Of the all the major real estate sectors, UK commercial property should be, in theory, the easiest to ‘green’. Historically held by institutional landlords who have access to the funds and firepower to implement large-scale change, and with pressure rising from their stakeholders to improve their ESG performance, commercial property – unlike the residential sector – has to ‘only’ implement change across tens of thousands of different assets, instead of tens of millions.

Not only this, but there are in-built structural advantages in the commercial property investment model: buyers have always factored in the costs of obsolescence to ensure that their assets remain lettable at the best market rates in the future. This means that they both budget for and keep abreast of potential regulatory changes and evolving demands from tenants, who themselves have recognised the financial advantages of having lower energy bills, and therefore are often ahead of the game in upgrading space so that it exceeds the minimum standards and remains attractive to occupiers.

Environmental labelling systems such as BREEAM and LEED are therefore now common in the sector, with steps being taken to also implement new systems which better measure the operational carbon performance of a building, such as NABERS or DECs.

While the above is positive, we shouldn’t underestimate the challenge still ahead. Currently about 80 per cent of UK commercial property has a low Energy Performance Certificate rating and runs the risk of becoming ‘unlettable’ if its environmental performance is not improved by 2030.

However, the picture is not equal across all sectors. Offices, for instance, are furthest ahead due to more demanding occupiers, whereas some, especially retail landlords who have had a fairly torrid 18 months, may need some policy intervention to support investment in improvements.

But overall in the next few years we should see substantial improvement in commercial EPC ratings, reflecting the huge increase in investor and occupier adoption of energy efficiency measures in the last couple of years.

However, some of the current darlings of the investment world – namely data centres and life sciences – are challenged by high energy usage and resultant emissions (although in the latter one can argue that the positive social impact potentially outweighs the negative environmental). In these sectors, either a revolution is needed in how to reduce their carbon emissions or owners will have to make significant investments in carbon off-setting schemes (in itself is not a cure-all, but the best option at the moment) to achieve any investor driven net zero targets.

But challenges like these are where things get exciting: given the scale of change required we’re going to see more investment into proptech solutions and the built environment than ever before.

The rise in availability of green debt and equity and the evidence that already exists that greener buildings cost less to run, means that less persuasion (or government investment) is needed to make commercial property stock more sustainable than other real estate sectors.

Savills recognises real estate is responsible for 40 per cent of carbon emissions and, to coincide with COP26, it is launching its latest research examining how the sector is adapting to meet climate change challenges. Savills is committed to achieving net zero carbon in its operation by 2030. Through Savills Earth it brings together the expertise of more than 100 specialists to support and advise clients on their sustainability, energy and carbon strategies. Visit Savills Earth to find out more. 

Further information

Contact Mat Oakley

Savills Spotlight: Real Estate & The Carbon Challenge