Green is the new black: how sustainable buildings can support returns
London is a top-five market globally for commercial real estate investment and thus one of the most exposed to evolving developer, investor and occupier demands. As green investing moves up the agenda, the capital needs to respond to this to ensure that it continues to be a global destination for investment as well as talent. The city is already positioning itself, with a large pool of green-rated commercial buildings and a world-leading infrastructure programme; the London Infrastructure Plan 2050.
5 minutes to read
- London is a leading city for infrastructure and green spaces
- The capital’s real estate needs to remain relevant as sustainability rises up the agenda
- Environmental considerations represent both a threat and an opportunity
Not all investors are yet noticing the full extent of demand for green or sustainable investing. However, larger, international institutions are certainly seeing this shift. Globally, assets totalling US$ 120 tn, including commercial real estate, are now managed by financial firms signed up to voluntary climate change disclosures. This is driving some of the growth in green investor demand, especially as there is an expectation that these standards could become mandatory. With a significant amount of London’s office stock now held in international ownership (c.80% in the City), the capital’s real estate needs to remain fit for purpose in this environment.
London is a leader for green infrastructure – but could do more
London is a leading city for infrastructure and green spaces. In 2019, the city became the world’s first National Park City, with approximately eight million trees acting as a carbon sink and 17% of the wider city being covered by public green space. Good public transport helps: there are almost 1.4 billion London Underground journeys per year and the 402km London Underground network is currently being extended. The new Elizabeth line will provide a fast link across London and extensions to the Northern and Bakerloo lines are either underway or in the pipeline.
This infrastructure means that there is a wide pool of commercial real estate that offers sustainable credentials from the perspective of travel to and from the buildings. However, commercial real estate investors are often most interested in the green credentials of the buildings themselves. Indeed, our London Landlord and Investor Survey finds that improving the environmental qualities of buildings is one of the top three London-related challenges for the coming year.
"With 64% of commercial buildings in London completed prior to the year 2000, there is opportunity to enhance value by innovatively greenifying these buildings"
‘Greenifying’ buildings
London already enjoys a stock of over 3,000 BREEAM-rated buildings. However, for investors, being sustainable does not just mean investing in existing green buildings. With 64% of commercial buildings in London completed prior to the year 2000, there is opportunity to enhance value by innovatively greenifying these buildings, particularly if we see an increase in ‘brown’ building discounts, as the stock of green buildings continue to grow.
Occupiers thinking green to win the war for talent
Green rental premiums* are largely driven by tenant demand for sustainable office space and this links directly to the war for talent.
Our London Landlord and Investor Survey finds that the top challenge for tenants in 2020 is the ability to attract and retain the right staff. London as a city helps tenants get part of the way there. In addition to agglomeration benefits, the capital offers hard-to-rival culture, diversity, inclusion and innovation factors, which help to attract and retain the top global talent.
Offering a working environment which matches a wider sustainable ethos is a way for businesses to distinguish themselves to an increasingly environmentally conscious workforce (Image license: Creative Commons)
However, London based companies also compete with each other. Offering a working environment which matches a wider sustainable ethos is a way of distinguishing themselves to an increasingly environmentally conscious workforce. While not all tenants will consider green buildings as a way of winning the war for talent, we do expect this to grow.
ESG legislation driving green requirements
Regulation cannot be ignored as a driver of green investment. Last year, the UK became the first major economy to pass a net zero emissions law mandating that greenhouse gas emissions reach net zero by 2050. These regulations are directly impacting the real estate market, including the London office market, through for example, MEES (Minimum Energy Efficiency Standards).
"Sustainable real estate investment is a way of mitigating the risk of obsolescence as a result of the introduction of such legislation and targets"
The UK government has also just started a consultation process on the prospect of tightening minimum EPC ratings to a “B” (subject to a payback test) by 2030. Sustainable real estate investment is a way of mitigating the risk of obsolescence as a result of the introduction of such legislation and targets.
More indirectly, legislation is also impacting investors such as pension funds and insurers. In a low bond yield environment, these liability matching investors are increasingly looking to real estate. UK pension fund regulations now require ESG considerations to be included in Statements of Investment Principles (SIPs). For insurance firms, the most recent Bank of England stability reporting required insurers to benchmark the impact on their assets, including commercial real estate assets, under different climate change scenarios.
The opportunity for London
London is responding to this increasingly green global mindset. Not only is London’s infrastructure working towards a carbon-neutral target, but the capital’s institutions, from the Bank of England, to the investors themselves, are leading the charge towards carbon-neutral, green investing.
It is important that in the real estate sphere, London’s landlords, developers, advisors and future investors are also primed for this change if London is to remain a leading destination for capital through to 2050 and beyond. For developers this could mean understanding investors’ green requirements, or revisiting construction methods and materials. For occupiers, this might mean understanding how a green workplace can help attract and retain talent.
For investors, this could mean understanding how best to invest in buildings which meet their current and future ESG targets and protect against risk of obsolescence in the face of strengthening legislation. For all stakeholders it means cutting through the noise, asking the right questions and taking advice where necessary to understand what elements of ESG actually achieve their goals in the context of wider carbon-neutral targets.
Green really is the new black.
*Research by M&G on their European portfolio has demonstrated evidence of green rental premiums