Could carbon become a property value issue for developers?

There remains a persistent tension within development between keeping upfront construction costs low and investing in future performance. Stripping out sustainability measures, low-carbon materials or enhanced building systems are often done during value-engineering exercises because they are perceived as adding cost.

But all those initial “savings” may be a false economy: all it does is simply make the supposed “added costs” into future costs downstream.

Think about how cheaper façades today may create higher maintenance liabilities tomorrow. Or how lower insulation standards may lock occupiers into permanently higher energy bills. What about carbon-intensive materials that may expose owners to future retrofit obligations as regulation tightens?

Developers often optimise for development margin by lowering their Capex obligations, while investors, owners and occupiers inherit the operational risks. That model is becoming increasingly unsustainable.

“The phrase ‘stranded assets’ has traditionally been associated with oil and gas. But increasingly, it applies to real estate”

More and more institutional investors are now examining property portfolios through the lens of climate risk and life cycle performance. Banks are beginning to differentiate lending based on sustainability credentials, with developers who are willing to incorporate sustainability measures into developments getting loans at lower interest rates.

Occupiers are becoming acutely aware of energy affordability following years of volatile energy prices and today’s global crisis. Whether we like it or not, carbon is starting to influence the economics of property in ways the sector can no longer ignore.

One of the biggest misconceptions in development is that sustainability begins when the building is occupied. In fact, a substantial proportion of a building’s total emissions are created long before anyone moves in.

Embodied carbon – the emissions generated through extracting minerals, manufacturing steel and glass, transporting, installing, maintaining and eventually disposing of materials – can account for over 50% of total life cycle emissions in modern developments. Understanding where the carbon cost is enables developers to consider alternative, more sustainable construction materials.

Consider two hypothetical mid-rise residential schemes. One uses a conventional reinforced concrete frame. The other adopts a hybrid engineered timber structure with recycled steel components and lower-carbon concrete alternatives.

The timber-based scheme may initially cost more due to supply chain constraints or specialist design being required, or insurance considerations. But over the full life cycle of that property, the picture changes dramatically.

If the lower-carbon timber structure was used, over the next 60 years it could deliver reduced embodied emissions, faster construction programmes, improved thermal performance, reduced future retrofit exposure, and greater investor appeal under environmental, social and governance criteria.

In addition, the development may attract stronger financing terms through sustainability-linked lending products, and command stronger sales values due to lower running costs and environmental credentials. The more expensive option upfront may ultimately become the more valuable asset in the long term. That is the shift the sector should be starting to understand.

“What happens in 10 or 15 years if energy regulation tightens further, or retrofit obligations become mandatory? What if lenders begin penalising inefficient buildings, or insurers price climate exposure more aggressively?”

The phrase ‘stranded assets’ has traditionally been associated with oil and gas. But increasingly, it applies to real estate. A stranded property asset is one that loses value because it can no longer meet market expectations, regulatory requirements or operational efficiency standards economically. And the risk is growing.

Imagine a residential scheme completed today using poor-performing, high-carbon materials, no renewables and carbon-intensive construction methods. What happens in 10 or 15 years if energy regulation tightens further, or retrofit obligations become mandatory? What if lenders begin penalising inefficient buildings, or insurers price climate exposure more aggressively?

The owner may face substantial reinvestment costs simply to keep the asset marketable. Suddenly, the cheapest scheme at planning stage becomes the most expensive asset to operate.

The operational side of carbon is equally important. Developers sometimes underestimate how strongly energy performance can now influence consumer behaviour and choices. Tenants and occupiers are now aware of energy performance after years of instability in their bills.

Two homes may look identical on a sales brochure. But if one costs significantly less to heat, cool, and maintain, it becomes inherently more attractive.

Such implications of reduced operational expenditure are more significant for institutional landlords and build-to-rent operators, where net operating income can be directly improved. And higher net operating income typically supports higher valuations. In simple terms: lower emissions can increasingly translate into higher asset value.

Another issue the sector has been slow to embrace is end-of-life responsibility. Greenhouse Gases Protocol adopts a ‘cradle to grave’ approach. When this becomes mandatory, consideration will need to be given to how materials will be recovered, reused or recycled decades later.

Demolition remains the default assumption. This approach is completely incompatible with long-term carbon reduction.

Developers need to see that this transition to a low-carbon economy may create significant competitive advantage if they are willing to act early. Those that do will attract more resilient investment and secure stronger lending conditions. They will future-proof assets against regulation, reduce life cycle operational costs and build schemes that remain desirable for longer.

This is particularly important in housing, where assets are expected to remain operational for generations. Yes, many sustainability measures are likely to increase Capex by a relatively small percentage, but the long-term operational savings and valuation protection can significantly outweigh those costs over the life of the asset.

The market needs to move from a culture of cheapest delivery to one of total life cycle value. And carbon sits at the centre of that transition. Carbon should no longer sit solely within the sustainability team – it belongs in financial modelling, investment appraisals, procurement decisions and board-level risk discussions.

Delivering assets that look commercially efficient today may become economically vulnerable tomorrow. Those who understand the financial implications of carbon across the full life cycle of a development may create something far more valuable:

Francesca Lee, founder and chief executive, Social Value Architect