The Covid-19 pandemic has meant major upheaval for the property sector. As economies gradually reopen, most segments are still struggling to recover from the initial shock, while others continue to benefit from a stop-and-go recovery. Over a year after the great lockdown of early 2020, many offices, hotels and traditional retail venues still have a long way to go to get back to normal. Meanwhile, logistics and datacenters remain on a tear.
Given the amplitude of the shock they suffered, Covid-19 could have, at least, given property companies a head start in their race towards the decarbonization targets set in the 2015 Paris agreement on climate change. Yet that does not seem to be the case. Robeco analysis shows that while carbon emissions of many property companies fell significantly in 2020, this drop was merely a foretaste of things to come, and shows how hard it will be for the sector to decarbonize.
While carbon emissions of many property companies fell significantly in 2020, this drop was merely a foretaste of things to come.
A major contributor to global GHG emissions
The property sector is a major contributor to global greenhouse gas (GHG) emissions, including CO2. According to the International Energy Agency (IEA), the built environment represents over 38% of total energy-related CO2 emissions annually. Building operations including heating, cooling, and lighting are responsible for 28% of global emissions, while building materials and construction, typically referred to as embodied carbon, are responsible for an additional 11%.
In order to achieve the targets set in the Paris agreement, the property sector will need to reduce carbon emissions at a 6% annual rate (85% by 2050). This challenge will require large investments in retrofitting programs; potentially more than USD 20 trillion.1 These programs represent the only alternative to incurring even higher costs in the form of potential carbon-related taxes, or the risk of stranded assets.
But while an estimate of the potential costs involved may be a useful way to assess the efforts needed to put the sector on the right track, it does not necessarily give an idea of the actual disruption involved. From this perspective, analyzing the impact of the Covid-19 shock on the sector’s carbon emissions in 2020 and comparing it to required decarbonization pathway provides a much better idea of the colossal efforts needed to achieve these goals.
To assess the impact of the pandemic on the carbon emissions of the property sector last year, we looked at the reported absolute levels of scope 1 & 2 carbon emissions2 of 200 of the largest listed real estate companies, and found that only 134 of the 200 companies have so far reported scope 1 & 2 carbon emissions for both 2019 and 2020. These 134 companies represent 65% of the market capitalization of the S&P Developed Property Index.
We also found that, for these 134 companies, total scope 1 & 2 carbon emissions declined by 6% on average, in 2020. While a 6% decline in absolute carbon emissions is in line with the projected decarbonization pathway the listed real estate should follow to achieve the targets set by the Paris Agreement, one would have expected a much steeper decline in a year in which the economy almost came to a standstill for several months. This illustrates the formidable task ahead.
One reason for the relatively small overall reduction in emissions is that Covid-19 hit some subsectors disproportionately, while other segments experienced a strong rise in activity.
Large differences across segments
One reason for the relatively small overall reduction in emissions is that Covid-19 hit some subsectors disproportionately, while other segments experienced a strong rise in activity. Figure 1 illustrates this. On the x-axis, the chart shows how carbon intensive for each segment is. The y-axis shows how much each segment’s absolute carbon emissions changed from 2019 to 2020. The size of each bubble reflects the absolute amount of carbon emissions.
Not unexpectedly, the worst hit subsector was Hotel & Resort REITs. As the pandemic broke, business and leisure travel activity virtually froze, and many hotels were closed for a large part of the year. Also among the hardest hit by the measures taken to contain the spread of the virus were Retail REITs, as physical shops and malls either remained closed or saw the number of customers visiting them fall sharply.
Figure 1: Absolute carbon emissions (scope 1& 2) per segment – 2019 versus 2020
Source: Robeco, November 2021.
Other segments severely affected by Covid-19 were the Office REITs, as people were forced to work from home, and the Diversified Real Estate subsectors, which also have a high representation of office and retail real estate. Finally, Healthcare REITs also suffered significantly. Many of the companies is this segment own senior housing facilities, which also had to close for an extended period of time at the height of the pandemic.
At the other end of the spectrum, the switch from physical to remote business meetings and from bricks & mortar shopping to ecommerce led to outsized growth for the Specialized REITs and the Industrial REITs segments. Datacenter companies represent a large part of the Specialized REITs category, and experienced a strong growth both in terms of occupancy rates and the number of datacenters in operation.
Also, among the big winners of the broad shift from physical to digital were Industrial REITs. The bulk of assets owned by companies within this category is made of warehouses and other logistics-related assets. These companies benefited from the stellar growth seen in ecommerce activity in the heat of the pandemic, which did not reverse once economies gradually reopened during the second half of the year.
Not before late 2023, at the earliest, will investors be able to judge whether the sector really is on a Paris-aligned pathway to net-zero emissions.
Durable impact on decarbonatization progress tracking
Looking ahead, it is also important to note that the impact of the pandemic will distort any analysis of the progress made by the property sector in terms of decarbonization for at least another reporting year, and perhaps even longer. This means that not before late 2023, at the earliest, will investors be able to judge whether the sector really is on a Paris-aligned pathway to net-zero emissions.
We will then have to compare the carbon disclosures with those of 2019, the last year of the pre-pandemic era. Hopefully by then we will also have much better disclosure on scope 3 carbon emissions, which represent by far the largest part of the overall carbon footprint of the real estate sector.
In the meantime, these considerations also serve as a reminder of the important implications of broad commitments towards net-zero emissions by a growing number of countries. As we argued in a recent white paper on the decarbonization of the real estate sector, it is high time investors in listed property companies start incorporating decarbonization strategies into their valuation framework and investment decisions.
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1Source: Morgan Stanley BluePaper (2019): Decarbonization: The Race to Net Zero, Global Alliance for Buildings and Construction, International Energy Agency and the United Nations Environment Programme (2019): 2019 global status report for buildings and construction: Towards a zero-emission, efficient and resilient buildings and construction sector, Robeco.
2GHG emissions are measured in three ways, according to how they were created. Scope 1 emissions are those that are directly generated by the company, such as an airline emitting exhaust fumes. Scope 2 emissions are those that are created by the generation of the electricity or heat needed by the company to sell its main products or provide its main services. Scope 3 emissions are those resulting from the entire value chain, including the end-user of the product over its life cycle, and are much more difficult to measure. For property companies, scope 3 emissions, which typically represent the vast majority of emissions, include items such as emissions from construction materials used by a developer for a new building, or emissions from the energy use of tenants, for example.