European office buildings in need of sustainability upgrades are being targeted by real estate investors, a new report by Knight Frank finds.
The report, based on the global real estate adviser’s ESG Property Investor Survey, revealed that 58% of respondents are actively seeking to acquire commercial buildings that perform poorly on environmental, social, and governance (ESG) metrics, with a plan to improve and upgrade them to meet future environmental standards.
The survey which polled 45 investors with nearly £300bn (€349.5bn) in managed assets, showed that value-add transactions in London accounted for just over half (52%) or £2bn of the total volume of office investments during the first half of 2023.
“The share of value-add transactions has been rising since the end of the pandemic despite the higher costs of development,” the Knight Frank report said.
In the first half of the year, £2.5bn of assets, representing 13.4% of total real estate investment volumes, were purchased in the UK for the purpose of renovation or redevelopment. For the offices sector, the figure was 24% or £1.2bn.
In the UK, Minimum Energy Efficiency Standards for non-residential buildings required a minimum Energy Performance Certificate (EPC) rating of E to be lettable from 1 April 2023, with the government planning to increase this to a minimum of C by 2027 and B by 2030.
Across the EU there are similar regulations coming into force, with the European Performance of Buildings Directive setting staggered targets, including a minimum requirement of EPC D for commercial buildings by 2030 and for all buildings to be net zero emissions by 2050.
According to the survey, more than 50% of firms targeting EPCs as a key metric have a minimum B requirement for their portfolios, while 47% require BREEAM Excellent or Outstanding ratings.
The survey showed that just 22% of owners are looking to divest poor-performing buildings, with 76% of the investors surveyed planning to repurpose or improve their existing buildings.
“However, the number of firms looking to divest assets that perform poorly on environmental metrics rises to 40% among core investors,” the report said.
Flora Harley, the head of ESG research at Knight Frank, said: “Investors increasingly recognise the potential to create value by bringing older office assets into line with future regulatory requirements, such as EPC ratings and European Performance of Buildings Directive, but also to meet occupiers’ own ESG commitments and net zero objectives.
“A higher interest rate environment and lower valuations are making under-performing assets more attractive to core-plus and value-add investors, while the ‘green premium’ for the best-performing assets continues to rise as demand far outstrips supply, led by firms which are targeting net zero portfolios by 2030.
“The influence of social value on real estate investment decisions is undeniably increasing, applying pressure on investors and asset owners to demonstrate tangible progress in alignment with social goals.”
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