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Expert Insights| ESG rules offer Hong Kong innovation opportunities

Hong Kong Blog Expert Insight Tom Parker 1536x1040

Developers and investors, restricted by tight land supplies, seek innovative ways to meet sustainability targets

Two centuries ago, few people would have predicted that this rocky outcrop we know as Hong Kong would become one of the world’s leading cities. 

At first glance, with its lush green slopes rising out of the South China Sea, Hong Kong seems as if it would have admirable ESG credentials. But, 75% of its land is unsuitable for development. Alongside its iconic skyline, it is the city with the highest number of skyscrapers globally, and its commercial buildings contribute to more than 75% of its carbon emissions and use more than 90% of its electricity. For context, the USA’s figures stand at 38% and 40%, respectively.

"Commercial buildings still contribute more than 75% of Hong Kong’s carbon emissions and 90% of its electricity use."

How can Asia’s World City defeat its geography to tackle its sustainability crisis? As the People's Republic of China is the world’s largest emitter of carbon dioxide, the Central Government aims to have 70% of all new buildings green certified by the end of this year, to achieve carbon neutrality by 2060. As a Special Administrative Region, Hong Kong aligns with this target, but it has one of the highest population densities globally and a severe shortage of land for development.

Much has changed in Hong Kong during the pandemic. The real estate sector is having genuine conversations about sustainability and ESG (Environment, Social, Governance) issues for the first time. There has been an awakening, led by occupiers and driven by ESG reporting requirements, as properties with green features are now vital for most stakeholders.

However, much has not changed, and the real estate sector limits its actions to a series of practice notes covering development parameters and adding some greenery to their plans. While this is a start, the practice notes focus more on general control than encouraging developers to incorporate innovative solutions.

ESG reporting and occupiers' preferences drive the conversation in commercial property. For much of the past decade, businesses have touted their green credentials, which now affect their office preferences. Even as far back as 2009, a study carried out in the US analysed the office occupancy patterns of more than 10,000 US corporates and found that more than 40% of their space could be certified as green. This ratio is likely to be significantly higher now. 

Companies use their offices to attract and retain staff and help them with their ESG goals. In Hong Kong, a survey last August of more than 550 corporate occupiers found that around 90% agreed that tackling property emissions is essential, and 62% would be willing to pay extra to lease a green-certified building.

"Companies use their offices to attract and retain staff and help them with their ESG goals."

It’s not just occupiers who have a taste for green. A 2021 survey by EY found that 98% of investors surveyed assess ESG, and of these, 72% will carry out a structured review of a company’s ESG performance before making any decision. Just two years ago, only around 32% were considering ESG.

The Task Force on Climate-Related Financial Disclosures’ framework – to be mandated in Hong Kong by 2025 – somewhat mitigates the lack of ESG monitoring standards. Hong Kong aims to align its listed companies with this blueprint, requiring them to publicise their climate-related disclosures and sustainability reports.

The idea aims to “promote more informed investment, credit, and insurance underwriting decisions” that, in turn, “would enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks”. 
While many may consider it a cynical view, real change is often only achieved when real capital losses may be incurred, and Hong Kong is no different.

Banks and investors are no longer keen to put their money into developments that might be damaged by climate change. So, companies are becoming more active in managing their portfolios against sustainability guidelines such as the Global Real Estate Sustainability Benchmark (GRESB). 

We’ve seen multiple developers and investors recruit ESG experts to help them comply with these benchmarks and reporting standards. Over the past year, more developers, landlords, and Real Estate Investment Trusts (REITs) have released their ESG strategies and announced their targets. Asia’s largest REIT in terms of market capitalisation, Link REIT, aims to be net-zero by 2035, while two of the largest developers, Sino Land and New World Development, have pledged to achieve that by 2050.

However, the significant hurdle companies face is Hong Kong’s geography. The weather is sweltering for much of the year, and humidity can surpass 80%, so buildings need significant artificial cooling to remain comfortable – it is estimated that 70% of all energy consumption in Hong Kong is from air conditioning. Investors and developers in Hong Kong must be increasingly innovative to meet their sustainability targets. Two prominent landlords, Hong Kong Land and Swire Properties, have announced that 86% and 97% of their portfolios, respectively, are certified green buildings, but what steps are other investors taking to retrofit their facilities, and how are developers incorporating sustainable features into new buildings?

We’ve seen multiple developers and investors recruit ESG experts to help them comply with these benchmarks and reporting standards.

Buildings have traditionally faced Victoria Harbour to maximise the view, which exposes them to solar radiation. Now, developers adopt shading features such as canopies, as seen at Manulife Place in Kowloon East.

In many older buildings, the air conditioning is either on or off. But with new technology, property managers in facilities such as ICC in West Kowloon can optimise conditions for each floor based on real-time data and in smart buildings, this process can be automated.

ICC, Hong Kong’s tallest building, plans to install photovoltaic cells, covering around 120,000 sq. m. of its exterior, and wind turbines to produce power. Meanwhile, a special silver-based coating was applied to the glazing, reflecting heat to keep the building cooler.

Innovative design ideas are extending to new developments. In November 2021, the highly prized Site 3 sold in Central. Alternative cooling measures to reduce its reliance on air conditioning are a hot topic. Some ideas have included dry misting, shading or using plants to create a micro-climate.

On the other side of Victoria Harbour, there are plans to use seawater for a centralised cooling system in the new Kai Tak re-development, which is expected to be around 35% more efficient than traditional systems. With most buildings within a few hundred metres of the sea, this could enjoy wider use if successful.

As valuers, we need to appraise the value of sustainable features accurately. Most clients will broach the subject, and I believe a two-tier market will emerge between green and less green buildings. Indeed, we may see greater re-development of older properties as this value gap widens, which would be another step in the right direction as Hong Kong once again faces another defining period in its long, remarkable history.

If you want to save time and money on your ESG reporting, click here to find the Colliers expert to help you accelerate your success.

This article was first published in RICS’ Property Journal on 18 March 2022.

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Tom Parker

Senior Manager

Valuation & Advisory Services

Hong Kong

Tom is an experienced property professional having worked in both the United Kingdom and now Hong Kong. Starting his career in Corporate Real Esate, Tom worked within the Property Team for Wessex Water dealing with a range of property classes and real estate issues. Following this, Tom joined Carter Jonas in the UK in 2014, firstly as a general practice surveyor undertaking valuation, lease advisory, capital markets and leasing work, before specialising as part a team responsible for office advisory services and agency across South West England. During this time, Tom has been responsible for some of the largest office transactions to take place within the City of Bath and during his time here, undertook more deals than any other Bath based agent. A particular career highlight was the letting of approx. 15,000 Sq Ft of space at Seven Dials and approx. 18,000 Sq Ft at Northgate House. Tom's client base included several investment institutions as well as government agencies, private investors and charities.

In 2018, Tom took the decision to work in an international setting and join

Tom qualified as a Member of The Royal Institution of Chartered Surveyors in 2016, is RICS Registered Valuer and is a well rounded general practice surveyor,

Tom adds value to clients by providing strategic real estate advice and ensuring the highest levels of professionalism and ethical standards, as well as taking a keen interest in his clients ambitions, looking to provide them with his own expert opinion and advice throughout.

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