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How to make real estate assets more resilient in response to global megatrends

The world is changing at a faster pace than ever before. The way we live, work, travel, and even communicate with each other, has, it could be argued, become underpinned by digitalisation. 

Technology innovation is leading to people living longer, pushing the global population ever higher. This has long-term consequences for social spaces and how we design cities, not to mention how we design, operate and monitor individual buildings.

Consider the five megatrends impacting the way we live illustrated in the diagram. Global climate change, demographic change and digital transformation are significant forces that real estate owners cannot afford to overlook as they seek to drive long-term value and price appreciation in their portfolios. Increasingly, real estate managers are asking themselves important questions that reflect the influence of the above megatrends.

These questions relate to grid constraints in local markets, changing regulation, energy price hikes, shifting consumer/tenant behaviour and, critically, cybersecurity risk as buildings get ‘switched on’ in the Internet of Things. In order to face these issues and come up with appropriate strategic solutions, building owners are actively discussing how the twin themes of sustainability and resilience can be applied to real estate assets to meet the current and future needs of society.

What is resilience?

James Lockhart Smith is Director, Head of Financial Sector Risk at Verisk Maplecroft. He defines resilience as the ability to pre-empt and respond to acute shocks and stresses.

“Negative impacts that a building might have had on the environment would not have been noticed as much decades ago whereas today, through law and the behaviour of investors, building owners are beginning to bear the cost. This has led to sustainability overlapping with resilience. Owners are now more exposed than they were to the financial and/or regulatory downsides of poor sustainability practices, just as they are exposed to external disruption that tests their resilience,” says Lockhart Smith.

These could include physical risks such as natural disasters, socio-economic risks (terrorist attacks, economic crashes), drastic changes in regulation, as well as cyber attacks that knock out power supplies and shut down operations.

“With this in mind it could be climate change, it could be energy sustainability (responding to regulatory change in local markets, grid constraints), it could be responding to technology and the Internet of Things,” says Niko Kavakiotis, Head of Building Performance & Sustainability (UK), Siemens Building Technologies.

Take, for example, the Internet of Things (‘IoT’). In the past, pieces of equipment installed in different parts of the building did not necessarily talk to each other meaning if something failed, the impact was localised. With IoT, the risk changes from local risk to systemic risk. As the assets become interconnected with the local city, the grid operator, etc, the failure of one might lead to a domino effect.

However, if different interconnected systems within a building asset are sharing data simultaneously and being properly monitored, this can go some way towards mitigating systemic risk and avoid an entire building shutting down.

Kavakiotis says that building resilience is not just a way to go but the way to go: “I think of buildings not just as passive assets but living organisms. If you change the building into something that can interact with the grid and can adapt over time; that to me is resilience. One of the best ways of making the building adapt is to have underlying performance data, allowing us to not only “hear” the building, but to “listen” to exactly what it’s telling us so that we understand what it needs most. And then have an infrastructure that would allow the building to be flexible i.e. adjust its energy usage and sell surplus power back to the grid.”

Why is resilience important?

Peter Halliday is Global Head of Building Performance & Sustainability at Siemens Building Technologies. When asked why he feels resilience has become important, Halliday responds: “Firstly, it has become important in terms of the resiliency of a building facility to the grid supplier – having the capability to generate its own electricity.

“Secondly, resilience is important is because it’s good for business. We’ve found that investing in sustainability, both for ourselves and our customers, is a good business model.”

In today’s climate of increasingly sophisticated cyber attacks, the risk of not having resilient commercial real estate assets could lead to businesses being rendered non-operational for periods of time. This not only impacts the bottom line, it can leave businesses susceptible to serious reputational harm.

