Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Vivian Wong, Director of Real Estate Finance at HSBC in Hong Kong, and I will be hosting our discussion today on retrofitting as part of our Transition Pathways series.
Speaker: In mature cities, 80% of today's buildings will still be in use in 2050, according to a study by JLL.
Speaker: Retrofitting the world's existing real estate to reduce energy-related emissions is therefore essential for the transition to net zero.
Speaker: But higher interest rates and declining property prices are adding to the challenge for property owners.
Speaker: How can they justify CapEx investments at this point in the real estate cycle?
Speaker: This podcast will take stock of real estate's progress with retrofitting and ask what can be done to increase momentum in a declining property market.
Speaker: How can financial institutions support this process?
Speaker: What do institutional investors expect?
Speaker: What do owners and developers need from their suppliers?
Speaker: And how does a building ultimately reach net zero?
Speaker: To cover this topic, we are delighted to welcome Matt Mason, Partner and Head of Development of Crosstree Real Estate Partners,
Speaker: a property investment firm based in London with a focus on UK properties.
Speaker: And Annie Feng at Arcadis, a consulting firm that runs the global project management office for HSBC capital projects globally.
Speaker: Annie is the sustainability lead for Asia Pacific, focusing on sustainable buildings and workspace, delivering the sustainable improvement program for HSBC's portfolio in the region.
Speaker: Welcome Matt, welcome Annie.
Speaker: Hi.
Speaker: Thanks for having me.
Speaker: Let's start with some scene setting on retrofitting real estate.
Speaker: Coming to you first, Matt, your business focuses on renovating mixed-use properties.
Speaker: Can you explain the commercial opportunities you see of refitting compared to redeveloping?
Speaker: I'll use our Barclays Street project as a good example of this.
Speaker: I think this is a scheme that we've owned for the best part of 11 years, and we've looked at it as both a new building and a refurbishment.
Speaker: And we found that a refurbishment of the existing building was more cost effective, was quicker.
Speaker: And at the end, the product that we've created is as good as anything that we could have created as a new build.
Speaker: So it doesn't feel as though you have to make compromises to retrofit an existing building.
Speaker: How would you describe some typical challenges involved in refitting commercial real estate?
Speaker: I think the biggest challenge is understanding the risk of what it is you've actually got and when that risk occurs.
Speaker: In a new build project, you're building everything from ground up.
Speaker: It's much more straightforward.
Speaker: In a refurbishment refit situation, it's a bit like an onion.
Speaker: You just keep peeling off layers and layers and eventually you find exactly what it is you need to find in order to be able to refurbish and refit.
Speaker: And the biggest challenge of that is when that occurs in the construction cycle.
Speaker: And obviously, the later it occurs in the construction cycle, the more costly it is.
Speaker: So that's the big risk, finding out all of those unknowns as early as you possibly can.
Speaker: And you would say that that's also what you came across in number one, Berkeley Street.
Speaker: Was there anything that you didn't expect that cropped up?
Speaker: I mean, we've been doing this for a while now, so on other buildings.
Speaker: So we developed the old Camden Town Hall annex into the standard hotel opposite Kings Cross.
Speaker: We found an awful lot there that we weren't expecting.
Speaker: And I think we learned from that and we put that experiences into what we have here at Barclay.
Speaker: And so actually it was relatively small areas of, you know, bits of beams that we didn't expect to see or a bit of floor slab here and there or just a slightly different detail.
Speaker: There was nothing major.
Speaker: So we were able to actually manage those risks reasonably well.
Speaker: It's a mixed use hotel office fit out scheme.
Speaker: We also chose to procure it in a way that allowed us to change our mind and to be able to take those challenges, if you like, from the existing building into a separate fit out contract.
Speaker: So we already knew about them when we bought it.
Speaker: I see.
Speaker: And Annie, how does this chime with your experience?
Speaker: Are clients generally open to the idea of renovating an existing property rather than rebuilding?
