London’s landlords milk demand for green offices

London landlords are cashing in on the green revolution as businesses try to clean up their acts.

Offices with the highest sustainability ratings are commanding rent premiums of more than 12%, according to a report by broker Knight Frank. The study, which analysed the effect of eco-certificates on rents in London over the past decade, found that companies are paying large premiums for workplaces that help them meet environmental, social and governance (ESG) goals. 

Banks and asset managers across the city are among firms that have made a flurry of promises to cut emissions to net zero. Yet, with about 40% of global carbon emissions coming from real estate, according to the World Green Building Council, coupled with a dearth of suitable space, pressure is increasing on rents and threatening to create a two-tier market. 

“As ESG continues to rise quickly up the agenda for both occupiers and investors,” according to Kate Horton, partner in London Capital Markets at Knight Frank, “we expect to start seeing a ‘green value premium’ for assets strongly aligned with ESG characteristics.” 

Office buildings that achieved a BREEAM (a method of assessing, rating, and certifying the sustainability of buildings) sustainability rating of “outstanding” resulted in as much as 12.3% premium in rents, while those rated “excellent” added 4.7%, according to the study. The ratings looked at areas including energy use, land use, transport and waste management.

For properties that do not carry the coveted credentials, the report offers an ominous warning to investors. 

“We see a clear risk that ‘non-compliant’ buildings will lose value fast as they near obsolescence and eventually become ‘stranded’, Horton said.

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