15 02 2024 | Eva Smaga with significant contributions from Louis Millon (Systemiq Capital) and Mike Batley (Systemiq Ltd)
The real estate industry is undergoing a slow but transformative shift, as real estate investors and portfolio managers are increasingly accepting the necessity of decarbonising buildings. However, they frequently find the task laborious and costly.
In this landscape of change, proptech has emerged as a possible superhero. It generates valuable insights thanks to the improvement in the quantity and quality of data and analytical methods. It also offers decision-support platforms that make it faster, easier and cheaper for real estate investors to align climate goals with investment strategies and capital allocation.
A subset of proptech that helps with investment & capital planning decision-making emerged over the last few years. It presents clear opportunities to unlock the ~$150bn additional capital needed annually by 2030 from commercial Financial Institutions (FI) and corporations to decarbonise buildings globally[1]. Retrofits and new heating appliances are estimated to make up around 80% of investments needed in the sector, followed by efficient appliances.
Real estate embracing the technology wave
The real estate sector is progressively embracing technological advancement, despite being once notorious for its reluctance to adopt/invest in such tech. From investment and portfolio management to design, construction, and facility operations, technology is slowly but surely finding its place in every nook and cranny of the industry. Within this range, we see investment proptech serving investment and portfolio management activities, construction tech serving construction and general proptech serving facility management.
A pivotal opportunity for climate x proptech
We have seen real estate investors & portfolio managers and asset owners redirecting their focus toward upvaluing existing assets in their portfolio rather than committing to large transactions in the current high-interest rates macro climate. With internal operations becoming investors’ main priority, energy efficiency and electrification interventions have been top of mind for all players. These are two clear ways to increase asset value whilst enabling deep decarbonisation.
At the same time, the investment required from commercial FIs and corporations to decarbonise real estate is colossal. It needs to more than double by 2030 to meet $240Bn annually needed to be on a path to Net Zero. This is why investors demonstrating commitment to sustainability that goes beyond mere compliance will be so important in the years to come.
The magnitude of this challenge necessitates a departure from traditional investment approaches. Some work from our sister company - Systemiq - with the Leaders of the Urban Future group (LOTUF) uncovered that traditional capital allocation planning tends to create a skewed view of the cost & benefits of decarbonisation strategies, with the result being that many interventions look unprofitable. This is because current capital planning practices usually rely on physical energy audits and asset-by-asset decarbonisation plans that are lengthy, costly and enjoy few or no benefits at scale.
Technology can be a game-changer here. By applying new technologies such as machine-learning and physics-based modelling, proptech solutions can generate insights that make it faster, easier and cheaper for investors and portfolio managers to deliver on decarbonisation opportunities. It can help them determine the optimal set of solutions and sequences of action for each building and the portfolio as a whole to meet decarbonisation targets, including answering these questions:
· Which asset(s) in my portfolio should I decarbonise first (i.e. prioritization)
· When to do it (i.e. timing)
· How to do it (i.e. which retrofit intervention)
· What will be the impact on RoI, exit yield and rent etc. (i.e. financial returns)
This new approach presents a clear opportunity for forward-thinking entrepreneurs. In conversations with emerging players, we’ve highlighted the main pain points that are being addressed:
1. Make faster and more precise investment decisions
Tools like Optiml, Sitowie or Audette leverage big data and machine learning models to guide investors in allocating their capital budget efficiently to make business cases for decarbonisation positive. This helps them move away from asset-by-asset decision-making and enables benefits from scaling investments. Solutions that best leverage and showcase synergies from individual building interventions to create value at the portfolio level will likely be clear winners.
2. Promote action—not just insights
Companies such as Adaptis, Mortar.io or Kelvin provide comprehensive retrofit intelligence, sometimes serving as one-stop-shops which enable real estate owners to set priorities, understand their options, and sometimes even connect with installers. Solutions that enable the development of a high-fidelity picture of the current state of an individual building without ever stepping foot inside will clearly be appealing to portfolio managers that need to engage in several (or hundreds of) decarbonisation projects simultaneously and across different geographies.
These solutions empower real estate investors to craft ambitious and informed decarbonization plans at both the asset and portfolio levels. The shift in perspective triggered by these tools has the potential to unlock solutions throughout the Sustainable Built Environment (SBE) value chain, including retrofit interventions like heat pumps and efficient windows.
Beyond decarbonisation planning, there is a range of other tech solutions that enable buildings transition that should be considered in connection to these decision-support tools. These include solutions allowing autonomous building control and energy demand management such as Elyos Energy, solutions that help engage tenants and landlords for better collaboration such as Hello Energy or technologies that help buildings becoming producers of energy and interact with the grid among many others.
Overall,we think the intersection of technology and real estate is catalyzing a revolution in how sustainability is integrated into investment strategies. A data-driven approach allows investors to pinpoint high-impact areas for decarbonization, unlocking positive business cases for portfolio-wide sustainability efforts.
If you’re building a start-up with the intersection between climate and proptech, please get in touch.
AI-generated image showcasing the various aspects of retrofitting, including the installation of insulation panels, solar panels, energy-efficient windows, and the application of a reflective, energy-saving coating.
[1] Race to Zero, 2023, Financing Roadmaps for buildings sector, https://www.gfanzero.com/netzerofinancing/. Today, annual investment from commercial FIs and corporations toward buildings decarbonisation is at ~$100bn and needs to reach $240bn by 2030.
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