UK Real Estate Sustainability: The Demand for Green Buildings

Occupier and investor demand for green buildings has increased in the UK but costs are holding the industry back. In the residential market, environmentally friendly homes have become an increasing priority for people. 49% of people looking to buy property sought out green credentials, according to a survey by Savills in 2020. At the same time, in the commercial sector UK law requires businesses to obtain a net-zero carbon emissions by 2050. Now, corporations are seeking to invest in sustainable buildings that will have an effect on decreasing operational costs. What does this prominent shift towards sustainable building selection mean for the UK real estate market????

How Sustainability has become an Increasingly Significant Factor in Building Selection

As climate change begins to influence what consumers and employees expect from their homes and workplaces, demand for green buildings increases from occupiers and investors. However, costs, legislative uncertainty and lack of measurement is delaying the real estate industry from making a bigger impact on net zero targets. Buildings with better sustainability credentials are obtaining higher capital values and rents. Green buildings exceeded an average capital value premium greater than 20%, according to JLL. Occupiers are prioritising buildings with green features such as energy and water efficiency and low carbon footprint. This prioritisation is being spurred on through rising energy costs and a rising awareness of green buildings benefits. On the investor side, the increase in demand for green buildings turns into enhanced values. Investment into these buildings would be less risky as government regulation will continue to be strict surrounding non-sustainable buildings. If there is failure to reach transition and physical climate risks, there will be consequences on income, bottom-line returns and eventually capital values. There may also be potential opportunities through sustainability initiatives that could amplify value, this would include minimising expenses and optimising income. However, there is still the case of overcoming the challenges associated with achieving a net-zero carbon emission.

Rules and Regulation Impacts for Real Estate Firms that Fail to be Sustainable

For the UK to secure a net-zero carbon emission by 2050, rules and regulations have been put in place for the Real Estate industry to follow. Firstly, according to the JLL Sustainability 2024 article, buildings that fail to comply with building energy and emission rules may face financial penalties, and secondly, CBRE UK Real Estate Outlook 2024, further suggested that the UK government and the FCA will make mandatory decisions to preventing greenwashing and direct capital influences. These rules will have to be followed by real estate firms to avoid penalties that may harm the company's market reputation, which will consequently affect investors currently investing with the company as they may receive less dividends from the firm's lack of demand from consumers, and in terms of the real estate firm new investor will avoid investing with a company that will destroy their portfolio credibility and achievements.

Can Retroffing Benefit the Real Estate Sector in Achieving Sustainable Infrastructure Improvements?

The UK real estate industry contributes to the negative environmental impacts through land pollution and the overproduction of residential homes in the UK that are currently abandoned, damaging our existing ecosystem. According to Alan Boswell's unoccupied property report, over 700,000 properties are empty in the UK, which is a huge problem in 2024 as the cost of homes is high, because of the lack of supply of residential homes to keep up with increased demand. The large abandonment of houses can either be because of poor building conditions or the case that old buildings have aged over time and may result in retrofitting.

Furthermore, with the practice of introducing a retrofitting approach, real estate firms can refurbish and redevelop existing properties to become more sustainable by, improving consumers' energy efficiency and consumption, and implementing renewable energy devices like solar panels and wind turbines to reduce the usage of fossil fuels and other unsustainable materials in producing energy, creating a better environment for consumers. RICS Sustainability 2023 report suggests that with the efficient use of resources and methods like retrofitting, the refurbishment cost will be reduced rather than increased, allowing residential real estate firms to incur low costs in creating a sustainable environment.?