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Low carbon property a long-term option

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Asset allocators have refocused their attention on commercial property over the past six months, attracted by high yields and abundant liquidity.

The sharp recovery in capital values cannot be sustained, but we believe we have identified a long-term theme that can drive property performance.

The requirement to reduce carbon emissions is well known. Legislation has developed significantly over the past five years and is set to be tightened further. Real estate sits in the crosshairs of this legislation because commercial property produces 18% of the UK’s carbon emissions.

As a result, we are seeing a range of measures to encourage companies, local authorities and government agencies to occupy low-carbon properties.

There are 16,000 leases secured on the UK office sector and around a third of these are due to expire in the next five years. Even at the current level of legislation, the Carbon Trust estimates that there is latent demand for 4.3m2 of low-carbon office space from 1,700 organisationsb.

This demand is likely to be met in two ways: new build and the development of existing stock. With new building only adding 2% to the existing office stock per annum, we expect the development of existing space to be the main driver.

Eighty per cent of the UK’s existing office stock is more than 10 years old and most is not compliant with legislationc.

Developing the nation’s 13.8m2 of offices into low-carbon space is likely to be a profitable business for established companies with the requisite experience.

For investors, low carbon property represents a scarce asset with proven current demand and limited supply. Holding such assets is not only a socially responsible strategy: it is also likely to generate premium rental income and capital performance over the longer term.

Issued by Threadneedle Asset Management Limited, authorised and regulated by the Financial Services Authority. The research and analysis included in this document has been produced by Threadneedle for its own investment management activities, may have been acted upon prior to publication and is made available here in cidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice. For investment professional use only.

Sources: aIPD, bthe Carbon Trust, cThreadneedle, as at March 2010.

Column sponsored and supplied by Threadneedle Asset Management Ltd. Don Jordison is managing director, Threadneedle Property Investments

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