Green buildings are cheaper to operate, more attractive to tenants, and they are future proofed, protecting the landlord against additional refurbishment spending as building standards get tougher. And, they are only slightly more expensive to build.
So, if the financial markets are efficient, green commercial buildings should be worth more. We looked at this back in January of this year, when a study by global real estate consultant JLL, of London property transactions, showed that commercial buildings with higher environmental status achieved higher rents.
Link to blog 👇🏾
One obvious push back is that you might expert real estate consultants to come to that conclusion. So, we were pleased to see that just last week Joachim Klement, in his excellent substack blog (Klement on Investing) highlighted an academic study that looked at similar data, and came to similar conclusions.
The study by Julian Zehner, of University College London, looked at 2,537 property sales and 2,907 rental transactions, between 2010 and 2021. The headline result - anything between a 8.3% and 26% premium for green buildings (as measured by the BREEAM certification). So far, so good.
But, the new piece of information was that while higher BREEAM certification standards were rewarded with higher rental premia and higher sales values, there was hardly any difference between the highest five star certification, and the second highest four star certification.
As Joachim comments in his blog, it seems that there is a cut off level of environmental investment, above which the financial return is limited or even negative. The good news is that the cut off is at 4 stars, so it seems that tenants are not just looking for the low hanging fruit.
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