Energy intensity has quietly become a valuation input

For most of the last decade, building energy performance sat in the reporting appendix. It was measured because investors asked, disclosed because regulators required it, and largely absent from the actual valuation.

That has changed, and not because sentiment shifted. It changed because the people lending against these buildings began pricing it.

The mechanism is credit, not conscience

When a lender applies a margin differential between a high-performing asset and a poor one, the difference capitalises immediately into value. A 25 basis point spread on a leveraged asset is not a rounding error — it is a permanent adjustment to the cash flow available to equity, and therefore to the price a rational buyer will pay.

Layer on top of that the tightening floor of minimum standards in several of our core markets, and a poorly performing asset carries something worse than a discount: it carries a date. A building that cannot be legally let after a known year is not a discounted asset, it is a development project with a deadline.

A stranded asset is rarely stranded suddenly. It is stranded on a schedule that everyone could read years in advance.

How this changes underwriting

We now underwrite the retrofit at acquisition rather than deferring it to the business plan. Specifically:

• Capital expenditure required to reach the target band is deducted from day-one value, not amortised into a future year.
• The works are scheduled against lease events, because a retrofit executed during a void is a fraction of the cost of one executed around a sitting tenant.
• Where the economics do not clear our hurdle after that deduction, we do not buy the asset and plan to "engage" later. Engagement is not a financing strategy.

The honest caveat

Not every retrofit pays. There are assets in every market where the cost to reach a compliant standard exceeds the value uplift, and the intellectually honest response is to recognise that at purchase — either by pricing in demolition and redevelopment, or by declining.

The portfolio is currently 38% below its 2019 energy intensity baseline. Roughly a third of that came from targeted capital works. The remainder came from not buying the assets that would have dragged the average down.