Speaker: Yeah, I definitely see the uncertainty, the challenge that Matt mentioned.
Speaker: And I think adding to that is the technical complexity of retrofitting existing building compared to new builds.
Speaker: There's some additional technical challenges that I would see with existing buildings.
Speaker: But however, like from my experience, my quick response to your answer is yes, that we are seeing more clients open to retrofitting existing buildings in Asia Pacific.
Speaker: For example, HSBC is currently going through a metro plan process where we are retrofitting the bank's portfolio with the primary objective to upgrade the workspace environment for the staff, while at the same time improving the portfolio sustainability performance.
Speaker: For example, we are replacing old chiller systems with more efficient units.
Speaker: Installing occupancy sensors to better control lighting and air conditioning operation.
Speaker: And also we're fitting out more sustainable materials such as using refurbished furniture and installing low carbon carpet tiles.
Speaker: So, yeah, we are actually seeing this retrofitting happening in Asia as well.
Speaker: I look forward to experiencing that on my floor, Annie.
Speaker: Yes.
Speaker: Moving on, the default approach to meeting new higher building standards, such as for energy efficiency, has historically been to demolish and rebuild, especially in the commercial real estate segment.
Speaker: But that seems to be changing as regulators increasingly push property developers and investors to retrofit
Speaker: on the basis that doing so produces less carbon emissions than rebuilding.
Speaker: Coming to you first again, Matt, to what extent are you seeing this trend?
Speaker: And presumably it provides more certainty around the investment case for retrofitting, which after all can be very capital intensive.
Speaker: Yeah, I think that's right in that regulators, particularly in the UK, particularly actually in London, have been doing that for some time.
Speaker: I mean,
Speaker: Love it or loathe it, the Greater London Authority, which has been around for the best part now of 20 years, has for those 20 years really been pushing the boundaries on this stuff.
Speaker: So in London, and I make the distinction London to the UK, in London in particular, regulation around carbon, around energy and around sort of energy consumption and energy performance has been a big issue for the last 20 years.
Speaker: And gradually that's got firmer and harder to be able to deal with new buildings.
Speaker: I think the other thing that you've also got to remember, certainly again in the London market, is most bad buildings, as let's call them, have been demolished and have been rebuilt.
Speaker: So we're now dealing with stock that is 30 years old that was built in the middle of the 90s.
Speaker: So actually, it's got good bones.
Speaker: Most of it is really good stuff.
Speaker: And as a result of that, it's much easier to be able to retrofit anyway.
Speaker: So we're not dealing with buildings that are poorly insulated,
Speaker: poor floor to ceiling high, it's inadequate from a structural point of view.
Speaker: They're actually good buildings in the first place, so much easier to retrofit.
Speaker: Thank you, Matt.
Speaker: And as a follow-on to that, there's a new HSBC survey of real estate developers and investors' views and plans on net zero
Speaker: suggesting that the UK property sector is further along the transition than many other countries.
Speaker: I guess that gels with what you just said about the authorities.
Speaker: I'm talking about this for a number of decades now.
Speaker: The UK companies are therefore more likely to see net zero as fundamentally more important to their growth and more likely to say they have a formal transition plan in place.
Speaker: That may be partly because industry requirements on emissions are tighter than in other markets.
Speaker: Would you have anything to add in terms of your views on that?
Speaker: Yeah, but I think the whole market in the UK is tuned into it.
Speaker: So,
Speaker: whether you be a developer or whether it be one of your customers, i.e.
Speaker: your occupiers, or whether it be people that are lending you money, I just say, and a bank, or whether it be your investors, it's important to everybody across that entire sort of cross section of people that we're hitting carbon targets, sustainability targets,
Speaker: It's an expectation, I think, now in the UK that our buildings perform in that manner.
Speaker: So I guess that's why the UK real estate sector, coupled with what I said earlier on about the sort of the GLA and legislation, everything else is a bit further ahead than maybe areas of the world.
