After a challenging few years, the shopping centre investment market is back on track. Furthermore, the green agenda appears to be front of mind, with ESG permeating our daily conversations with investors.
However, despite this apparent enthusiasm, it remains difficult to isolate the specific benefits of green schemes from other factors that distinguish the cream of the crop. Is premium just premium irrespective of whether it is green; is the issue more about lack of action and the so-called ‘brown discount’?
This debate has occupied the office sector for some time, and you could no doubt argue that the highest performing BREEAM rated offices make the best investments. However, equally, you could contend that the greenest developments are usually also the newest buildings in the most desirable locations.
But there is a key differential between green premiums in the office sector versus retail. You could easily lose count of the number of new office developments over the last decade, each greener than the last. During the same period, on the other hand, no more than a handful of new shopping destinations have been built, proving it far more difficult to measure the market using the same metrics.
Retail has had a perfect storm in recent years, with a wide array of factors affecting the market’s performance which consequently impact on asset valuation and investment premiums. That’s before we even start considering the environmental performance or social benefits of a building. The loss of value we have seen across many shopping centres has had nothing to do with their carbon footprints or build quality.
However, there is a sea change and advancing legislation that is likely to flip things on its head in the next few years. ESG is driving major institutions to rethink their approach to how they manage and operate their schemes. Increasingly, there’s a school of thought that retail schemes that operate in line with environmental and social policies in particular will prove more favourable, by garnering support from tenants due to operational efficiency and from customers through community engagement.
While we may begin to see evidence of the green premium over coming years, it is the notion of brown discounting that may arguably have a bigger impact on the sector. Essentially the brown discount is a direct result of doing nothing, which is considered to have more severe negative implications for property values than the positive implications of a green premium.
The brown discount within retail is inevitably intertwined with lower grade retail spaces, creating difficulties in that the stock most in need of improvement often receives the lowest levels of investment.
This is where the value of repurposing can really be evidenced. Where there is no longer occupational demand for the retail that’s in situ, there is an opportunity to adapt through repurposing.
So, can we directly and definitively prove the retail green premium? In such an occupationally demanding market, not yet. On the other hand, the cost of inactivity seems clear. If bringing down emissions and aligning with ESG principals is not part of the strategy there is, if nothing else, an elevated risk that the market will punish the worst assets and devaluation will occur.
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