The definition of prime in European office markets currently lack any explicit reference to sustainability. Lesley Atkinson-Baldwyn, Sarah Sayce and Judy Smith ask: Will green become a prime colour?
This article presents new research by the authors exploring the use of the term ‘prime’ as applied to offices across three European countries. In particular, it considers the extent to which the concept of a ‘sustainable’ or ‘green’ building (the terms are used interchangeably here, although it is appreciated that there are differences) has become important within the notion of a prime property. The research revealed that interpretation and use of the term prime varies widely, but (perhaps surprising given its current prominence in real estate matters) one factor almost universally absent in presented definitions was any explicit mention of sustainability.
The research was based on an online survey of real estate professionals in France, Germany and the UK. Heterogeneity of usage and understanding of the term varied both within and across countries, but a common feature was the lack of specific reference to sustainability. This perspective is reinforced by European literature, which similarly lacks reference within definitions of prime. However, a wealth of literature and empirical research now supports the contention that sustainability is a matter critical to the policies and strategic governance of many large corporate occupiers; therefore, it can no longer be viewed as the latest chimera within the real estate industry.
Having established a lack of explicit mention of sustainability characteristics within the definitions, further analysis was undertaken to ascertain which were the top factors essential to a definition of prime.
Participants were asked to select five from a list of 27 criteria distilled from literature on prime offices and definitions of prime advocated by industry bodies. These criteria were configured to form six categories: aesthetic; economic; facilities; finish and systems (relatively quick fix); specification (unalterable without great expense); and sustainability.
It was found that economic and aesthetic factors most clearly define a prime office. The criteria of sustainable, green labels and green leases did not register in the top five. Yet these elements are likely to have an increasing economic impact, particularly on office occupiers, through cost savings. However, if demand for such buildings enables landlords to achieve differential rental levels, this will effectively transfer the economic benefits from the occupier to the investor.
Indeed, there is an increasing volume of literature, mainly focused on the US, which has argued that there now exists a price differential between energy efficient buildings and other stock. This is, as yet, less clearly substantiated among European markets, where the incidence of environmental rating of buildings is less widespread and data is less available. Even where no value differential is supported by market data, there are reports that green buildings experience higher absorption rates through their relative attractiveness to occupiers resulting in quicker letting.
It is also considered that buildings that are ‘future proofed’ by the presence of sustainability features, such as low carbon management and water re-cycling systems, are at lower risk of obsolescence and value depreciation. They may also profit from lower vacancy rates through a reduction in occupier turnover, and savings on operation and maintenance, although the latter will be affected by the lease terms.
A further economic benefit could be the greater likelihood of attracting occupiers with developed corporate social responsibility (CSR) policies, which tend to be larger, with more attractive covenants. Indeed, this has been the experience of both Australia and the UK where public sector occupiers in particular have insisted on taking space that matches environmental and social criteria, as represented by rating systems such as NABERS and BREEAM.
In respect of the occupiers’ position, the link between ‘green buildings’ and related benefits, such as energy savings, lower rates of absenteeism and increased employee productivity, have been well documented. Occupying a green building also has an impact on image and perception and it is likely that such buildings will be seen as essential to fulfilling CSR policies alongside the triple bottom line.
Within the wider capital markets, sustainability and corporate responsibility is big business. To date, the majority of green construction has been initiated, and continues to be owned, by government and corporate owner-occupiers. However, fund advisers are increasingly aware of the issue and are now encouraging the integration of responsible or sustainability criteria within building investment strategies. Based on a 2010 survey of funds under management, a European Social Investment Forum report found that European socially responsible investment funds were estimated to be worth up to €5trn at the end of 2009, an increase from €2.7trn in 2007.
To further illustrate this growing interest in sustainability, European property players such as PRUPIM, Aviva Investors, Hermes Real Estate, F&C REIT Asset Management, Unibail-Rodamco, Hammerson, British Land and Land Securities have all developed strong integral policies. Furthermore, a range of ‘green funds’ are being launched, such as the UK’s Threadneedle Low Carbon Workplace Trust, and Germany’s IVG Premium Green Fund, while Caisse des Dépôts in France has invested $140m (€97.5m) in office developments aimed at outperforming the usual green certifications. Current estimates of green property funds in the US and UK place them at a combined value of £2.2b (€2.49bn).
With the rise of these green funds, many of which have been designed to capitalise on the tightening of environmental restrictions, will it be long before multi-national investors and global occupiers expectations’ regarding sustainability affect a definition of a prime building? It is also likely that institutional investors will actively seek property funds that demonstrate performance and add value through the pursuit of sustainability policies.
The biggest move to green buildings is likely to occur in the properties that: confer the greatest benefits to investors and occupiers relative to conventional buildings; align their interests in the property; and offer tangible benefits that matter to occupiers. Arguably, prime offices will experience the most market penetration by green product.
In the future, given the relationship between the quality of an office building and its economic value, the role of sustainability in an investment might prove increasingly important in giving resilience to future financial returns. For this reason the authors argue that it no longer makes sense to define buildings as prime without consideration of their green credentials. Therefore, it appears that green should be considered the new prime colour.
L to R: Sarah Sayce is a professor, Judy Smith is academic director and Lesley Atkinson-Baldwyn is a PhD student at Kingston University