The 10th edition of Deloitte’s Global risk management survey suggests that 41 per cent of institutional respondents consider cybersecurity to be among the top three risks that would increase in importance for their institutions over the next two years.synaptic

Deloitte states that the three main reasons for the commercial real estate industry to enhance their cyberattack preparedness include:

• Increase in connected buildings and cities, and heightened tenant exposure

• Investor pressure

• Regulatory emphasis

As buildings become smarter, autonomous assets connected to the IoT, they will need resilience measures to cope with cyber attacks and protect their tenants. JLL EMEA’s Chief Information Officer, Chris Zissis, was quoted as saying in April 2016: “Property owners and their tenants must do three things: understand the sort of data IoT generates while it monitors and safeguards buildings, work out which data is of value, and get solutions put in by leading security experts to secure that data.”

Although a long-standing issue, resilience has emerged as a more prominent issue in light of major climate change events over the last several years, such as floods in Houston and wildfires in California, and new recommendations from the Task Force on Climate-Related Financial Disclosure (TCFD).

The impact of Hurricane Harvey last September was severe. BP’s Westlake One office in Houston’s Energy Corridor saw its basement flooded and electrical systems brought down, requiring thousands of staff to work from home until early 2018 while the damage was repaired.

Through using alternative energy stores, more resilient buildings are able to function when others are completely knocked out. Just look at the impact Hurricane Sandy had on downtown Manhattan in 2012.

“It’s an important point,” states Halliday. “Natural disasters are one of the key drivers behind the adoption of distributed energy systems. There were pockets of Manhattan that were still lit up and it was business as usual because they had their own co-generation systems in place.”

Global warming – a key driver

Improving the resilience of real assets in response to global warming is becoming increasingly mandatory as opposed to a ‘nice to have’. More than 500 climate change laws have been introduced over the last few years and countries like France, with Article 173, are taking a proactive approach to the situation.

Under Article 173, French asset managers and pension fund investors are required to report not only on how they integrate ESG factors into their investment policies – and, where applicable, risk management – but also specifically on how climate change considerations are incorporated.

“Not too many companies are yet able to comply and disclose the required depth of information required by Article 173,” says Roxana Isaiu, Director Real Estate, GRESB, an investor-driven organisation committed to assessing the ESG performance of global real assets. “That said, I don’t think we are behind the curve in terms of available data. The data is there, it’s just a case of slicing and dicing it to look at things from an ESG perspective.”

Investors too are pushing for more sustainable investing. One example of this is the two Dutch pension funds, APG and PGGM, who last year created governance criteria for investments. The methodology, referred to as taxonomies, seeks to identify investment opportunities linked to 13 of the United Nations’ 17 Sustainable Development Goals (SDGs).

Measuring performance

Chris Pyke, Research Officer with the US Green Building Council in Washington DC, says that ESG is maturing in the property industry. “More companies are reporting on ESG and more institutional investors are asking for information,” says Pyke. “At the same time, practice and performance are improving and benchmarks, including GRESB, are increasingly competitive for top tier companies. Tools like the GRESB Public Disclosure Score show that the majority of firms have begun to integrate ESG into their operations. This is reflected in establishment of foundational policies and institutionalisation of performance measurement (e.g. tracking energy, greenhouse gas emissions, water, and waste).

“Over time, the market is moving toward repeated or even continuous performance measurement, such as the annual GRESB benchmark or Arc Skoru scoring system.”

Independent studies show that ESG performance is significantly correlated with total returns, volatility, and investment risk. A landmark study from INREV found significant differences in risk/return profiles for the Top 10 per cent, Median, and Bottom 10 per cent of GRESB respondents.

Although it is more expensive to create carbon neutral buildings with the greenest of credentials, some investment managers such as AMP Capital, one of the world’s leading investment managers with USD146.8 billion in group AUM, are seeing the benefits of holding such assets. Back in 2015, it acquired the Convention Centre Dublin for its Irish Infrastructure Fund.

“The CCD is the world’s first and only carbon neutral convention centre, largely because it’s so young,” says Niamh McBreen, Investment Director in AMP Capital’s infrastructure division. “It is more expensive to build something like that but from a sustainability standpoint, it’s incomparable to other convention centres. It consistently gets ranked top of its peer group by GRESB and that validates the whole point of setting a zero carbon goal at the outset.”

