Is sustainable real estate investment the future?

The sustainability of real estate assets is an increasing area of interest for landlords, tenants and institutional investors. Commercial buildings generate c. 40% of total greenhouse gas emissions in developed countries. Investors, particularly those with a long term view, are considering how their assets can become more energy efficient in the fight to combat climate change.

The costs associated with building to higher fabric standards or renovating existing assets may be a deterrent. However, the long term cost savings of greener buildings is a compelling argument for sustainable design, construction and management. Research suggests that greener buildings can achieve higher rents and occupancy rates. For example, a major London landlord is committing to net zero carbon across its portfolio and is currently investing large sums to retrofit existing assets to higher fabric standards. Its analysis is that over the long term this is likely to increase value, yields and marketability.

The Climate Change Act 2008, as amended in June 2019, legislates a UK target to bring emissions to ‘net zero’ by 2050 - a 100% reduction.

The transition into a low carbon economy may benefit the commercial real estate sector. Organisations such as the UK Green Building Council believe that energy efficient properties should pay less in council tax and business rates, which will be attractive to tenants. In February 2019, the government also launched an inquiry on the ‘Impact of business rates on business’. This suggested that the government should incentivise the transition to a low carbon economy by ensuring that businesses that invest in green assets, such as energy efficient machinery, pay less in business rates as a result. The consultation further suggests that a revision of the business rates system would greatly help to achieve this aim.

As policy is introduced to support the net zero target, the transition into a low carbon economy will continue to be an important consideration for landlords as they assess the sustainability of their assets.