few regulations regarding sustainable use, repurposing and longevity of buildings.

Why go for sustainability?  

One might ask why the Norwegian real estate industry is going sustainable if it is not legally required. Our experience is that property owners, developers and investors see the value of optional measures in two respects. Firstly, the major developers and owners seem compelled to be socially responsible, and most major owners and developers have an environmental strategy or even specific environmental goals. This also tends to make them more attractive to investors and financiers, which gives a competitive advantage. Secondly, sustainable real estate provides financial sustainability. More energy efficient buildings have proven to be maintain their value, which reduces financial risk. Developers and owners who hold higher standards than they are required to are also well prepared for future regulations from the authorities, reducing future costs. An environmental focus also provides an edge when competing for tenants. Some tenants, especially central and local government institutions, demand a certain environmental standard.

How is the industry working towards sustainability?

Sustainability is not just achieved by constructing energy effective buildings or reducing the environmental impact of the construction process itself. There are many relevant measures when it comes to the planning and use of buildings. We are seeing developers who incorporate flexible solutions to their buildings so that they can be repurposed later, for example commercial buildings that can be built into apartments without having to tear it down. The developer NCC Property Development has built one such project in Oslo. The project consists of 6.500 square meters of commercial real estate that can easily be converted into 75/80 apartments. The project is equipped to meet a market shift and the building has an increased longevity.  

The Norwegian real estate company Entra ASA has launched a project in in central Oslo. The project is constructed mainly from recycled materials.[10] Some developers plan parking garages that can be repurposed when the need for cars is inevitably reduced by automatic cars, car collectives etc. Mobility solutions reduce the need for transportation and parking and there are commercial buildings that share spaces and common areas to reduce energy costs and waste. Rooftops are being used to provide energy and to grow locally sourced food, and to provide outdoor areas in urban areas – creating greener and healthier work environments. In some projects, like the Bosco Verticale in Milano, vegetation equivalent to 20,000 square meters of woodland and undergrowth makes the building absorb CO2, and also creates a green habitat for about 1,600 specimens of birds and butterflies.[11] Several buildings are constructed in such a way as to let the maximum amount of light in, thus reducing the need for artificial lighting, like the Munkegård school in Denmark.[12] There is also a focus on sustainability in procurement and when choosing suppliers and collaborators.

Technological innovation for the real estate sector (property technology/Prop.Tech.) also plays an increasing role in making buildings more sustainable. BIM-systems[13], virtual and artificial reality and artificial intelligence can all contribute to more efficient planning processes. Artificial intelligence can also for example predict movement in a building to limit energy use in that area. Sensors can be used to monitor technical installations and their condition, but also which parts of a building are in use, in order to regulate lights, heating etc. Solar panels on walls, windows and roof tops limit the need for external sources of energy. Some buildings even produce excess energy that can be redistributed, like the Powerhouse project[14] in Norway or the Solar Settlement at Freiburg, Germany.[15] Smartphones and tablets can help with daily operations, such as ordering meals to limit food-waste, track cleaning needs and limit unnecessary use of chemicals, as well as reducing use of paper. In Oslo, Norway Oslo City Bikes and electric scooters available to the public provide bike sharing by means of apps on the smartphone taking people to and from buildings.

An increasing number of companies in the real estate sector incorporate policies on environmental, social and governance issues (“ESG policies”) seeking to identify and manage climate risk and other ESG-related risks and opportunities, for instance in relation to their asset acquisitions and business strategies. Implementing ESG policies may also facilitate investor and real estate managers with quantifiable and measurable data for monitoring sustainability performance. Material factors to measure sustainability will typically include energy and water consumption, greenhouse gas emissions, indoor air quality, safety, and waste management. Several voluntary frameworks, guidelines and rating systems have been developed by respect of criteria, metrics, monitoring and reporting on ESG within the real estate sector in particular. [16]  

Environmental certification of buildings following an independent third-party assessment based on certain pre-defined criteria is also to an increasing degree gaining foothold in the property market.

In Norway, the Government Pension Fund Global (“GFGB”), has as an explicit long-term goal to have all its office and retail properties in its portfolio to be certified. Each year, the GFGB assess all of its unlisted real estate investments against the Global Real Estate Sustainability Benchmark (“GRESB”), including data on carbon intensity and the use of renewable energy. It is also developing a data platform for its portfolio properties, including environmental impacts and measures, and will produce climate accounts for its unlisted real estate assets.[17]

Trade organizations and government-industry collaborations also play an important role in the sustainability shift. As an example, the Norwegian trade organization Norsk Eiendom and The Norwegian Green Building Council has created a strategy for the industry, which includes 10 recommended immediate measures for more sustainable buildings.[18] Several developers have committed to these measures. The collaboration has created recommended measures for the authorities to implement, including incentive tools to encourage sustainability measures.

Are regulations keeping up with the industry?

The industry itself has an opportunity to take advantage of innovation quicker and to a larger extent than the authorities. As a result, the industry is often ahead of regulations. National, regional and local planning and building authorities use planning to reduce the need for transportation and create more sustainable development patterns. As an example, a general strategy is to develop cities and areas around communication lines to reduce the need for cars. The City of Oslo has made a map of such areas in the two strategic plans Oslo Strategikart mot 2030 and -2050 [19] and is generally working towards reducing the number of cars in the city. Another example is limiting the number of parking spaces in new development projects and increasing bicycle parking. There are also measures taken to limit air pollution.

We expect that the authorities will follow the industry and that in time we will see more specific regulations regarding repurposing, flexible planning and recycling of building materials.  

As an owner or developer of real estate in Norway, you should be prepared to partake in the implementation of sustainability measures. You should also be aware that the issues of environmental impact and sustainability is increasingly important to the players in the rental market and the authorities.

[1](UN Environmental Programme Financial Initiative (UNEPFI), 2016)

[2]https://www.un.org/sustainabledevelopment/
sustainable-development-goals/

[3]Teknisk forskrift til plan- og bygningsloven 1997, 4. utgave

[4]Byggteknisk forskrift (TEK10)

[5]UNEP-FI/SBCI’S FINANCIAL AND SUSTAINABILITY REPORT

[6]UNEP-FI/SBCI’S FINANCIAL AND SUSTAINABILITY REPORT

[7]https://entra.no/about/article/environment/14

[8]https://www.skanska.co.uk/about-skanska/sustainability/green/carbon/

[9]https://www.bygg21.no/

[11]https://www.stefanoboeriarchitetti.net/
en/project/vertical-forest/

[12]https://www.archdaily.com/919433/the-munkegaard-school-dorte-mandrup

[13]Building information management

[14]Powerhouse Kjørbo, Norway’s fist energy positive office building powerhouse.no

[15]http://www.rolfdisch.de/en/projects/the-solar-settlement/

[16]Examples being methodologies, benchmarks and scorecards provided by partnerships and initiatives like Better Buildings Partnership (UK), Global Real Estate Sustainability Benchmark (“GRESB”), Energy Star and LEED.

[17]“Account of work on climate risk”, a letter from the GPFG to the Norwegian Ministry of Finance dated 26 November 2019 (https://www.nbim.no/en/publications/submissions-to-ministry/2019/government-pension-fund-global--account-of-work-on-climate-risk/)

[18]https://www.norskeiendom.org/portfolio-items/eiendomssektorens-veikart-mot-2050/

[19]https://www.oslo.kommune.no/getfile.php/
1374705-1444815795/Tjenester%20og%20tilbud/Politikk%20og%
20administrasjon/Politikk/Kommuneplan/Ny%
20kommuneplan%202015/Strategikart%20mot%202030.pdf

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