Speaker: And would you say that it's really the EPC related regulations that are driving this that people are looking to, or is it more than that?
Speaker: I think it's more than that.
Speaker: I mean, the EPC is a good headline for, you know, 2027 to EPC-C, 2029 to EPC-B.
Speaker: And that will have an effect over the next couple of years, no doubt about it.
Speaker: But even before then,
Speaker: You know, people are looking at buildings in a completely different way.
Speaker: And there is an expectation, as I said, from that cross section of people that are effectively stakeholders in any development and investment process that they want to see good carbon figures.
Speaker: They want to see sustainable buildings and they want to make sure that their money is going in into that direction.
Speaker: Thank you very much, Matt.
Speaker: And coming to you, Annie, how are you seeing policymakers addressing property sector emissions in Asia Pacific?
Speaker: To what extent are they focusing on retrofitting?
Speaker: And also, how about the corporate and investor clients you work with?
Speaker: And can you point to any markets as examples?
Speaker: So I think a very good example is actually Singapore, where the government recognised that retrofitting existing buildings is a critical contribution towards the country's 2030 targets set within its Green Building Master Plan, which in turn is used to accelerate the country's transition towards a low carbon built environment.
Speaker: So early last year, Singapore actually released the Green Mart incentive scheme for existing buildings, which actually upscale the energy efficiency requirement for getting the Green Mart scheme and also linking up the incentive amount with how much emissions are reduced through upgrading the older systems.
Speaker: So I think Singapore as a market has a very healthy regulatory requirement environment and also very strong incentive schemes to drive property owners, developers and also investor towards the retrofit markets.
Speaker: Another very key player in Asia is actually China.
Speaker: So China is the second largest building energy consumer globally.
Speaker: This is according to the IEA statistics.
Speaker: Like Matt mentioned, a challenge in China is that the building quality is not as good, that a lot of the older buildings, like those that built in the 60s to 80s, are in the process of being demolished and for rebuild.
Speaker: However, the newer buildings that are in the 90s, unlike the UK markets, they are not necessarily in good conditions.
Speaker: So that makes the market facing a higher challenge technically and lots more uncertainty into retrofitting these older buildings.
Speaker: However, as a country, China has set forth in its previous five-year plan to retrofit more than 500 million square metres of existing buildings during the 2016 to 2020 periods.
Speaker: But however, the statistics show that there are lots of barriers that to really make this target possible.
Speaker: Barriers like financial support and the specific green retrofit policy are not there to support, to become the driver towards this building retrofit, not like Singapore markets.
Speaker: I understand.
Speaker: Thank you very much, Annie.
Speaker: Following on from what you said,
Speaker: It's noticed that the long-term trend may be towards greener buildings, but upgrading or redeveloping real estate both require high outlay, which I think is something that both of you alluded to earlier.
Speaker: And coupled with that, we have higher interest rates and declining property prices in many markets, which could make heavy capital expenditure even harder to justify.
Speaker: Maybe I'll come to you first again, Matt.
Speaker: Would you agree with that statement?
Speaker: And how are you coping with this environment?
Speaker: I guess that's not specific to retrofit.
Speaker: That's just a challenge of the market right now.
Speaker: And there are pockets of the market.
Speaker: You know, Mayfair is a good example where actually rental growth is exponential for a real grade A kit.
Speaker: And as a result of which there is actually an opportunity right now to be able to take a building that is, you know, coming back to your EPC point, you know, an EPC,
Speaker: D or E and there is a really good business case to spend money to upgrade that to an EPC A or B and you will get you'll get payback on that very quickly because of where the market's at.
Speaker: So there are pockets of that market.
Speaker: It's a challenging market for everyone, no matter what you're doing at the moment.
Speaker: And therefore, the bar is high in terms of certainly what we are looking to do right now.
Speaker: But we're finding some opportunities, but it's tough.
Speaker: Yeah.