The following examples illustrate a few of the ways real estate owners can improve the resilience of their assets:

1. Building resilience by de-risking assets

Within the context of climate change resilience, the ability to de-risk real estate assets will largely depend upon the quality of ESG data available. This is necessary so as to understand what risks one’s assets are exposed to and identify mitigation steps. Take a simple example; if an asset is situated within a high-risk flooding area, it makes no sense to locate the generators in the basement. Moving the generators to a higher position within the building straightaway reduces the risk but not all buildings within a global portfolio will have the same level of susceptibility to flooding.

Verisk Maplecroft provides global data and research on climate, ESG and political risks and quantifies them based on geography.

“From a risk perspective, our data allows firms to calibrate and appropriately benchmark how entities perform relative to one another. For some issues such as carbon emissions you might want a unified approach to quantifying the risk. For others, you may need to calibrate what’s being done or not done close to the level of the underlying risk.

“For example, you might have a data set on adaptation to a specific kind of natural hazard such as earthquakes. It might not be as appropriate for someone in the London office to devote time and resources to this compared to their colleague in California,” says Lockhart Smith.

Lockhart Smith explains that most of their clients’ interest focuses on environmental issues as well as social issues, such as human rights risks in emerging markets. “They can create geo-coded data and use that for risk-based prioritisation for particular assets, or to integrate into their wider portfolios. It’s all about being able to simplify the complex and come out with a set of decision tools, giving end users an aggregate view of risk and full transparency down to the asset level,” he says.

To illustrate how technology can be used to de-risk real estate assets and improve asset efficiency, Kavakiotis refers to one industrial client whose energy needs were increasing and couldn’t solely rely on the grid because they hadn’t put the proper investments in place that Siemens had recommended.

“Our solutions do not only save energy but allow for replacement of equipment that can be business critical. Based on what we saw, we told the client, ‘if you leave things as they are, you risk X, Y, Z. This means risking production. How many minutes of disrupted production do you need to come up with a cost equal to the cost of the investment?’ The answer was 17 minutes. Using distributed energy systems was at the heart of this project,” confirms Kavakiotis.

Resilience impact on asset value

Technology is allowing building owners to make better operational decisions, which not only benefit the building’s tenants and improve their day-to-day experience, but also enhance the value of the asset. At AMP Capital, McBreen is unequivocal over the importance technology plays in de-risking assets. As a hands-on, active manager AMP Capital thinks carefully about ESG and the role of technology “plays a part in our due diligence process even before we make an investment”.

“We think about how to take an asset, de-risk it and make it more sustainable for the long-term, which is ultimately how we drive value. A huge part of that centres on efficiency and technology.

“One of our portfolio companies in the UK is Angel Trains. We’ve done a lot of work with them on Wifi communications and passenger information systems onboard their trains. Ultimately, we invest in our assets to create a better user experience and lock in long-term revenue streams,” outlines McBreen.

2. Building resilience using distributed energy systems

Reduced reliance on the energy grid is another important route to greater building resilience and the chance to unlock hidden value. Energy grids are constrained and with infrastructure ageing, government policy decisions to decommission nuclear power stations, for example, can lead to a reduced total capacity output.

But whereas in the past buildings were viewed merely as consumers, in recent years they have begun to operate as both consumers and producers – or ‘prosumers’. Using distributed energy systems, buildings are able to generate their own power and sell energy back to the grid during periods of peak demand.

“By doing this, you can create a more dynamic building,” says Kavakiotis. “Depending on what is happening in the grid environment, you can have a building that interacts with the grid, with the local community; just interacts more generally. This interaction can bring in new revenues and offer stability back to the grid.”

Depending on what the strategic goals are, there are different combinations one could put together to build a DES solution. Kavakiotis stresses the reliance on having a smart system to run simulations and determine the best combination. “I might be able to deploy alternative energy sources as part of a programme and say to the local grid operator, ‘If I pursue this strategy you would set to benefit, would you be interested?’ That’s one example of setting strategic goals that could change the whole model of an RE investment fund.”

