Sustainability in property investment: How is the property sector responding to the sustainability challenge?

We live in a time of unprecedented change – both within wider society and the in real estate sector – and the importance of responding to the challenge of climate change and other social and environmental constraints is coming to the fore. As witnessed by the recent engagement by senior politicians with climate protestors, and the ambitious work of the UK’s Committee on Climate Change, the target of net zero is starting to feel within reach. This is also being recognised by investors and developers, who acknowledge the twin roles that stakeholder demand and regulation have in changing the broader property landscape.

At Ramboll, we strive to be at the forefront of emerging developments in sustainability. Ramboll’s Sustainable Buildings Market Study 2019 (the study), launched in June 2019 is a multi-market analysis of trends and perceptions of sustainability in the real estate and construction sector. The study identifies a number of key themes related to how investors are engaging with sustainability in the built environment.

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Sustainability as a value proposition

Maximising asset value and income is of uppermost importance in investor decisions. We see from the study, and through previous work, that capital values, rental income and occupancy rates are all positively correlated with sustainable buildings. Sustainable buildings are recognised as being of higher quality and are thought of as healthier and more comfortable; all conclusions supported by recently published studies of accredited buildings. Sustainability is now more than simply energy performance. We are seeing the emergence of climate resilience, flexible use of space, community accessibility and materials use as key issues that investors are aware of and are actively pursuing.

Moving towards socially and environmentally responsible investment

The study shows how investors are increasingly embedding environmental, social and governance (ESG) criteria into their investment and asset management decisions, with health and well-being widely considered as standard, closely followed by materials use and biodiversity. This is driven by three main factors: the desire to lower risk, demand from tenants and the increasing focus from investors and lenders on demonstrating sustainability performance. An increasing number of companies are also embedding and monitoring specific sustainability KPIs within their strategies.

Quantifying the benefits of sustainable buildings

Our study reveals a broad lack of confidence that sustainability rated buildings are cost-effective, both in terms of construction costs and anticipated savings in the operational phase. While the body of evidence supporting this is mounting, there is a need for better quantification of the cost and performance in sustainable buildings. Operational performance is key in this and we are seeing a move by investors towards more evidence-based sustainability metrics in their investment and asset management decisions. Operational accreditations such as BREEAM In-Use and WELL take assets beyond the design stage and give investors and occupiers confidence that they are getting the best out of their assets.

Future trends

Looking to the future, the study and our experience in advising clients on their most pressing sustainability challenges reveals a number of developing trends in the market:

1. We are seeing much more attention focused on healthy workplaces and homes. Clients are increasingly looking to accredited standards to demonstrate and deliver better buildings that promote well-being.
2. The drive to zero carbon will lead to a closer focus on circular economy principles – bringing resource efficiency into play at all stages of the property lifecycle and reducing embodied carbon.
3. Investors and occupiers want to see their assets performing at or above design standards. Increasingly we see clients looking to work their investments harder in sustainability terms – increasing lifespan and resilience, reducing resource take and providing better accommodation
4. With the UK’s ageing building stock, refurbishment and re-purposing of existing assets provides the greatest potential for sustainability gains. Investors are re-evaluating their portfolios, looking to adapt to changes in investment and occupier demands, future proofing valuable assets and evaluating the options for poor performing asset classes. Sustainable buildings will increasingly mean smarter use of sites to provide more sustainable and healthy communities.