Boris Johnson has again reiterated his government’s commitment to renewable energy and to delivering a carbon neutral economy by 2050. He declared at the recent Conservative Party Conference that by 2035 the UK will be powered entirely by electricity from clean energy sources and one can expect further accelerated and challenging targets to be announced at next month’s COP 26 summit in Glasgow.
The seeds for the latest climate policy goals were sown by David Cameron back in 2010 with the “Vote blue, go green” slogan but it was Theresa May who in 2019 committed the UK to the goal of Net Zero by 2050 which the Johnson Government is now striving and struggling to deliver.
The property industry has long been cognisant of environmental issues and continues to innovate and develop green initiatives on new developments as well as refurbishments with the institutional investors and largest property companies at the vanguard of implementing Environmental, Social and Governance (ESG) principals.
Extensive research and consideration of how to improve ESG aspects of the built environment has been undertaken by many, but notably by BREEAM and GRESB, who each now provide certification and a means of measuring different elements of ESG performance.
Recent research by Knight Frank suggests commercial tenants are now prepared to pay up to 13% more in rent for buildings with strong, benchmarked green credentials and that investors attach a 10.5% premium on Capital Value to buildings with a BREEM “Excellent” rating.
The RICS is continually developing its advice to valuers on which aspects of ESG should be incorporated into the valuation of commercial assets and this will continue to become an increasingly important aspect of assessing Market Value and future financial performance. Lenders are now offering green loans and evidence of a green building premium and brown building discount is becoming increasingly apparent and will continue to diverge. Impact investing is driving institutional grade property but it will take time to trickle down to the secondary property market but will certainly have a severe and negative impact on the tertiary market.
The challenge for private property owners is to quickly and effectively review existing portfolios to establish with confidence which assets can economically be brought up to standard and stay ahead of increasingly stringent bechmarks and those which need to be sold in a timely manner! ESG considerations must also now be at the centre of each and every acquisition decision irrespective of value.
The ESG warning light is constantly illuminated in the boardrooms of savvy investors and this issue will present the biggest challenge (and opportunity) to private commercial investors over the next decade. A great deal of innovative thought will be needed to comply with the existing targets let alone any new ones coming out of COP 26 next month.
Chris Horler
CEO, TREIO