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To build or not to build, that is the question

Decarbonising the built environment

We assess the financial and environmental pros and cons of developing new buildings versus retrofitting old ones.

Read this article to understand:

  • The carbon footprint of the built environment
  • Whole-life carbon assessments and why they matter
  • When to retrofit existing buildings and when to build new ones

There are an estimated one billion buildings in the world. This will more than double by 2050 to 2.6 billion, as the global population approaches ten billion.1

To put this in context, a city the size of Paris is built every week. This shocking statistic comes from the latest Built for the environment report, produced by the Royal Institute of British Architects (RIBA) in collaboration with Architects Declare, a non-profit focused on addressing the climate and biodiversity crises.2

This has significant implications for efforts to decarbonise economies, given 38 per cent of global energy-related greenhouse gas emissions is attributable to buildings and construction (Figure 1). Of that, 28 per cent is due to heating, cooling and operating buildings, while the remaining ten per cent comes from materials and products used during construction and maintenance – commonly referred to as “embodied carbon”.

Figure 1: GHG emissions attributed to the built environment

GHG emissions attributed to the built environment

Source: RIBA, May 4, 20223

It is no surprise, then, that new green building regulations are in the offing, specifying higher standards for new developments and bringing older, carbon-intensive assets under scrutiny. For example, the European Commission is proposing changes to the Energy Performance of Buildings Directive (EPBD), mandating that poorly performing properties be renovated and improved.4

Thankfully, there is much that can be done to change the way the built environment is designed, built, maintained and operated.

In this article, we will look at the relative climate impact of retrofitting existing buildings versus building more-efficient ones from scratch and examine the implications for investors.

Whole-life carbon assessments

The first step to assess the carbon footprint of developing a new building versus making an existing one more efficient is conducting an analysis of where the emissions come from. This is called a whole-life carbon assessment (WLCA), which aims to measure the emissions produced by the construction and use of a building through its entire life.

While they are widely used in the real estate industry and a good starting point for decarbonisation efforts, WLCAs are far from perfect. In fact, there is no flawless way to determine how much CO2 will be released by a building over its lifetime. Such a calculation is often a matter of prediction and depends on variables that are difficult to quantify precisely, such as the lifespan of construction materials.

It’s critical to understand the different assumptions in these assessments and the narratives embedded in them

“It’s critical to understand the different assumptions in these assessments and the narratives embedded in them,” says Smith Mordak, director of sustainability and physics at engineering consultancy Buro Happold.

WLCAs are the topic of extensive debate. Architects and developers often come armed with WLCAs that support proposals to demolish buildings with the intent of erecting new ones. In response, campaigners are producing their own rival WLCAs to question the assumptions made by developers.

The recent furore over the planned demolition of Marks & Spencer’s flagship store on London’s Oxford Street is a good example. The plan to replace the 1930s building with a new ten-storey complex drew criticism from environmentalists. The Mayor of London initially stopped the project, then granted permission when developers produced a WLCA that showed the new building would have a lower carbon footprint over its whole lifecycle. But in June 2022, the UK government intervened due to concerns over projected emissions during the demolition/construction phase, and the project has been halted while it scrutinises the detail.

For a government with net-zero targets to achieve, such concerns are understandable. Emissions produced in the construction process are concentrated over a very short period, usually a couple of years. This corresponds to 35 per cent of the whole lifecycle carbon for a typical office development, and it is emitted before the building has not even opened. The figure for residential premises goes up to 51 per cent (Figure 2).

Figure 2: Total whole-life carbon emissions breakdown

Source: Royal Institute of Chartered Surveyors, 20175

“Those estimates are pretty wild,” says Trevor Keeling, responsible investment director, real assets at Aviva Investors.

As he points out, they can lead to speculative questions such as: Is it worse to emit a tonne of carbon now or a century from now when there might be better technologies for absorbing emissions? It might be decades before new buildings pay back their carbon debt by saving more emissions than they created, but in that timeframe carbon reduction will be critical in meeting climate targets.

