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Report: An Analysis of “Brown-to-Green” Funds
The requirement for carbon emissions reductions and sustainability increases continues to be a factor in commercial real estate buildings worldwide. This has led to the formation of real estate transition funds. These “brown-to-green” funds aim to transform energy-inefficient buildings into more sustainable spaces.
JLL’s article “Can Real Estate Transition Funds Get Older Buildings Up to Scratch?” examined these monetary vehicles, providing an overview of their effectiveness in raising capital and deploying it where it’s needed.
The Positive Aspects
The transition funds (including those handled by France’s Ardian and Switzerland’s Empira Group) are coming online at an ideal time. According to Nidhi Baiswar, senior director, Global Sustainability and Climate Leadership at JLL, there’s a growing investor appetite for transition strategies due to environmental and social benefits and financial return. On the one hand, this means that the brown-to-green vehicles are raising capital. But “It’s early days as we wait to see exactly how and where the capital. . is deployed,” Baiswar said.
The second piece of good news is the growing need for retrofits. The JLL article explained a high demand for sustainable space among tenants. Furthermore, because renovating these buildings to meet sustainability goals is costly, transition funds are in an excellent position to fill the gap.
Another advantage is that office vacancies create what the JLL article dubbed a “blank canvas” for redevelopment. “It’s a pretty unique moment in that sense,” Baiswar said. “But we’re seeing transition opportunities across the board.” He went on to say that the opportunities included industrial properties, retail parks and multifamily.
The Challenges
The article lists “stumbling blocks” in getting these funds to a place where they’re operational. Some of these obstacles include:
- A lack of green building skills, expertise and development partners.
- Massive amounts of red tape; Baiswar pointed out that because investors are working globally, this generates “an alphabet soup of regulations in multiple jurisdictions.”
- Targeting smaller properties and non-core assets in well-connected urban areas versus larger spaces in prime locations; the idea is that these funds want to demonstrate success on a small scale to investors before taking on larger products.
To Conclude . . .
Baiswar noted that 80% of today’s office buildings are likely to still be online in 2050, meaning transition funds can fill a vital role in upgrading these structures. Furthermore, tenant demand will continue driving the need for sustainable space.
Because of this, Baiswar said there would be plenty of opportunities to upgrade existing assets to improve their performance. This can help create “value for the building owners and tenants and sizeable returns for investors,” he said.
- ◦Development
