Mr. Carlos Martinez, Director of Research & Consultancy, Knight Frank Thailand, remarked that,Sustainability has been an increasingly important consideration in the global property market in the world, especially in the office market. Most market players understand that sustainable buildings have benefits for the environment, but there is still confusion about how sustainability adds monetary value.
On the tenant side, there are numerous advantages of occupying a green-certified office building such as energy optimization translating into savings in water and power bills, improving staff productivity, attracting talent, and enhancing the corporate image. Companies that adopt sustainability as a value will also be better rewarded by their customers, and in some cases will have competitive advantages, e.g., tax reduction. We observed that occupiers are beginning to be willing to pay a rental premium for those buildings that better reflect their values and help to meet their increasingly more demanding Environmental, Social, & Governance (ESG) targets. As revealed in our latest survey, demand is expected to increase as only 8% of almost 400 global occupiers currently believe that the real estate supports their ESG strategy, while 40% have a stated net carbon emissions target.
Despite the increase in demand for suitable office green rating buildings, the actual financial benefit to developers, investors, and landlords is difficult to ascertain. The construction cost premium in most cases falls somewhere between 1% to 5% of the total project cost according to the World Green Building Council. Yet, the improvement in performance in terms of satisfactory occupancy levels or rental premiums is difficult to calculate as it can be down not only to green ratings but physical attributes (building size and the number of floors), quality (grade and age), location (submarket, and proximity to main stations), surroundings, or technology. Despite multiple variables impacting the office rents alongside green certification, we know that the latter has a positive impact on rents. According to our research in the London office market, the green certification increases prime central London office rents by up to 13%. This rent premium increases further up to 15% in the Bangkok CBD office market.
With a given yield, sustainable office buildings have therefore higher value as they command higher rents. Our research indicates that prime central London office buildings with green ratings enjoy just above 10% premium on sale price compared to unrated buildings. There is not enough transactional data in the Bangkok office market to estimate this premium with an appropriate degree of accuracy though. While there are some location-specific differences, the results of this research conducted in a global office city suggest that might also be expected to apply to a certain degree to office markets in other locations around the world.
We expect to see a green value premium because of the increasing ESG focus of occupiers and investors, which also results in increased liquidity of an asset at sale. This improved liquidity together with lower legislation and obsolescence risks of green-rated buildings may reduce risks premiums supporting downwards pressure on yields, and ultimately increasing the asset value. That is why sustainable buildings are preferred by investors.
Our data reveals that 17% of the total office space in Bangkok is green certified, from which 80% was developed in the past ten years, and 60% in the past five years. Furthermore, we estimate that approximately 80% of over 1.67 million square metres of new office space to be completed in the next five years will have some type of green certification, confirming the upward trend in green buildings. The amount of green-certified office space in Bangkok will then be 31% of the total supply, in line with circa 29% in London or 42% across the 30 largest US office markets. It is then foreseeable to continue to see an increasing number of developers and investors with a preference towards green-rated buildings as an element of differentiation from the rest of the market that will ultimately become the market norm in the mid-to-long-term, adding a clear risk to ‘non-green-certified’ office buildings that will lose value, and eventually become obsolete.