“Carbon assessments must take into account how long the building will remain operational in order for the carbon savings to compensate for the extra carbon that has been spent up front,” says Luke Layfield, real assets portfolio manager at Aviva Investors.

Environmental and financial considerations

Considering these factors, there are broad guidelines developers can follow when trying to weigh up the carbon impact of real estate projects. Some use a hierarchy analysis to determine the best course of action to reduce embodied carbon (Figure 3). From an environmental perspective, these indicate it is often better to avoid building from scratch, but every project will have its own dynamics and trade-offs to consider.

“WLCAs only tell part of the story,” says Mordak. “We also need to consider ecosystem impacts, for example the harm caused by extracting raw materials, or pollution to water courses, or whether we’re using more than our fair share of rare earth materials. We also need to be more honest about the alternative scenarios when appraising different options. Is it fair to compare demolishing and replacing a building with doing nothing to the existing one? Is it reasonable to assume a new building will be well maintained for the next century?”

Figure 3: Reducing embodied carbon: Hierarchy of action

Reducing embodied carbon: Hierarchy of action

Source: Aviva Investors, January 2023

From a financial perspective, there are other nuances that must be considered. The UK Green Building Council recently canvassed opinions from developers on how they decide whether to refurb or build new. They cited factors that could be put into three categories: individual business models (including costs, prospective profit margins, end-user requirements and leasing cycles); the physical condition of the building (including its age, structural flexibility and any heritage requirements); and sustainability considerations (including the progress of new green regulation, internal and external carbon targets and social value).6

Bermondsey Yards is a great example of increasing the floor area while minimising the additional embodied carbon

Based on these kinds of financial and environmental factors, it may make sense to combine new development and refurbishment within a single project. For example, Aviva Investors recently undertook a redevelopment and selective renovation of Bermondsey Yards in London. The site, which sits next to the popular Vinegar Yards open-air market, included existing commercial buildings on Bermondsey Street and a former leather warehouse on an adjacent plot. The project involved the creation of a mixed-use office campus and retail facilities but retained elements of the former structure. This helped save costs and limit carbon emissions.

“We doubled the floor area of Bermondsey Yards, retaining much of the existing structure and building upon it. That’s a great example of increasing the floor area while minimising the additional embodied carbon. You save on materials and cost,” says Keeling.

The WLCA for the project shows that, over the whole lifetime, one third of carbon is emitted during operations, one third during construction and one third during refurbishment and the type of materials used throughout the life of the building.

Retrofitting and refurbishment

At other times, focusing solely on refurbishment of an existing structure is the logical approach for both financial and environmental reasons.

Take Curtain House, an asset acquired as part of our climate transition real assets approach. This historic warehouse building, located close to Old Street’s “Silicon Roundabout” technology hub, is being extensively refurbished and decarbonised as it is converted into offices. It was a good candidate for this work, especially as there was limited scope to develop new, environmentally compliant building stock in the area.

It is often better to invest in existing buildings to improve them than to build from scratch

“From both a financial and environmental point of view, it is often better to invest in existing buildings to improve them than to build from scratch,” says Layfield. “Curtain House is a good example of a market where the equivalent building could not have been built from scratch, because land is in tight supply and much of the existing stock is listed.”

Broadly speaking, as more materials are used in building something new, anything that can be done to retain brown assets and make them sustainable is inherently good from a climate perspective.

“Invariably, you’re going to favour retrofit and refurbishment over tearing something down and starting again – because that really is profligate,” says Julie Hirigoyen, chief executive of the UK Green Building Council. “We haven’t got enough ‘stuff’ anyway, we’re running out of things like sand. We need to do more with less.”

“In most scenarios, you can strip a building back to its structure and put a whole new facade on with a new energy system that is more efficient. That way some materials and carbon associated with the original structure are retained,” adds Keeling.