Speaker: And Annie, what's your take on that when it comes to property developers and investors?
Speaker: Yeah, definitely.
Speaker: Without significant capital investment, it's difficult to bring an older building up to the level of efficiency that are possible in a new build.
Speaker: But if we look at the longer life cycle of the buildings, the initial capital expenditure will bring the buildings in line with high standards of energy efficiency and also improving the occupancy experience.
Speaker: So potentially, this will give these buildings a new lease life with potentially higher returns.
Speaker: Also, from the investor and developer perspective, we talk about a lot of ESG disclosure.
Speaker: This could be a contribution in limiting climate disruption, fulfilling their ESG commitments.
Speaker: I would like to use a recent case of a very simple chuler replacement project in a HSBC building in Hong Kong to illustrate the difference in consideration of life cycle.
Speaker: If we take a longer building cycle view to include, for example, total expenditure to the equation, this may help us to view this differently.
Speaker: Within this chiller replacement project, chiller A is a 1 million Hong Kong dollars more expensive than chiller B in terms of capex investment, which is about 28% more.
Speaker: But when it comes to OPEX for one year of the operation, the type A chiller is actually 29% less costly compared to type B. So the simple payback period for choosing type A is just about 1.2 years.
Speaker: Considering an operational lifespan of 10 to 20 years, Type A will actually bring up about HK$5 million savings to HSBC compared to choosing Type B, although initially it would have a lower capex initially.
Speaker: So I think this is hopefully a small, simple project to provide a different view of how we can see the lifecycle of a project or a building.
Speaker: Furthermore, if we also look at the whole life cycle carbon of the building, where embodied carbon saving will come to the equation, upgrading or retrofitting existing buildings could actually be more favourable.
Speaker: Understood.
Speaker: Thank you, Annie.
Speaker: So despite it being a tough environment, capital is clearly being spent.
Speaker: So let's dig a little bit deeper into what actions real estate developers and investors are taking to reduce their emissions.
Speaker: In our survey, property developers came out as slightly ahead of investors on many of the actions taken in pursuit of net zero.
Speaker: The general impression is that developers are more likely to invest in things like on-site electrification and switching to renewable energy than investors, perhaps because divestment is still the easiest way for investors to tackle their carbon footprint.
Speaker: Coming to you first again, Matt, would you agree with that statement or not quite?
Speaker: I mean, I think it's more complex than that.
Speaker: And the one thing that's sort of not in that survey by the Senate is this carbon in use point, which Annie made as well.
Speaker: And whole life carbon on a building is becoming more and more important in the UK now.
Speaker: How you design a building now so that in 30 years time, it can be retrofitted much easier.
Speaker: It can be a different type of use.
Speaker: So office can go to residential, residential can go to hotel, hotel can go to office.
Speaker: and how all of that works together, I think is really important.
Speaker: And as I say, the carbon footprint, if you like, of everything that we do seems, for me anyway, seems to be the most important thing.
Speaker: Of course, electrification and sustainability and all the efficiencies come into that and how you use the building, but it's that use of carbon in particular that I think is the real focus in the UK.
Speaker: Thank you.
Speaker: Looking back at HSBC survey results,
Speaker: On the overall basis, the survey also found that the top three CAPEX priorities for respondents were energy efficiency, electrification, and renewable power generation.
Speaker: Matt, how do these fit with your priorities for refitting?
Speaker: Energy efficiency, I think, is probably the number one item for us.
Speaker: The rest of those on there may well be a solution to that energy efficiency, but it's the energy efficiency that we're looking for in everything we do.
Speaker: And as I said, that sort of that carbon in use and whole life cycle carbon are the important things for us.
Speaker: Thank you very much.
Speaker: And looking back again at the survey results, waste and water optimization was seen as more important by respondents in Asia than in other regions.
Speaker: Coming to you this time, Annie, what are you seeing your property sector clients prioritizing in terms of CapEx spend on emissions reduction when it comes to retrofitting?
