Research has shown that green credentials have a measurable impact on the attractiveness of a rental proposition: not only is there a rental premium on sustainable developments (and a concomitant “brown discount”) but occupants report higher rates of satisfaction when they know that building operators are taking steps to minimize their impact on the environment.
As the Committee on Climate Change point out in their most recent report, the various pathways that the United Kingdom may take moving forwards from this years’ COP26 in Glasgow will vary considerably based on the level of technology adoption in the buildings sector. Pathways will also diverge based on individual efforts to live and consume sustainably, turning off household appliances, switching to green energy, resolving to fly less and so on.
Investors are keenly aware of this. Invesco recently submitted a portfolio of residential assets for BREEAM In-Use certification, benchmarking the sustainability performance of their buildings. L&G have, in common with many others, committed to a robust ESG framework that involves becoming carbon neutral by 2030. Aberdeen Standard’s internal investment committee now requires all investments to meet certain key ESG criteria. “Central to this,” according to Knight Frank, “is reducing risk of obsolescence triggered by… shifts in tenant sentiment and preferences.”
Investors are also aware that, for residents, ESG covers a wide range of issues, from health (i.e., access to sports facilities), to wellbeing (i.e., access to green spaces), to safety (i.e., avoiding the unhealthy flame-retardant chemicals that are often used in furniture). BTR tends to emphasize communal space and social networks and to invest in bike schemes and green public developments, elevating them above the average rental unit for lifestyle factors.
Knight Frank are currently conducting a survey with HomeViews to determine the importance that residents place on environmental factors in deciding where to stay. As they put it,
We anticipate the results will show that tenants do increasingly value the environmental and sustainability credentials of the buildings in which they live.
If a direct link can be established between resident awareness and rental prices then the focus on ESG will be justified again. In any case as the market moves in step with government legislation around climate change, sustainability will only increase as an issue of central and critical importance. As the researchers conclude:
[W]e expect to see that the very best buildings will help drive greater tenant retention, demand and, ultimately, income resilience in the future.
So do we.