The importance of ESG in real estate in 2023
Ahead of our real estate team’s attendance at MIPIM in Cannes this year, Robert Cattle, Client Services Director, provides an update on the importance of ESG in today’s context.
Reducing building emissions and promoting active travel
If the UK is to achieve its stated aim of being a ‘net zero’ country by 2050, the status quo must change.
The UK government, long ago, made it compulsory for listed businesses to publish details of their emissions in their annual reports. This prompted many organisations to voluntarily disclose wider ESG credentials, initially in an attempt to differentiate themselves from their competition, and, latterly to avoid being left behind at a time when stakeholders had placed increased importance on these matters. Clearly, it is essential in 2023 for all UK businesses to, at the very least, give serious consideration to ESG.
The real estate industry is a major consumer of energy, whether that be in relation to construction or in running existing property portfolios. UK local councils are increasingly focusing on the ‘E’ in ESG and, in my role at Equiom, I have seen a greatly increased emphasis on the use of eco-friendly building materials and the repurposing of existing materials where practical. Whilst this has led to an increase in the cost of material and contractors, it is a necessary cost to ensure planning consent is granted.
Investors are increasingly concerned with the environmental impact of their activity as well as the communities their footprint affects, and real estate decision makers may struggle to raise capital if they are not alive to this fact. It’s widely recognised that the adoption of ESG principles leads to long term value in the world of real estate and probably in every other asset class. In addition, valuers and lenders are placing a greater emphasis on sustainability, so it is essential for landlords to move with the times and adopt an ESG policy to ensure their survival.
The use of firms such as BREEAM, who provide comparable certification systems for sustainable real estate is on the rise and is enabling landlords to identify ways in which to retrospectively tackle environment efficiency to attract likeminded tenants. Gathering verifiable data is also a great way to demonstrate green credentials to local councils during a planning application process.
Furthermore, the implementation of an active travel strategy have become an essential element for any successful planning application in a city centre location. This dovetails with the UK governments drive (pun intended) towards reducing vehicle emissions and town planners are also keen to reduce car use in city centres, with millions of pounds invested by local councils into cycle lanes and public bicycle hire. In the commercial developments I am currently working on, we have spared no expense engaging active travel consultants and specialist architects in the process. Another example of an active travel strategy in play is a prime office development we manage, where provisions include bike friendly lifts, shower facilities and bike storage solutions which form a centrepiece to the reception area – quite the statement!
Partnering with tenants on ESG
It’s increasingly important for landlords to demonstrate ESG credentials to attract the best quality tenants with the strongest financial covenant. UK businesses are being compelled to analyse their carbon footprint, in the case of listed entities, or encouraged by some of the largest business, e.g., Marks and Spencer which their premises will no doubt contribute to in a significant way.
I have seen in recent years how important green outdoor space is to office tenants, providing areas conducive to the promotion of wellbeing and stimulation of ideas and creative thinking. The addition of green space can add a significant premium to rent levels, whether that be in the form of a roof terrace with long grass swaying in the breeze or, in the case of a major office development I am currently working with, which boasts balconies of ever-increasing depth as one climbs to the higher floors.
Other characteristics of office property designed for the discerning tenant are the installation of ‘superloos’ - a self-contained luxury bathroom for high end offices, air conditioning systems to improve air quality and reduce the spread of infectious diseases, (particularly topical post Covid), improved disabled facilities, as well as exercise and prayer spaces. Elsewhere, many landlords are adopting WELL building standards, a performance-based concept that measures features of the built environmental and its impact on the overall health and wellbeing of humans.
Although some experts predict that hybrid working will reduce many companies’ requirement for office space, those seeking the best talent may actually require more space to accommodate an increased emphasis on face-to-face collaboration when staff members are in the office. Clearly, the world has changed since Covid, and landlords and tenants alike must change to meet the demands of office workers.
For further information relating to real estate, contact Robert Cattle.
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