Speaker: I think that it's a very interesting response from that survey, but I guess it will also come down to the different materiality importance view by the clients that responded to the survey.
Speaker: Because I think I will echo Matt say that energy efficiency would still be the key drivers when coming to retrofitting for emission reduction.
Speaker: So, for example, when it comes to retrofitting with the HSBC properties, we do have waste diversion goals, we have minimum water design requirement, but energy reduction remains the most important and most effective cap expense to reduce emission overall.
Speaker: Following and linked to this, technology developments ranked as one of the main accelerators for transition in the sector in the HSBC survey results.
Speaker: So what sort of new technologies are you seeing emerge that are supporting the move to net zero?
Speaker: Maybe this time we come to you first, Annie, and then we go to Matt.
Speaker: Thanks.
Speaker: Yeah, there is a statement from a recent market research that transition to net zero is a technology transition.
Speaker: So undeniably, technology stands at the center as an enabler to make existing buildings with high standards of energy efficiency.
Speaker: So I think roughly, I think I would group the new type of technology into phase one, techs that are already in market and being used to improve the way we use energy in the building.
Speaker: Some of these are like sophisticated building energy model to inform sunlight heating direction that would provide into the retrofit design and also smart building management system or the BMS that monitor and actually manage building energy demand and also efficient and intelligent HVAC system that minimise overheating or cooling.
Speaker: For HSBC, we did an analysis that for most of our buildings, HVAC can account for as high as 60% of the energy demand.
Speaker: Therefore, having very efficient and intelligent system, it's very effective to control the energy usage for our properties.
Speaker: And of course, the fairly commonly applied solar PV system to provide onsite green energy.
Speaker: So these are the type of technology that we have seen that it's already being used in the market.
Speaker: Then there comes the phase two techs that are those that not yet at large scale market deployment.
Speaker: However, we have seen them being pilot at large corporates, for example, Microsoft in China.
Speaker: So these are like BIPVs, hydrogen cells and energy storage battery units.
Speaker: Thank you very much, Shani.
Speaker: And I guess a lot of it is really behavioral driven, right?
Speaker: So it's all about energy efficiency based on what both yourself and Matt said, and Matt will come on to you as well shortly.
Speaker: But I do feel that it's really about behavioral and how you actually use the property.
Speaker: Matt, anything further you'd like to add?
Speaker: Yeah, I mean, I think I'd echo that, right, which is it's about user interface.
Speaker: And I think that's where we're seeing new technologies probably make the biggest difference.
Speaker: Because all the rest of that stuff, if you like, is already happening anyway, with regards to how the HVAC system works, the BMS, you know, hydrogen cells, you know, solar, PVs, wind, that's all really, really good stuff.
Speaker: But we're seeing technologies now that
Speaker: inform users how they're using the building and therefore what their personal energy usage.
Speaker: And actually, I think that will have a bigger difference on energy efficiency than anything else, because it's people effectively that are switching the air conditioning on when they shouldn't be or opening a window when they shouldn't be or leaving the lights on when they shouldn't be.
Speaker: And particularly when it comes to uses in hotel or residential type of uses, student co-living,
Speaker: et cetera, et cetera.
Speaker: Then it's, it's a, it's, there's something there to actually show people what their personal energy use is, what their benchmark should be and what they're actually doing.
Speaker: And we've found that technology to start to really be used now in those environments.
Speaker: Thank you, Matt.
Speaker: Very insightful.
Speaker: Last, but certainly not least, let's talk specifically about financing availability and solutions.
Speaker: This is very interesting for me because I'm a real estate finance banker.
Speaker: So this is my territory.
Speaker: So traditionally, lenders and investors have been keener to finance new builds than retrofits because new developments tend to have greater and more obvious return potential.
Speaker: But nowadays, they seem to be more open to sustainable refitting of property.
Speaker: So Matt, how easy are you finding it these days to finance renovations and energy efficiency initiatives?
