Major Review of London Offices Confirms 'Greenest' Sell and Rent for Best Prices
Buildings with better sustainability credentials are clearly securing higher capital values and rents, according to a five-year study of London offices by JLL.
JLL’s Sustainability and Value – London Offices Investment report analysed almost 600 transactions in central London in a five-year period.
The report conclusively shows a market attaching higher prices to more sustainable assets, in anticipation of higher returns and lower risks, JLL says. The data also shows that this is resulting in improvements being made to the environmental performance of London’s office stock.
JLL reviewed what it terms 592 "pure" office investment deals that took place in Central London between January 2017 and December 2021. Development, refurbishment and portfolio deals were excluded. Deals were matched for age, size and location, and both BREEAM and energy performance certificate status from the most efficient, A, to G. It used a "hedonic pricing" model, which isolates different factors that affect the price. This means the impact of environmental accreditation can be isolated from other effects, such as building age.
JLL’s results show that both BREEAM and EPC certification produce a clear premium for most measures. Capital values were on average 20.6% higher as a result of BREEAM certification, with a single-step improvement in EPC ratings producing a corresponding premium of 3.7%. Similarly, the average increase in rents associated with BREEAM certificates and a step improvement in EPC were 11.6% and 4.2% respectively.
According to JLL sustainable buildings are likely to drive greater interest from occupiers on account of the reduced operating and energy costs. As more businesses sign up to net zero targets, the demand for sustainable buildings will increase, it adds, with BREEAM buildings likely to need less investment to reach required targets.
For investors, JLL says sustainable buildings should be considered less risky. Government regulation will continue to tighten on non-sustainable buildings and the yields secured when selling on buildings for different grades of sustainable offices will also continue to widen, increasing the potential returns, JLL reports.
Jon Neale, head of UK research, said in a statement: “Considering the Central London office investment market is among the largest, most diverse, most liquid and most internationalised in the world, it offers a perfect laboratory in which to study an evident premium for ‘green’ real estate. This research demonstrates that there are now clear financial benefits associated with environmental certification.
“With standards around buildings tightening, including stricter provisions in the Minimum Energy Efficiency Standards regulations this year, we have seen some funds introducing their own environmental targets to move ahead of regulation. It therefore pays to be on the front foot and invest in the green building sector now, rather than run the risk of facing ever-tighter regulation on non-compliant stock in the future."
Emma Hoskyn, UK head of sustainability at JLL, added that the analysis clearly shows there is a financial, as well as environmental and social, benefit in refurbishing buildings so that they meet more rigorous criteria.
Julian Sandbach, head of Central London office markets at JLL, said the research endorses what the company has been witnessing in occupational and investment markets within Central London for some time, "namely buildings with strong sustainability credentials will lease for premium rents and sell for premium yields".
“The strong trend of pre-letting, that has been such a feature of the London leasing market over the past few years, demonstrates that occupiers have adopted a meaningful shift in the types of buildings they want to operate their businesses from," Sandbach added.