Data quality challenge

Good quality data is an integral part of any resilience programme. Without this, one can never know how well an asset is performing. This could lead to erroneous assumptions and people taking the wrong decisions, potentially impacting one’s operating costs.

“Firstly, you need as much data as possible,” says Kavakiotis. “Secondly, you need continuity of data and thirdly you need data granularity. Assuming you’ve got all of this good data, what do you do with it? How do you use it? You would need an army of analysts, which would be expensive, so ideally you need a combination of people and smart algorithms, like those used on the Navigator platform, to help drive conclusions.

“We have advanced operations centres that handle real-time data and we are moving towards a phase of augmented intelligence; that is, using a combination of smart algorithms with human beings as opposed to merely using artificial intelligence, which implies it is only the machine doing everything.”

AMP Capital collects a huge amount of data from each of its assets and places special emphasis on ESG data collection and analysis, especially at the pre-investment stage.

“A lot of our thinking (with respect to resilience) is shaped by the data we collect, some of which is generated by our investment process,” says McBreen. “ESG considerations are a huge factor.

There have been instances where we’ve walked away from investments because we’ve not been satisfied with the ESG component of the target asset.”

McBreen confirms that they are starting to trial a data management system to improve their ESG data analytic capabilities.

“It is basically a fund analytics tool and there is an ESG module within the system. What we ultimately want to be able to do is correlate, in concrete terms, the ESG performance of assets and funds,” she says.

“If you’re not monitoring and providing insights into how the building is running, you’ll never know how much better it could be running,” explains Halliday. “The Navigator system gives us that insight. Being connected to the cloud allows you to develop rules and analytics to benchmark the performance of the building. You still need to have the base building running with a separate system, but by also plugging it into the cloud, that adds an extra layer of insight.”

3. Building resilience using financing options

Real estate owners face a number of challenges when looking to create more resilient buildings. Ultimately, someone needs to pay for it. Does the building owner foot the bill or will the tenants agree to share some of the costs and the savings? This split incentive is one of the biggest challenges.

One way Siemens helps building owners optimise their operating expenses to overcome capital expenditure constraints is to offer what it refers to as ‘Building Efficiency as a Service’.

Siemens works with the client to identify which parts of the building need to be improved, from an efficiency perspective, and then determines a monthly or quarterly fee over a defined period of time to pay for the energy savings.

“Instead of the client paying for an upgrade, we will do that upgrade and charge them a pre-agreed amount each quarter, over three years, for example. The savings they get can be beneficial. Say their electricity bill previously was USD100 a month and we put a programme in place to improve the performance of the building, reducing that bill to USD70 a month. The client might use USD20 to pay Siemens for the upgrade and keep the remaining USD10 as a cost saving,” outlines Halliday.

This allows building owners to achieve better operational outcomes without the need to divert capital from core business priorities. A higher performing building can create a smarter workplace environment and enhance staff comfort and productivity.

4. Building resilience through security

Having good security will inevitably improve a building’s resilience, both physical and virtual, if it is connected to other assets via the Internet of Things. As such, good cybersecurity processes and protocols need to be in place as well as physical security (CCTV cameras, door sensors) to reduce the threat of being hacked in to.

As Halliday states: “You need to make sure the asset you are connecting does not leave a huge gap in the firewalls. It can make you more resilient but it’s also important that by being connected on the cloud, you don’t leave yourself vulnerable to attacks.”

Sello increased its resilience by installing a suite of security systems in the Battery room. These included access control, CCTV, video analytics, noise control analytics and a fire system. Other ways to make real estate assets more secure might include secure data sharing and real-time monitoring of emergency exits.

If you are able to monitor key assets of the building, you’re going to protect it better, says Halliday. “Whether it’s physical security – like monitoring access controls – or online security – such as monitoring firewalls. We’ve got software running in our applications that detect when systems become vulnerable. We take the cybersecurity topic very seriously.”

