The key role of sustainability in Kuala Lumpur’s real estate sector

What was once a “nice to have” is now being pushed into the mainstream

There are four key benefits of shifting towards sustainability

MALAYSIA

As one of the largest contributors to carbon dioxide emissions, the real estate sector is key to building a more sustainable future. In Kuala Lumpur, JLL says stationary energy (energy consumed within buildings) accounted for 41% of carbon emissions. As such, it isn’t easy to imagine a sustainable future for our planet without the real estate sector playing a key role in finding solutions.

In recent years, the conversation around Malaysian real estate has shifted more towards sustainability and green buildings. What was once a “nice to have” is now being pushed into the mainstream. Occupiers, landlords and investors, recognising the importance of sustainable real estate, have begun incorporating sustainability themes into their real estate strategies.

This is especially evident for government-linked companies (GLCs) and multinational companies (MNCs) in Malaysia, where JLL’s Sustainability Services team has undertaken several projects. One of these is the development of a hypermodern sustainable building for a GLC where JLL led the advisory and guided the development towards WELL certification. Within the private sector, JLL advised a shipping company on a decarbonisation plan for their new warehouse development. These examples highlight how critical sustainability is for corporations. In today’s business environment, corporate strategies focused on sustainability can add brand value, meet consumer demands, increase efficiency, attract valuable talent and create new opportunities.

Key benefits

The shift towards sustainable real estate comes with additional benefits: (1)Growing demand from occupiers. As more companies increase their sustainability commitments, they become more willing to pay premium prices for green buildings. Such buildings typically command a rental premium of 5-15%, suggesting that occupiers are willing to pay that premium to move forward with their sustainability goals. (2)Optimising energy consumption. According to the Green Building Index, green/sustainable buildings could yield at least 30% to 40% energy savings compared to an average baseline building. (3)Access to incentives. Owners/occupiers of green/sustainable buildings are eligible for several tax incentives. (4)Avoiding brown discounts (referring to lower rents for landlords/decreased asset value when investors have failed to invest in sustainable upgrades).

Whilst there may be a higher initial outlay in implementing green/ sustainability initiatives in real estate, it is a necessary step towards building a better tomorrow.

WHY REAL ESTATE DEBT IS GAINING TRACTION AMONGST APAC INVESTORS

As investors strive for diversification, commercial real estate debt is increasingly becoming one of the most popular debt strategies.

According to JLL, the need to mitigate market risks in light of recent steep cash rate hikes by central banks is further strengthening the appeal of debt strategies– a more stable alternative to shield investors from market volatility.

“Across the Asia Pacific region, central banks are increasing cash rates or adjusting exchange rates because of a massive, swift change in global monetary policy,” says Paul Brindley, Head of Debt Advisory, Asia Pacific, JLL.

Interest rates in some markets have risen by as much as 250 basis points in less than six months, JLL data shows. This rapid change is further accelerating the reallocation of capital into debt investments.

In fact, around 21% of investors are planning to deploy more capital in the debt space this year, according to JLL’s Investor sentiment barometer.

“Despite the potential for a slowdown in markets, some institutional investors continue to seek avenues to deploy capital,” says Brindley. “A growing number of investors are opting to invest in debt over equity for its stability, trading off upside for cash returns.”

In more volatile markets where investors may not have the data points to invest in equity, debt provides an alternative at a lower risk point and with more downside protection, Brindley says.

As banks focus on the impact on rising base rates and incumbent sponsors, opportunities are emerging, particularly for non-bank lenders who can take higher risks, to tap demand for development financing.

“For sponsors that can’t meet the traditional metrics required to secure commercial bank financing or are seeking flexibility on covenants, borrowers are pivoting to the range of non-bank lenders that can provide such accommodations,” says Matthew Duncan, Head of Debt Advisory, Australia, JLL.