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The impact of sustainability on value


Conclusion


Our analysis of the existing environmental ratings shows that overall, sustainable buildings perform better if you consider the combination of void rates, leasing velocity and achieved rents. This is the base case to start to formulate an understanding of how the next generation of sustainable offices may perform.


It is worth noting that a BREEAM rating is not the sole factor for low vacancy or increased rents, more so a contributing factor among other market fundamentals. Tenants consider a range of factors when seeking new office space, some of which are location, access to transport and amenities, cost, and floor plate size. Furthermore, local supply and demand factors affect leasing outcomes, particularly between markets. However, given the increasing prevalence of corporate mandates toward sustainability, BREEAM is becoming a more prominent deciding factor and for some tenants, a prerequisite for their new location.


As more occupiers commit to environmental targets, the pressure to engage with the supply chain to reduce direct emissions will intensify which means pressure on real estate and landlords. A move to occupy an environmentally efficient or even net zero carbon building can help support this message to company stakeholders and employees.


The urgency to build what occupiers are increasingly demanding will only speed up. The first developers to deliver more sustainable buildings should see heightened demand for their space and higher building performance.


But, for efforts from the landlord to construct more sustainable offices and from tenants who want to occupy sustainable building to be successful, there has to be greater collaboration and partnership between both sides throughout the life-cycle of the building. Landlords need


to be explicit with occupiers as to how the building is designed to be operated and reassess performance regularly, while occupiers need to understand their role in operating the office space in an energy efficient and sustainable way.


The market is also moving towards a more operational rating for buildings, the link to value will become much clearer. Users of space will be more able to make a distinction of how their asset is performing operationally, and more importantly how it compares to other spaces.


The stimulus for a developer to invest in a higher rated building is to increase value and to promote their brand. It is only a matter of time before building regulations become tougher, to drive a reduction in energy consumption and carbon emissions.


As sustainability performance becomes clearer and more defined, it is likely that premiums will disappear and that those buildings that don’t comply will underperform. Buildings that are not designed to be net zero carbon will require costly retrofits in the future, which are likely to result in the displacement of tenants and lost rent.


JLL expect that net zero carbon office buildings in central London will drive an enhance premium value for the next 5-10 years. Even with a potential increase in construction costs, we estimate that the rental premium and yield compression would result in an overall increase in returns. An example we have looked at which assumes a 5% increase in build costs, shows that even an increase of just 5% on the rent could increase scheme profit on cost by 2.9%. If we then factor in a 10bps yield shift, this could increase profit on cost by 5.7% taking a typical scheme from 15% profit on cost to over 20% profit on cost.


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