Article | Intelligent Investment

Does it matter if we can’t prove there’s additional value in green building features?

August 12, 2022 5 Minute Read

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It’s become popular in real estate research to try to identify the percentage increase in value that buildings with ‘green’ features enjoy.

Typically, these studies look at the increase in either rental or capital value arising from a building having a ‘green certification’ like BREEAM or LEED, compared with those that don’t.

Our new 39-page research report on this topic (available to clients now) finds that there is indeed likely to be a modest value uplift arising from the presence of green building features. The numbers we put on this uplift are based on the dozens of existing quantitative studies, and on new occupier attitude survey data.

A significant minority of large UK office occupiers, and the majority of large European logistics operators, say they are willing to pay more for greener real estate. And CBRE agents are now regularly reporting leasing and investment transactions in which better prices are being achieved.

But our research also indicates some problems:

  • The evidence is very patchy. Studies of US and UK office and residential markets dominate – which is fine if you are investing in those markets, but not otherwise. CBRE has started filling this gap for key European office and logistics markets, but more research is needed
  • The margin of error is significant. Findings can show anything from negative returns for green building features through to double-digit premiums
  • The evidence is likely to go out of date quite quickly. As the supply of green buildings grows, measured premiums for any given green feature seem likely to fall
  • The focus on certifications risks being misleading because certifications are bundles of a whole range of environmental outcomes. Admittedly there’s not usually enough published data to base research on anything else. But care is needed, as it could be only one feature covered by the certification scheme that is driving the premium
  • Similarly, there are methodological problems in establishing that a building’s green features are in fact driving the increase in value – and not (for example) its otherwise generally high specification

So research can only be a general guide to value uplift arising from the presence of green building features – so much so, that our research also explored whether alternative analysis would be more fruitful.

Trying to identify the likely discount arising from not having a green feature may be analytically easier than attempting find the premium from having it. Decision makers could model scenarios in which rents and prices start to be chipped away for real estate which doesn’t have green building features which are becoming either desirable (to the tenant or customer) or indeed downright essential (because of regulation).

For example, CBRE Investment Management colleagues have shown that buildings suffering from regulatory obsolescence (with EPC F or G ratings) do now seem to be suffering a discount. By contrast we doubt that there is yet any discount for not having top-of-the-range green features in the UK market (let alone ‘net zero’). This is because consumer pressure is not strong enough, and there is no specific regulatory requirement either.

However, such a discount might appear in the future. Even if consumer (occupier) demand for ever-greener buildings is only weakly articulated for now, attitudes can change. And the Government’s demands could become very firm indeed, leading to potentially big discounts for property not meeting those demands.

Indeed, there is some evidence that the risk of discounts in the future (even if they cannot be quantified now) is potentially the biggest single driver of UK real estate investors’ behaviour.

Investors understand the need to protect the value of real assets against the relentless march of both regulation and consumer demand for greener solutions, and are investing accordingly. Some are also driven by self-imposed targets, or see an opportunity to attract green finance.

These wider motivations seem likely to cause as much green investment as the potential upside of a modest and uncertain rental or capital value premium.

Get in touch if you’d like to see our report and discuss our findings.

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