The future of green building ratings

Green rating tools are an established way to assess a building’s sustainability. But, asks Philip Hirst, what is their true value, and how can investors use them more effectively? 

At a time when pledges to deliver a low-carbon economy are being made by governments and businesses the world over, the real estate sector – being responsible for 40% of total global carbon emissions – has a huge role to play.

One of the most established ways those in the industry choose to demonstrate a building’s sustainability and commitment to more sustainable outcomes, including lower carbon emissions, is via a green-building rating. Since the establishment of the BREEAM series of ratings in the 1990s, hundreds of these green-building rating systems have evolved across the world. The current estimate is that more than 600 different systems exist, with the US Green Building Council’s LEED system having the largest global coverage.

A building does not have to be certified under a green-building rating to be sustainable. So, as a result, the reasons for developers, tenants, and owners to pursue a green rating – and for investors to use them in their decision making – are varied.

Ratings firstly help to give credibility to a building’s sustainability performance by providing third-party verification. Green-building ratings are therefore often required by governments for their own estates as a means to ensure a certain level of quality is achieved, or by tenants when commissioning or deciding to rent a building. They act as a communication and marketing tool to convey a building’s sustainability level to potential purchasers, tenants and to the wider market.

With increasing regulations across the globe focusing on the sustainability of buildings, voluntary and market-led green-building ratings can also provide a tool to not just ensure compliance with minimum legal requirements, but to exceed them.

Green ratings also provide a clear framework to ensure sustainability is considered throughout a project’s lifecycle, and not forgotten about in key decision-making stages or lost in a complex design process. In this way, they can act as an effective project management tool and help to reduce design-related failures and associated costs.

From an investor’s perspective, many studies have tried to establish if a more sustainable building is a more valuable building, and green-building ratings provide a well-understood indicator of a building’s sustainability against which its value can be analysed. Evidence from studies carried out over the past 10 years suggests that green buildings tend to have higher asset values than conventional buildings. This ‘asset value’ equates to higher rental values, lower operating costs, higher occupancy rates and lower yields.

The World Green Building Council undertook the largest review of studies into the link between green-building ratings and value, and found that having a green rating could decrease a building’s sale price by as much as 15% or increase it by up to 30% compared with a conventional building. Similar ranges of -7.5% to 25% for rental values and 0-23% for occupancy rates were also found, although, on average, buildings with green ratings were found to be more valuable and easier to lease. The study also found that, overall, green buildings did not cost more than a ‘non-green’ building to build and that the price differential was largely based on perception rather than data.

Other findings from these studies suggest that higher levels of certification tend to result in higher sales and rental values, although this is less certain and the actual amount of increase varies between countries and studies. Sales-value increases were also found to begin at certain certification levels, meaning that merely having a certified building was not enough – the level of certification had to, in some way, be above the market norm. But at the same time, extremely high levels of certification did not necessarily translate into extreme variations in sales or rental values. Indeed, one of the studies found that for each additional green building in a particular area, the rental and sale premium for a certified building in the same area decreased. This is also related to a key finding from the study that in markets where green is more mainstream, there are indications of emerging ‘brown discounts’, where buildings that are not green might rent or sell for less.

Using green ratings more effectively

For investors, green-building ratings can be useful in deciding whether to buy or sell a building, or to invest in a project, in terms of its physical design and its value. But how can investors ensure they maximise the value they derive from these ratings?

Firstly, they should ensure that the sustainability parameters measured by a rating match those that are important to them. For example, different ratings put different emphasis on carbon reduction in terms of the points that are available and the levels of reduction required. To give some context, at COP21 in Paris, leading organisations in the property sector, including JLL, pledged to play their part in reaching the 2˚C climate goal by moving towards net-zero new buildings by 2020, and net-zero refurbished buildings by 2030. Investors should therefore consider if particular green-building ratings and scores go far enough in their ambitions on key sustainability parameters.

“Many studies have tried to establish if a more sustainable building is a more valuable building, and green building ratings provide a well-understood indicator of a building’s sustainability against which its value can be analysed”

Secondly, investors should consider market demand for ratings. As mentioned, there are over 600 green ratings globally and they are often rooted in their country or region of creation. For example, analysis conducted by JLL on green-building ratings in the Middle East found that there were 603 LEED registered projects in Dubai, but no BREEAM registered buildings. In addition, the Government of Dubai also launched its own Al Sa’fat Green Building Tool in 2016 – yet another rating for buildings in this key real estate market.

Another consideration for investors is the extent to which the ratings are audited. Most ratings tools are not audited and are predictive of performance. A gap is opening up between buildings that have been designed to high levels of performance under green rating systems and their real in-use, operational performance. It is therefore important for investors looking to make a medium or long-term investment to consider how performance will be achieved in reality. This could be through using operational green ratings, such as BREEAM In-Use, but could equally be about assessing a building or developer’s handover procedures, operating practices or post-occupancy testing regime.

Despite their challenges, the intelligent use of green-building ratings has become widespread in the real estate industry and by real estate investors. But what does the future hold for green ratings as their numbers multiply and as the real estate industry, governments and investors become more adept at achieving sustainable outcomes?

A key trend on the minds of investors is the rise of health and wellbeing in buildings. The WELL certification has quickly become a well-understood standard in this area. Indeed, it is a rigorous standard that is accompanied by regular checks to maintain accreditation and it therefore addresses some of the limitations of traditional green rating certifications that are based on design assessments only. However, as with green certifications, a building does not have to have a rating to be healthy. Therefore, how the WELL standard or other health and wellbeing focused ratings are used and adopted by the real estate sector and investors moving forward remains to be seen.

A final consideration is community ratings. Green-building ratings are widely used and hundreds of thousands of buildings around the world have been certified using them. By contrast, use of community ratings is a new phenomenon that is emerging as an option for the largest and highest-profile new developments, which incorporates not just buildings but public spaces such as squares, parks and streets. For example, the Beijing Olympic Village (LEED for Neighbourhood Development) and Stratford Olympic City, London (BREEAM Communities) both obtained community ratings. Although a building or project might not always warrant a community rating, greater consideration of sustainability issues beyond the red line of a building – and particularly social and economic issues – is something that green-building ratings and their users will have to adapt to.

So for green ratings to replicate the growth they have seen since the 1990s and to remain of value, they will need to adapt to new sustainability challenges including net-zero buildings, health and wellbeing and socio-economic issues. However, ultimately green ratings do solve some of the fundamental problems for all stakeholders in a building. They provide a system to manage the complexity of sustainability; they help a building to comply with legislation; they measure value; and they provide objective evidence of performance.

The type, number and focus of ratings will evolve over time, but by addressing those fundamental issues green-building ratings are likely to remain a key tool for the real estate industry and its investors in the future.

Philip Hirst is director of upstream sustainability services at JLL