Green buildings in the Ile-de-France office market are attracting growing interest from core investors. Lydia Brissy and Marie-Josée Lopes report
With 5.3m sqm of high environment quality (HQE) certified office space expected on the Ile-de-France (IDF) market by 2015, the French region presents new investment opportunities for buyers seeking secure, future-proof assets.
In 2013, we believe the volume of green office investment should range between €1.5bn and €1.7bn. Based on the significant HQE office development expected in the coming years, particularly in 2014, we predict the annual green investment volume in the Paris region could exceed €5bn by 2015. Some 79% of investment in new office stock in Ile-de-France in 2012 was for HQE certified stock, totalling €1.4bn. Of this, 54% was invested by domestic buyers, nearly 24% by German funds and 13% by US investors.
Overall, the volume of forward-funding acquisitions in IDF remains limited due to ongoing economic uncertainties and the difficulty in obtaining debt from cautious banks. However, there is an increasing investor perception that ‘green’ properties involve less risk when forward funding deals. Indeed, HQE investments accounted for 73% of all forward-funded acquisitions recorded in IDF in 2012. This represents a significant rise in the share of forward funding for HQE investments compared with 2011 (54%) and 2010 (33%), reflecting a growing investor confidence and demand for sustainable office product in this region.
While there is still no indication at present of the HQE label affecting a property’s rental level or on the potential growth in capital values that can be achieved by a decline in operating costs, HQE offices are perceived as attractive, secure and future-proof by investors. This is shown by the fact that 64% of the green office investments recorded last year were acquired by core funds.
A landmark green office investment includes the forward funded acquisition by Union Investment of the City’zen project based in Bois-Colombe for €240m signed in July 2012.
The scheme, which includes two office buildings (40,000sqm and 10,000sqm), will be delivered during the second half of 2013 and will also be BREEAM and LEED certified.
The two buildings are already pre-let to Coface and GRT Gaz on fixed nine-year lease.
In the occupier market, corporate responsibility policies are encouraging many tenants to choose certified green properties and HQE operating certified offices, which can save up to 30% of energy costs, according to Certivea. This is particularly important in a cost-cutting economic context with volatile and unpredictable energy prices.
As a consequence of more occupiers wanting green buildings, over 50% of the HQE certified office in IDF is leased prior to completion thus reducing the risk of vacancy. These offices generally attract well-known companies with good covenants.
Tenants that have opted to take HQE-certified space in recent months include:
• Thales in April last year pre-let the Velizy Campus, a 49,000sqm office building located in Velizy, on a nine-year fixed lease. The project is due for completion in mid-2014;
• Rexel which moved in January this year into the Vision 17 office building located in the 17th district of Paris. The nine-year fixed lease was signed in April last year at €400/sqm/year;
• Lafarge in February 2013 signed a lease in le Panoramic located in Clamart.
Furthermore, in the French office market traditional lease lengths are three, six and nine years (nine-year leases have break options every three years) and we have observed that HQE office users are more often prepared to commit to longer leases than occupiers in non-certified buildings. For example, in 2012, nine-year fixed leases represented 47% of lettings in HQE buildings compared with 17% in the overall French office market.
There are currently 369 HQE office buildings across France, representing approximately 3.7m sqm, 80% of which is concentrated in IDF. Thus, nearly 8% of the IDF office is now certified. The majority of green office buildings exceed 5,000sqm and are located in the suburbs of Paris in Plaine Saint Denis, La Defense or in the Western Crescent, where land is available to develop large HQE schemes.
Central Paris, notably the CBD, has a lower concentration of green office development because the HQE Refurbishment certification – which aims to bring existing buildings in line with HQE standards – was initiated later than the HQE certification for new developments and involves higher costs.
However, we believe the volume of certified stock in Paris will gradually increase, particularly for quality CBD office buildings and the HQE Refurbishment certification will allow the old Haussmann buildings to adopt a green image.
With an additional 5.3m sqm of registered office space due to come onto the market over the next three years, the share of certified office stock in IDF will reach 17% by 2015. The majority of offices currently being certified is concentrated in the Hauts-de-Seine, Paris and the Seine-Saint-Denis areas of Ile-de-France as well as La Defense, which is becoming the major green hub of the region.
Most of the multi-certified schemes, where assets have HQE as well as LEED or BREEAM certifications, are already concentrated in La Defense with a further 550,000sqm of HQE offices due to be delivered by 2015.
Interest from investors in French green offices will continue to increase exponentially as a result of the 2020 deadline of the EU Climate and Energy Package signed in 2008, requiring all commercial buildings to reach a minimum level of sustainability. Meanwhile, tenants will continue to prioritise green offices to reduce real estate operating costs.
With 5.3m sqm of HQE office space expected on the IDF market by 2015, the France represents opportunities for investors looking for future-proof assets. We believe green investments will also be boosted by new financing models, including clean energy bonds and green mortgages. The annual green investment volume in Paris could exceed €5bn by 2015.
Lydia Brissy, European research director at Savills, and Marie-Josée Lopes, head of research at Savills France