Carbon Neutral Real Estate Fund

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Carbon reduction through commercial real estate investment

Climate change is firmly back on the agenda. As large asset owners, institutional investors have an important role to play in helping to reduce carbon emissions.

UK office buildings are bad offenders, contributing around a fifth of total carbon emissions in the UK. New build, carbon-compliant real estate only accounts for 1-2% of total supply. To meet the Government’s 2050 carbon reduction targets, emissions from existing buildings will need to be reduced by 80%. Realistically, this can only be achieved via refurbishment.

As large investors and investment managers we have the ability – and the responsibility – to help drive positive outcomes for society. We have one of the largest and most experienced UK property teams and in 2010 took a pioneering step towards carbon reduction by teaming up with Stanhope, one of the leading commercial developers and the Carbon Trust, a world-leading adviser to businesses, governments and the public sector on carbon reduction.

In March 2010 we launched the Low Carbon Workplace Trust and assembled a team of industry leaders in property investment management, design, carbon engineering/refurbishment and carbon compliance. Together with our partners we identify suitable office buildings and turn them into modern, energy-efficient workplaces, while at the same time generating returns for investors. We then let and manage the buildings to ensure ongoing management and reduction of energy wastage.

Reflecting the certification of its office investment portfolio to operational carbon neutrality in 2019, the fund changed its name to the Threadneedle Carbon Neutral Real Estate Fund (‘the Fund’) in May 2020. The name change reflected the status of the Fund as a pioneer of carbon reduction in commercial real estate assets through value-add refurbishment and continued operational carbon neutral management.

As large asset owners with stewardship responsibilities, institutional investors are increasingly looking for a responsible, tangible aspect to their investments, whether social or environmental. This is increasingly mirrored by the demands in the occupational market and we are seeing sustainability and carbon neutrality credentials being high on tenant’s agenda when considering stock selection.

The Carbon Neutral Real Estate Fund concept is economically viable, socially responsible, repeatable, scalable and profitable. It is a great example of the private sector taking the initiative and developing new commercial models that unlock the value in low carbon refurbishment.

*Source: Carbon Trust, October 2020

Investment Process

Step 1: Identification

Columbia Threadneedle Investments leads in the identification of suitable redundant/obsolete/vacant/short-term let office property showing the optimal combination of location, building fabric, original construction, configuration and local market conditions, offering the potential for a desirable occupational solution that will benefit from a Low Carbon Workplace refurbishment.

Step 2: Economic assessment

The rigorous economic assessment by all three Partners to confirm the achievability of an economic, risk adjusted, profitable and low emission end product, which meets the needs of both occupiers and investors. The entry price, carbon engineering/ refurbishment budget and rental value equation will be computed under a number of potential scenarios.

Step 3: Carbon engineering/refurbishment

The ‘on site’ phase, where Stanhope and the Carbon Trust work in tandem to deliver the agreed physical and carbon specification, within the agreed budget and time scales. Concurrently, Columbia Threadneedle Investments leads early engagement with the potential occupiers, supported by the Carbon Trust.

Step 4: Completed projects and continuing carbon appraisal

Following and during the completion of projects the Carbon Trust applies rigorous carbon oversight of the strategy’s development and investment portfolios. Such oversight includes maintaining ongoing occupier engagement under the Low Carbon Charter, in order to provide training, support and assistance to occupiers with the target of ensuring annual certification under the Charter. This level of continuous occupier engagement provides the strategy with a clear competitive edge over its peers and increases the likelihood of occupier retention.

Step 5: Portfolio management

The strategic asset allocation of the portfolio is reviewed by reference to Columbia Threadneedle Investments assessment of the UK Investment Market and the relative prospects for the underlying geographical areas. Columbia Threadneedle Investments utilises the capabilities of its large and long-established investment team and seeks to generate outperformance in line with similar track records of Columbia Threadneedle Investments-managed property funds.

Value for occupiers and investors

Value to occupiers	Value to investors
Reduced running costs	Lower energy costs mean properties are resistant to functional and environmental obsolescence
Future-proofing against future energy price hikes and new legislation	Due to the imbalance between supply and demand, low carbon properties also benefit from better security and quality of income, greater potential for capital gains, shorter void periods and access to pre-let developments
Improved employee satisfaction and workforce productivity	Together with the strong risk-adjusted returns we have generated, this is good news for investors
Enhanced corporate reputation

Explore the portflio

To date the Carbon Neutral Real Estate Fund has raised over £175m and the portfolio currently comprises of six buildings.

Acquired in December 2014
Currently under development
Acquisition price band £15-20m – 30,000 sqft office
Location – prime London EC4 postcode in close proximity to St Pauls underground station and Blackfriars mainline station
£6m Refurbishment programme – full replacement of M&E and development plan to increase lettable area
Vacant possession achieved – 2Q 2015
Planning consent obtained for additional floor on top and reconfiguration of reception and entrance
Strong Letting Prospects – Targeting blue chip institutional occupiers in a local city market currently considered to be buoyant
Forecast end value £29m – delivering a RoE of 17%