City Conditions: What real estate investors know and don’t know about climate change

The power of cities: understanding their significance

Cities hold a pivotal role in achieving a sustainable future. You don’t agree? Let’s start with a few facts: cities consume approximately 60–80% of the world’s primary energy production¹ . They occupy only 2% of the world’s land surfaces, but are home to more than 50% of the world’s population² . And if you are not convinced yet, estimates show that urban areas could be responsible for up to 80% of total greenhouse gas emissions³.

According to ‘The Case for City Disclosure’, a report jointly authored by the Carbon Disclosure Project (CDP) and Accenture, this is a challenge cities are willing to take, as they are “well placed to act quickly and effectively to combat climate change and its effect.” But does the right information exist for investors to make informed decisions at the city-level? Do city leaders truly understand the impacts and sources of their highest emitting activities?

We think cities and the investment community are still trying to come to terms with the necessary information, which is why Jones Lang LaSalle and CDP Cities are publishing a series of research snapshots on the implications of city climate change data for investors and businesses, focusing on the real estate sector. This article is our first research snapshot, revealing our findings to date and the future direction of our collaborative research. It also features quotes from interviews of our own local expert panel around the world.

“New York is concerned about the quality of the building and its impact on the environment. In Sao Paulo, there is not the same level of concern yet. So one needs to ask ‘what’s the difference?’ The difference is the city.” - Fabio Maceira (Sao Paulo)

Cities are significant: New York City’s 2010 GDP is roughly equivalent to Korea’s, Mexico’s or Australia’s GDP. The economic scale and impact of cities is great and growing relative to national GDPs in many cases. This is evident in the eleven cities around the world seen in the chart below, taken from data held by Jones Lang LaSalle as part of its World Winning Cities database of 660 cities.

Click here to enlarge

But there’s still progress to be made around cities’ abilities to enable attractive investment conditions through meaningful information.

Shedding light on the ideal conditions: what we’ve found so far

Due to this current state of play – the fact that cities hold a lot of significance, but do not provide investors with robust and detailed information – we have endeavoured to better understand the levers required for cities to increase economic competiveness, including how climate change data impacts investment in real estate. We are addressing the following through our research: firstly, what creates attractive urban investment conditions; secondly, what is the role of a city government in creating these attractive urban investment conditions; thirdly, how climate change will impact the value of real estate investments; and finally, what is the role of climate change data in enabling decisions at the city level.

To shape our initial findings, we conducted thirteen interviews across the eleven cities listed in the chart above with Jones Lang LaSalle experts who were asked to reflect on their view of the market and externalities. We also carried out a series of brainstorming workshops to facilitate conclusions and to conduct a global review of our experts’ insights. Outcomes to date reveal five main themes:

• Short-term vs. long-term investment outlooks: Unsurprisingly, climate change is not currently front-of-mind for real estate investors, as most investment horizons are 3-5 years, whereas climate risk is perceived to be on a 25+ year horizon. Investors consider anything that is cost-related in the short-term; and outside of energy costs, climate change is perceived to pose little to no known short-term costs. Platforms such as CDP Cities, which provide annual self-reported risk assessments, have the potential to reduce this investor myopia. In particular, CDP Cities can provide current snapshots of city risk and can help accelerate the time lapse as we move towards an undefined tipping point in investor perception.

“I think most people know climate change is a real risk, but I also think it is human nature to not respond practically to long-term risk. It’s the same reason people ignore the long-term consequences of smoking.” - Dana Schneider (New York City)

• Challenges of key city ‘actors’: There is a gap between the data investors have access to versus the data investors need to make informed, long-term decisions and to understand climate change risks. Equally, city incentives, such as tax deductions or incentives based on a location decision, are rare in relation to low carbon real estate investment. Thus, city representatives and policies seldom influence investor behavior by rewarding them for considering climate change as a primary criterion. Additionally, we found that cities could appeal directly to investors through better marketing of their sustainability initiatives.

“In terms of attractiveness, governance is absolutely critical. Having a ‘go to person’ in a strong position of power is vital to encourage the flow of real estate investment.” - Lee Elliott (London)

• Established cities vs. growth cities: Different factors should be considered depending on the maturity of the market, which is one of the key aspects an investor considers, given varying drivers and priorities related to economic progression. For example, growth cities offer significantly higher margins than established cities. Therefore, investment in growth cities is less likely to be driven by criteria such as environmental regulation, governance and labor markets.

“That’s the challenge: basic information that is readily available in other global cities is still not readily available in India.” - Deepak Bhavsar (New Delhi)

• Transparency: Investors look for good economic growth prospects; robust governance; sufficient labor; regulatory incentives; and solid infrastructure, as a few examples of criteria that create attractive urban investment conditions. We found that roughly half the cities in our study do not effectively and openly communicate the status of these conditions. Thus, markets lack the transparency necessary for investors to make informed decisions. City governments must enable more comprehensive and more readily available information, thereby increasing the attractiveness of the urban landscape.

“There is a general lack of transparency in Shanghai’s market – it is improving and has been improving for years – but if you look at Jones Lang LaSalle’s Global Real Estate Transparency Index (the 2012 Index will be released in June), it is one of the most important aspects for investors. Transparency applies to sustainability just like any other metric you are trying to measure.” - Parker White (Shanghai)

• City level indicators: The ‘Financial Times’ recently concluded: “Global investors usually think in terms of countries. They should be paying more attention to cities .” For years, investors have paid careful attention to the actions of national governments to determine if their investments will remain safe and remunerative. As the world urbanizes, however, city governments are also playing an increasing role in creating low-carbon, climate-safe communities that are attractive places to invest. The investment community must better understand the role of the local government in minimizing risk and maximizing investment opportunity in cities. This is true of all data, not just sustainability data.

“Defining a new indicator for investors won’t make them change their behaviour in a fundamental way. I think if we want behaviour to change, the legal approach has to be more constrictive by saying, for example, 'buildings have to enhance performance on item x by y %’.This, in conjunction with a shift in occupiers’ demands for green buildings that cause investors to adapt accordingly, will lead to progressive changes.” - Virginie Houzé (Paris)

Collectively, these five themes set the stage for defining the ideal scenario to enable sustainable investment in cities.

Next steps: how we will shift the debate and enable action

Now that we have an understanding of the challenges for investors and businesses, what’s our plan? We will take a collaborative, multi-stakeholder approach to more precisely express the barriers and the potential solutions. Our aim is to define the ideal scenario for enabling sustainable investment in cities, which will be brought to life through ten conditions. Our resulting recommendations are intended to shift the debate and to move from the current state to the necessary threshold for low-carbon, sustainable cities. We are aiming to publish the results of this endeavour jointly with CDP Cities later in 2012.

For further information please contact:
Sarah Nicholls, Jones Lang LaSalle or Conor Riffle, CDP Cities Project

Progress by cities to date: a special preview of 2012 CDP Cities report findings

CDP Cities hosts disclosure from 73 cities and local governments this year — up from 48 last year —from all corners of the globe. Participants range in size from the city of Tokyo, with a population of 13 million, to the village of Kadiovacik in Turkey, with a population of 216. The CDP Cities’ report findings will show:

• Reducing city-wide emissions through actions related to energy demand in buildings is a key area for private sector involvement. Although cities are for the most part relying on their own budgets to finance emissions reduction projects, actions related to reducing emissions from energy demand in buildings show high utilization rates of outside or private funding sources.
• Planning and construction of the built environment is a key area for cities’ adaptation and resilience strategies. A large number of the adaptation actions reported by cities fall under this important category.

The full report will be released 7 June 2012 on the CDP Cities’ website.