It also gives the building’s tenants greater confidence if they know the building has the proper systems in place to monitor security on a continuous basis.

Cybersecurity vulnerabilities are not necessarily top of mind for building owners, which is why it can help to partner with someone who can take a helicopter view and give a more holistic view on where the cyber threats might come from and how best to address them.

Future vision

The way buildings operate in years to come could be far more intuitive, thanks to technology advances in augmented intelligence and cloud-based data management systems, and if done correctly, make them more resilient to external forces.

One future concept that could become reality is the Synaptic Building, proposed by Stanislas Chaillou from the Harvard Graduate School of Design. Chaillou’s vision imagines a building that actively adjusts its spatial arrangement in response to usage patterns throughout the day. This could be achieved using machine learning algorithms that process occupancy data to create a schedule for how the building arranges its spaces.

Designed to have a minimal footprint while containing vertical circulation areas and all fixed services (like plumbing, wiring, HVAC, and LED lighting), the structure would rely on steel vaults that rise and expand like branches of a tree to support the various floors of a building. This reinforces the earlier point made by Kavakiotis that buildings are becoming living organisms, with a level of autonomy that will enable them to dynamically adapt to external conditions, maximising the comfort of tenants.

Arrays of sensors will measure outside humidity to adjust the AC levels, window blinds will rise and fall as buildings follow the arc of the sun, while predictive analytic models will forecast the arrival of thunderstorms or ice storms and allow building operators to take precautionary measures; i.e. shutting down ground-level generators in case of flooding.

With Amazon Alexa becoming popular in people’s homes, tomorrow’s buildings will likewise increasingly interact with humans, using voice recognition systems reminiscent of HAL 9000 in Stanley Kubrick’s film, 2001: A Space Odyssey, to control their work environments. As Siemens points out in, ‘the more that buildings learn, the more they will become autonomous’.

“We are already experiencing a reality of self-regulating buildings,” comments Kavakiotis. “Buildings that analyse immense amounts of data and take decisions, constantly adjusting themselves as to serve a specific purpose (in most cases optimising environments for human beings). As we move into a future where more buildings are self-regulated, we will be able to apply new parameters that will allow optimisation of a bigger gathering of buildings; systemic optimisation rather than individual. And the system in this case is ‘the city’.”

As the number of connected devices rises exponentially due to the Internet of Things, buildings are providing vast arrays of data on energy performance, alternative energy production, office space utilisation, etc.

This can go some way towards increasing the value of the asset but it is not without risks. Digitalisation requires building owners to have the right systems and analytical tools in place so that they can turn data into real, actionable insights. But as Kavakiotis stresses: “Digitalisation is not a panacea. The amount of data is going to be so overwhelming that we are going to need smart ways of processing it. That’s where augmented intelligence will make a difference.”

Last year, cybersecurity cost an estimated USD400 billion; equivalent to the GDP of Norway.

“Cybersecurity is going to become an even more serious risk and will need to come under increased scrutiny. If that security is not in place, the market would be under threat,” says Halliday.

This could render buildings, cities and critical infrastructure redundant. Threat actors shutting down an entire energy grid would have enormous repercussions to a nation’s economy. But as this report demonstrates, using a distributed energy system, which is both independent from the local grid and decentralised, could help buildings remain operational. Moreover, they could feed energy back to the grid and support a city’s local infrastructure while it recovered from any such cyber attack.

Looking ahead, resilience will likely become tightly integrated with corporate management. “I believe that this will include internal leadership, systematic risk assessment, and strategic risk mitigation actions. “Industry leaders will want to showcase these practices to their investors. Investors will know to ask hard questions for firms that are less than forthcoming and transparent about their practices and performance,” says Pyke.

To achieve this, selecting the right partner will be key. Siemens’ expertise meets with ISO 50001 and DIN EN 16247-1 industry standards for its energy management frameworks, as well as audits, energy and water master planning.

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