Solar energy is at the heart of the real estate decarbonisation agenda

In 2018, Big Yellow – the UK’s largest goods warehousing company – celebrated its 20th birthday.^t year of operation. By then it had amassed a huge portfolio of warehouse properties traded on the London Stock Exchange, with a capacity equivalent to 90 football pitches. This year, 14 of its stores were fitted with solar panels.

In the years since, this number has grown at a faster rate than in the past. There are now 68 Big Yellow stores in the UK with solar panels on their roofs.

Several listed property companies in the UK have a similar story to tell. Their optimism about solar power has grown in recent years. But there’s a catch. The commercial viability of solar power in property portfolios faces myriad challenges.

Reports published by listed property funds and UK property companies provide key guidance on what these challenges are and how developers are addressing them.

Build it

For developers looking to take advantage of solar energy, the first challenge is designing or redesigning assets. Installing solar panels on roofs requires retrofitting—updating older designs to accommodate solar panels and their associated accessories.

In older property assets in markets like housing, this can be structurally difficult. In the case of the UK, a country where over 30% of its housing stock was built before 1946, this is a hurdle that requires innovative thinking.

At Abrdn Property Income Trust, a listed property manager, solar retrofitting is a strategic priority and design challenge. The Trust recently implemented a 1.16MW scheme, the largest in its portfolio, at Rainhill Road in WA.

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“Given the specifics of this property, we used an innovative product that combined photovoltaic panels and roofing, alleviating the need for roof renovation or replacement. When combined with a comprehensive renovation, the property is now effectively carbon neutral,” the company said in its annual report.

Others have also invested in design thinking. Assura, a FTSE-250 REIT focused on healthcare real estate, launched a net-zero design guide last year. The guide incorporates a solar perspective into Assura’s design philosophy:

“The building should be oriented to maximize natural light and solar heat gain. The building should be positioned 30 degrees from south, and roads should ideally be located on the east-west axis,” the design principle in the guide states.

Financial Viability

The optimism surrounding solar power has a lot to do with its cost. Data from the International Renewable Energy Agency shows that the average cost of electricity for solar power fell by 89% between 2010 and 2021, the largest cost reduction for any renewable energy technology during that period.

“Costs are expected to fall even further in the future, falling to a central estimate of £30/MWh in 2040 – or perhaps £26/MWh at the lowest estimate. By then, the cost of generating gas would rise to a staggering £165/MWh,” says Solar Energy UK, the industry trade body.

However, installing solar across a portfolio remains capital intensive. Some companies are looking at financing mechanisms to raise funds. For example, British Land has set up a “transition vehicle” – funded by an internal carbon tax, which currently stands at £90 per tonne of embodied carbon.

Others, such as Big Yellow, which invested £6m in solar upgrades last year, sell unused power back to the grid, a practice known as net metering. The company currently has a £25m solar PV upgrade programme, more than half of which has already been invested.

Out of sight but still in mind

There is also the question of who controls the energy supply – customers or property owners? In the case of SEGRO, a REIT specializing in industrial and warehouse properties, customers in most cases acquire energy. In other cases, owners acquire energy on behalf of customers.

In both cases, the challenge is transparency of energy demand and control over the source of supply.

“Like many property owners, the responsibility for sourcing and monitoring energy usage rests with our customers for most of our offerings,” we read in the latest SEGRO reportResponsible SEGRO’ report.

What is sometimes out of sight is not necessarily out of mind. Customer emissions are included in SEGRO’s net zero target. “Along with including our customers’ emissions in our science-based targets, obtaining good quality energy data and encouraging our customers to purchase renewable energy is paramount,” the report adds.

Last year, SEGRO added 15 MW of installed solar capacity to its portfolio, its largest year-on-year increase to date.

In the recent past, the presence of rooftop solar in listed property portfolios has increased. As cost reductions and investor expectations converge to encourage the acceleration of this trend, its future depends on overcoming several major challenges – design and visibility being key among them.