16
The impact of sustainability on value
Overview on costs
Delivering a more sustainable building will, in most cases, cost more to build than a less sustainable office. However, if this results in higher demand from occupiers in the guise of higher achieved rents, lower void rates and savings in operational costs then this should mitigate the initial higher capital costs.
Estimates for additional capital expenditure vary, and are dependent upon building type, design and efficiency of delivery, but have been estimated to be in the order of 5-10% depending upon the level of environmental credentials of the space.
However costs are reducing as technology and construction techniques evolve and, as more sustainable buildings become cheaper to deliver, we may actually see a reduction in capital costs as new construction methods are adopted. Cross-laminated timber (CLT) buildings, for example, are quicker to deliver - but this is not generally being passed on in terms of costs savings. Suppliers are still pricing in risk, but as it becomes more mainstream we expect costs to be reduced.
Increase in capital costs for different building types and certification levels
Rating
Very Good Excellent
Outstanding Source: BRE/Sweett Group 2016
Office 0.2% 0.8% 9.8%
But it’s not just about the cost to physically build an office that should be considered, there is increasing evidence of more preferential interest rates being offered to finance sustainable buildings. Derwent agreed a revolving credit facility, which included a green tranche to fund activities that meet their sustainability objectives, including the development of commercial space that receive a minimum green building certification. GPE recently announced a revolving credit facility, which incorporates three ESG linked KPIs and the headline margin will be increased/decreased by 2.5 basis points depending upon performance.
Despite the uplift in capital expenditure, the associated rental premiums, reduction in yield and lower interest expenses should result in a more positive cash flow and an overall increase in returns for greener buildings.
Absolutely we are spending more to deliver a more sustainable building, but we expect, and in fact we are seeing, occupiers pay more to lease our greener buildings. We have made the commitment to sustainability and we will not compromise on pricing.
Central London developer
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