Extreme climate events have led to higher heating and cooling costs among 58% of Singapore-listed REITs (S-REITs) in the past three years, while 47% faced increased spending on protective measures to safeguard assets against future climate risks.
This could be affecting S-REITs’ stability as a yield play. Seven in 10 S-REIT respondents face difficulties in balancing portfolio decarbonisation with short-term distribution per unit (DPU) payout expectations, according to a joint study by Knight Frank and the REIT Association of Singapore (REITAS) that examined sustainability reports from 40 S-REITs and surveyed 33 REIT managers.
Released on Oct 9, the 26-page Climate Readiness: From Disclosure to Asset Implementation report assessed climate preparedness across Singapore's $100 billion REIT market.
Climate events are creating unexpected costs across S-REIT portfolios, say Nupur Joshi, CEO of REITAS; and analysts from Knight Frank led by Asia-Pacific and Singapore ESG director Jackie Cheung.
Some 42% of respondents incurred capital outlays for asset replacement following damage and 26% faced rising insurance premiums driven by location-specific risks. “These findings show that climate risks are generating tangible financial costs, from higher operating expenses to capital investments in preventive and corrective measures, as well as escalating insurance premiums in vulnerable areas,” say the authors.
See also: More accurate carbon reporting as Singapore Emission Factors Registry expands to over 220 factors
Climate change affecting acquisitions
One-third of S-REIT respondents have more than 80% of their portfolio green-certified, but the S-REIT respondents are no longer only looking at green building certifications or use of renewable energy sources.
See also: Green stocks are beating world’s biggest trades, even gold
Climate resilience now drives acquisition decisions, according to the study, with 91% of respondents ranking “resilience to physical climate risks, such as flooding, extreme heat and typhoons” as their top ESG due diligence criteria when evaluating new properties.
“This marks a fundamental shift toward ESG-focused due diligence that prioritises long-term asset protection over traditional financial metrics alone,” note the authors.
Cheung adds: “Climate-related disruptions are no longer distant possibilities; they are happening now and directly affecting our industry. The growing frequency and intensity of these events highlight the urgent need for asset-level adaptation strategies. In real estate, ESG is not just a compliance requirement, but a strategic opportunity to future-proof portfolios by integrating sustainability into every stage of the asset lifecycle.”
Financial implications
About 70% of S-REITs expect buildings meeting sustainability standards to command a green premium, while those without may face a brown discount.
In addition, 42% have tied ESG performance at the asset level directly to their financing, unlocking access to more favourable sustainability-linked loans (SLLs) and funding.
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“This suggests a growing recognition that sustainability performance directly influences access to capital,” say the authors. “By meeting measurable ESG outcomes such as energy efficiency, renewable energy adoption, or green building certifications, S-REITs can secure preferential financing terms, often through SLLs or green bonds.”
SLLs are structured to enable customers to pay variable interest depending on whether they achieve a set of pre-agreed sustainability performance targets, which are validated by an independent rating or verification agency.
Tenants blamed for resisting
According to the study, although many S-REITs actively promote green leases and fit-out guidelines, tenant buy-in remains uneven. For some occupiers, sustainability measures are perceived as additional costs or operational burdens, slowing joint progress towards net-zero targets.
The most widely adopted tenant engagement strategies are green leases or mandatory green fit-outs (71%) and the provision of ESG guidelines (68%). Other common approaches are individual tenant feedback sessions (65%), ESG-related training or awareness programmes (58%), and the sharing of ESG data and targets between landlords and tenants (35%).
However, while engagement is broad, examples of genuine joint climate action remain limited. In fact, in the survey, “Tenant resistance or low engagement in green initiatives (e.g. green leases)” was ranked among the top three challenges to advancing decarbonisation or sustainability initiatives at the asset level.
Tenant emissions are categorised as an asset owner’s downstream or Scope 3 emissions, which can stand in the way of them achieving their net-zero goals.
For example, some respondents say it is difficult obtaining tenant consumption data in certain asset types. This presents a practical barrier to Scope 3 disclosures and hinders the ability to baseline whole-building performance.
According to the study, 50% of S-REITs have started reporting Scope 3 emissions.
Scope 1 emissions are direct emissions from owned or controlled sources, while Scope 2 emissions are indirect emissions from purchased electricity, heat or steam. Scope 3 emissions, in contrast, cover a broad range of upstream and downstream activities connected to a company’s operations but not directly owned or controlled by it.
For REITs, Scope 3 emissions can often represent the largest share of their total carbon footprint, highlighting impacts beyond the immediate control of property owners, yet remain influenced by their business activities.
The report’s authors write: “Overcoming structural and regulatory constraints will require asset-specific strategies, such as phased retrofits, modular upgrades, or repurposing underutilised spaces, coupled with early engagement with regulators to explore flexibility in zoning or retrofit approvals.”
For the DPU-decarbonisation trade-off, managers can develop multi-year investment roadmaps that explicitly link sustainability upgrades to long-term cost savings, asset value protection and investor returns, add the authors.
“Tenant resistance can be reduced through co-created sustainability targets, green lease incentives and clear demonstration of both operational and reputational benefits. Strong board-level commitment empowers S-REITs to build on a leadership foundation that can align these actions into a coherent, sector-wide decarbonisation pathway,” say the authors.
Infographics: Knight Frank, REITAS