Speaker: And are you seeing new types of financing solutions?
Speaker: And if so, how effective are they really?
Speaker: I think the finance market, certainly in the UK, has got their head around it pretty quickly.
Speaker: And if anything, the sort of the green loan initiatives that most banks now provide are a key part of your own sort of requirements for your own investors and for your own reporting.
Speaker: Being able to be part of that process, I think, helps.
Speaker: So we're certainly not seeing any sort of kickback against retrofitting in the finance market.
Speaker: There's obviously different, in the UK anyway, there's obviously different types of UK grants and government grants you can get that also count towards retrofitting, whether that be from a tax point of view or whether that be from a sort of a pure capex point of view.
Speaker: So actually, the market over here is very much set up, I think, to finance in that way.
Speaker: And Annie, what are you hearing from your clients and seeing in the market about funding availability?
Speaker: And can you give any examples of trends or deals you've seen in certain Asian markets?
Speaker: Coming back to this is, again, the Singapore case with several building retrofit fundings being available in the market.
Speaker: So just now we mentioned the green mark incentive schemes.
Speaker: So under this scheme, the building projects that pursue higher standards of energy efficiency will be eligible for higher rates of funding.
Speaker: As an example, buildings that can achieve the highest green mark rating of zero energy after retrofitting will get...
Speaker: about 45 Singapore dollars for each ton of carbon reduced.
Speaker: Of course, it's kept at a certain limit.
Speaker: And also, I understand that in Singapore, there are also other schemes.
Speaker: For example, the Building Construction Authority of Singapore also launched the Building Retrofit Energy Efficiency Financing Scheme, which is facilitated by the authority and also the participating financial institutions.
Speaker: and also the sustainability loan that Matt just mentioned is also available in Singapore.
Speaker: So coming to Hong Kong, it's also we see a similar trend being available.
Speaker: Just provide an actual example that last year we had an investor client together with a local property developer acquire an existing hotel property in Hong Kong, which they then use the green loan from a local bank to upgrade the building to a high-end service apartment.
Speaker: with the aim to attain the gold standard for the building.
Speaker: So the financing solution initially helped them with the initial capex investment.
Speaker: And of course, with the retrofit, making the building more energy efficient, as we shown previously, for the long run, it will actually help to reduce the building's operational costs in the long run.
Speaker: Thank you.
Speaker: So it seems like a combination of carrots and sticks.
Speaker: So maybe a final question for me on this topic.
Speaker: Would you say that, for both of you actually, would you say that there are more carrots at play or more sticks at play at this point in time?
Speaker: That's really difficult.
Speaker: I think the London market has always felt like there's quite a lot of sticks, particularly through the way that our planning system works.
Speaker: Right.
Speaker: But that said, when you look back at them in, you know, over a five year period, actually, there's as much as a carrot maybe than they can be, which is.
Speaker: In other words, you look back and you go, that was the right thing to do.
Speaker: We've got our returns from it.
Speaker: You know, we produced a good building.
Speaker: Yeah, our tenants are happy.
Speaker: Our investors are happy.
Speaker: You know, the market's happy.
Speaker: We're happy.
Speaker: So is it a stick or is it a carrot?
Speaker: It's a really difficult one.
Speaker: Thank you very much, Matt.
Speaker: Anything further to add from your nanny?
Speaker: My gut feeling being the year of rabbit, I think I prefer to say that it's more a carrot for the rabbits.
Speaker: Yeah, I see more carrots in the market.
Speaker: Thank you very much.
Speaker: With that, we are about out of time.
Speaker: Matt and Annie, thank you for sharing your insights and thoughts.
Speaker: It was great to hear your different perspectives and how this topic varies from the UK to Asia.
Speaker: And thank you to our listeners for taking the time to listen to this podcast.
Speaker: For more insights on today's conversation, visit our Transition Pathways website via the episode description.
Speaker: Thank you.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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