The impact of sustainability on value


Executive summary

This report examines trends in the performance of sustainable office buildings in central London, in terms of rental values and leasing velocity. It focuses on space that has a BREEAM rating or EPC certificate and sets out to quantify to what extent demand for sustainable offices is increasing.

The research reveals that sustainable buildings in central London have a rental premium in range of 6% and 11%; and that at both 12 months and 24 months after completion, vacancy was lower in buildings with an Outstanding/Excellent BREEAM rating compared to those that were rated Very Good.

Our analysis shows that demand for sustainable office space is rapidly increasing and this growth has happened over a relatively short time-period. The number of companies signing up to science-based targets, with a central London presence, has doubled since December 2018 and now totals 126 firms. These companies occupy around 12 million sq ft of space in the capital and nearly 4 million sq ft will be subject to a lease event in the next five years.

Pressure on the real estate industry to act is being driven by action from organisations on their own sustainability journeys. We interviewed a number of corporate occupiers which shows that they are becoming more demanding and are ready and waiting for the delivery of net zero carbon buildings in central London to meet their own science-based target commitments.

With more occupiers focusing on environmental targets, the onus to engage with the supply chain to reduce direct emissions will intensify, and this means an increased pressure on real estate and landlords too. Investors are now at a pivotal moment in defining their sustainable investment strategies. Sustainability and climate change are deemed to have the greatest impact on real estate performance according to JLL’s latest investor survey, with two thirds stating that they would be increasing their allocation to more sustainable property.

Occupiers, developers and investors now have a clear opportunity to showcase their sustainability credentials via their real estate footprint, but the research identifies a clear gap between demand and supply of sustainable office space. There are no available net zero carbon buildings today in central London, but this will start to change.

The report concludes that there will be a rental premium for net zero carbon buildings in central London for those that can deliver effectively and fast. Even with a potential increase in construction costs, we estimate that the rental premium and yield compression could take a typical scheme from 15% profit on cost to over 20% profit on cost.

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