Figure 4: Energy hierarchy

Energy hierarchy

Source: Aviva Investors, Buro Happold, January 2023

When refurbishing a building, focusing on energy consumption can help reduce operational emissions. Hierarchy analysis can be applied here, too. Figure 4 sets out different three principles to improve the environmental profile of a building: “Lean” means to maximise energy efficiency, “clean” is to supply energy efficiently using low-carbon heating and cooling systems, “green” is to incorporate renewable energy.

Knowing where that energy comes from is an important part of the calculation. “There are many ways to save energy, such as switching off lights or ventilation at night, reducing the temperature of the radiators, putting in insulation, replacing windows, substituting gas boilers with heat pumps and installing solar panels,” says Keeling.

The most effective way to curb emissions is through maintaining, retrofitting, and extending the lives of the buildings we already have

All these principles will be applied to the work at Curtain House, which will include converting the site to an electricity-only operation, installing a solar array and the provision of heating and cooling via an air source heat pump system. Once refurbished, the building will be managed as part of our Smart Buildings Programme, which uses smart technology to minimise the energy usage of buildings.

“We’re making it as energy efficient as possible and the building’s Energy Performance Certificate (EPC) rating will improve from an ‘E’ to an ‘A’ as a result,” says Keeling.

Lastly, it is also important to have good maintenance regimes in place so that new buildings do not degrade too quickly. “The most effective way to curb emissions is through maintaining, retrofitting, and extending the lives of the buildings we already have. It saves money, carbon and time,” says Mordak.

New buildings and sustainable materials

While refurbishing an old building is often less carbon-intensive than developing a new one from scratch, this route is not always logistically possible or financially viable. For example, the frame of a building might not fit the purpose of the upcoming development, or the building might not last long enough. It may be unsafe or too costly to convert an old building. Also, growing populations will need new spaces in which to live and work. So how can we make the construction process more sustainable?

Manufacturing steel and cement, the major construction materials, emits huge amounts of carbon and other pollutants. Cement is the most widely used substance on earth; if the cement industry were a country, it would be the third-largest CO2 emitter in the world. At 2.8 billion tonnes, its annual emissions are surpassed only by China and the US.7

Figure 5: Global greenhouse emissions

Global greenhouse emissions

Source: Jeffrey Rissman, et al., May 15, 20208

One obvious way to reduce emissions, then, is to use less (cement and other) materials in constructing new buildings. “This method would produce less carbon and save money. That way everybody is happy,” says Keeling

Another solution is switching to materials that are considered more sustainable, like bio-based ones such as timber. The Athena Sustainable Materials Institute compared the environmental impact of wood, steel and concrete structures (Figure 5). The results were clear: when sourced from sustainably managed forests, wood is the best choice in terms of environmental impact, using fewer natural resources and releasing less contaminants than metal or concrete into the air and water.

Figure 6: The impact of concrete and steel compared to wood (per cent)

Source: Canadian Wood Council, 20199

Another important aspect is that once trees are taken out, the environment has time to regenerate (this is called regenerative forestry). As long as the building lasts longer than the time needed to grow more trees, the process can be considered sustainable.

While timber is more environmentally-friendly than concrete and steel, there are some issues associated with it

However, while timber is more environmentally-friendly than concrete and steel, there are some issues associated with it. Timber buildings can be difficult to insure, for example. “Timber performs worse than concrete when it comes to physical risk, not only in case of fire, but also a pipe leak, which is a very common insurance claim,” says Keeling.

Perhaps the bigger issue is that there is not enough timber to service the world’s development needs. This shows there is not one simple solution to the building materials problem, but many that need to be put in place simultaneously. Decarbonising the processes through which all building materials are made would clearly be beneficial.

“All materials can be sustainable. It’s not about what materials we use, but how we use them,” says Keeling. “We need to improve how we make concrete and steel, to use more alternative materials, as well as increase recycled content and the use of renewable energy throughout the supply chain.”

There is more to life than carbon

The built environment doesn’t just affect carbon emissions but the environment more broadly. It is a complicated system with different interactions. A more holistic approach is needed to realise a built environment that works in partnership with natural ecosystems, Mordak explains.

