While some sources of pollution are more visible, the built environment is regarded a major one that is not. Fidelity International, via Luxembourg, is launching a new climate impact fund leveraging the need for improved performance of existing commercial real estate buildings in Europe. Investment Officer sat down with Aymeric de Sérésin, Fidelity’s director of European real estate investments.
Roughly 40 percent of the total carbon emissions worldwide comes from the existing real estate stock, explained De Sérésin. If you focus on urban locations, that statistic goes up to 60-70 percent. “Real estate is part of the problem,” he said. “We believe real estate can also therefore be part of the solution.”
As part of this solution, the firm has set up the Fidelity European Real Estate Climate Impact Fund, a closed-end fund registered as an SCA in the Luxembourg Business Register in December. The fund intends to raise 1.5 billion euros with a target of 50 percent leverage, and a top end of 60 percent. The fund will have a two year deployment, with four years investing and up to two one-year extensions with majority investor consent.
Transforming ‘brown’ buildings
Eighty percent of the total commercial real estate in Europe was not built with a view to helping to comply with the Paris Climate agreement. Only one percent of the stock is being renovated or demolished and redeveloped every year, said De Sérésin. “If we continue with the current pattern, we are going to miss the Paris Climate Agreement.”
The strategy of the Fidelity’s fund is to buy existing properties, considered “brown” buildings because they are not green and “transform them to make them super highly efficient, energy efficient buildings, which are going be capable …of being operated at net zero carbon,” De Sérésin said.
Sell to specialist funds
After working with the buildings for five to six years, “we are going to sell those assets to specialist funds who are only looking to acquire highly sustainable or net zero carbon capable buildings,” he said. “Those funds are on the rise.”
While 2050 has been the target for carbon neutrality, De Sérésin explained, over the past five to six years, “things have accelerated”. “There is a kind of competition between companies to say I’m going to be more green than my neighbour,” he said. More and more firms are targeting 2030. Commercial real estate sector is, he said, still on a path to 2040-45.
“There is a big mismatch, a big imbalance between what tenants want and what the landlord can offer to them,” he said. This allows his fund to step in and offer something that is not otherwise on the market.
Stranded asset risks increasing
Still, with the very high costs in Europe, how can Fidelity make a decent return for its impact investors? De Sérésin said the timing is right. The value of brown assets in need of refurbishment is dropping, he said. “The risk of what we call a stranded asset is increasing massively and rapidly.” The stock they’re targeting faces a 25-30 percent pricing correction.
De Sérésin added that Fidelity is employing a strategy focussing only on energy efficiency. “Our strategy is going to be rather limited in terms of CapEx injections, still we are talking about 20-25 percent of the value of the building.” He said certain competitors are spending 50-75 percent.
The fund also plans to create value on exit by re-letting the renovated properties for prime rent. “So the highest rent, simply because we are going to focus on very good locations and on exit our buildings are going to be extremely green,” he said.
Paris proof of concept
Fidelity has already demonstrated that its model works. A Paris property owned through an open ended core fund, a roughly 8,000 square metre office building named “Le Prelude”, into which the firm injected “a good deal of CapEx” over a 21-month period.
As the renovation work took place, the firm started to try to let the property. “We even had three companies after three months of marketing,” he said. This made it possible to put the lease out for tender, “to try to extract better terms on the lease.”
“When you have the right product, green products with a capability of running at net zero carbon, you’ve got a lot of demand,” he concluded.