While carbon is a primary consideration, there may be other aspects that need to be considered. For example, one construction material can score well in terms of carbon footprint but have a big water footprint or adverse affects on biodiversity. The International WELL Building Institute (IWBI) developed the WELL Building Standard to ensure buildings incorporate features and best practices to support and improve human health and wellness, considering ten aspects (Figure 7).

Figure 8: The core concepts of the WELL Building Standard

The core concepts of the WELL Building Standard

Source: International WELL Building Institute, Q4 202210

To integrate these broader considerations into the process, everyone must be clear on the project’s objectives. Investors will need to ensure their development partners are committed to the same social, environmental and governance (ESG) priorities.

Real assets are critical to society and, managed well, can bring significant benefits to communities, especially when their social outcomes are aligned with the United Nations’ Sustainable Development Goals, including SDG 11, focusing on making cities and human settlements inclusive, safe, resilient and sustainable.

Things go well when the whole design team and investors are on the same page

“Things go well when the whole design team and investors are on the same page. If we have aligned goals, the industry has the technical solutions to make good decisions about the built environment and make it fair and sustainable,” says Keeling.

“The G in ESG is vital. We need to ask ourselves: are our goals and values aligned? Are they embedded in the way we govern and organise our practices?” adds Mordak.

To build or not to build: that is the question – but there is no right or wrong answer for every situation. Investors must consider many different financial and environmental considerations and the appropriate course of action will depend on a myriad of factors. Integrating biodiversity and social impacts into the equation brings further nuances.

But investors who make the right calls can take advantage of a wealth of long-term opportunities while simultaneously future-proofing their portfolios and contributing in a direct, tangible and meaningful way to the battle against climate change.

Investment implications

While refurbishing and developing buildings in more climate-friendly ways can be challenging, it can also bring rewards. “Delivering environmental improvements often goes hand-in-hand with financial returns. We are seeing increasing appetite for energy-efficient office space among occupiers,” says Layfield.

For example, he expects Curtain House to attract significant demand, as it will provide best-in-class office space close to an important industry cluster. “It will be cheaper to run because of the efficiency improvements and will also help occupiers meet their own net-zero targets,” he says.

“Inefficient buildings are likely to become less attractive to occupiers for cost reasons and the owners of these assets may need to buy carbon offsets to meet net-zero commitments. Because of these dynamics, we expect the prices of energy-efficient assets to rise over time,” says Mark Meiklejon, head of real asset investment specialists at Aviva Investors.

Our analysis shows for assets where no effort is made to improve environmental performance, sustainability-related obsolescence risk could result in an average loss in value (see Figure 8).

A comprehensive review of academic literature shows energy efficient assets that reduce costs for occupiers and align with net-zero carbon commitments are seeing stronger rental premiums. This should translate into higher asset values (see Figure 9).

For equity investors, meanwhile, there could be opportunities to invest in companies developing new sustainable materials for the construction process.

“These are challenges, but also opportunities that come from the climate transition,” says Keeling. “For example, there are only a small number of major glass manufacturers in the world. Depending on how you treat the glass, it becomes easier or harder to dispose of it at the end of its life. There is an opportunity to service those needs.”

There are several players trying to develop solutions in this area, like Ireland-based Kingspan Group and Danish manufacturer Rockwool. “They all use different types of sustainable materials, but all have much better efficiency than the previous generation,” says Julie Zhuang, co-manager on the Aviva Investors Natural Capital Transition Global Equity strategy.

Figure 8: Obsolescence linked to energy and carbon efficiency (per cent)

Source: Aviva Investors, June 2021


Figure 9: Global rental premiums for energy-efficient property (per cent)

Source: Andrea Chegut, et al., 2014; Alexander Reichardt, et al., 2012; Franz Fuerst, et al., 2009; Wiley Benefield, et al., 2010; Erin A. Hopkins, 2016; Stefanie Lena Heinzle, et al., 2012; Prashant Das, et al., 2013; Franz Fuerst, et al., 2015; Maya Papinaeu, 2017

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