How does environmental efficiency impact on the rents of commercial offices in the UK?

Abstract

The aim of this study is to investigate whether offices in the United Kingdom with an environmental label command price premiums when compared to non-labelled offices. The de facto standard for sustainability in the UK is the Building Research Establishment Environmental Assessment Method (BREEAM). BREEAM is a building quality indicator that investigates a range of environmental criteria, awards credits based on the degree to which these criteria are represented in a building and then awards a rating based on the total number of credits that have been achieved. This research investigates the effect of BREEAM ratings on observed contract rents in the UK and as such provides a potentially stronger empirical test of the hypothesis than previous appraisal-based studies. The market impact of BREEAM ratings is investigated, using a control sample of non-BREEAM rated office buildings throughout the UK. To achieve this, a dataset is used that contains 19,509 commercial office lease transactions that were completed from 2006 to 2010. The results indicate that a premium exists for BREEAM-certified buildings. The results also indicate that the premium shows variations during the study period and that premiums vary depending on the year of construction and certification.

Energy-related standards and UK speculative office development

“…Investment decisions and rental deals both constitute and reflect 'the market' created through the qualculative processes described above. Tracing the 'impact' of various green certifications, assessments and regulations as 'price signals' in a classical market is an established area of literature (Chegut et al, 2013;Fuerst & McAllister, 2011;Fuerst & van de Wetering, 2015;Fuerst et al, 2013Fuerst et al, , 2017, which fails to capture fully the recursive effects of their use, along with less formal 'standards', in the creation of a market itself through calculations and deals (MacKenzie et al, 2007). Seeing decisions to invest in energy-efficient buildings as being solely incentivized by their market value premium (De Jong & Parkinson, 2013) ignores: the powerful social processes shaping energy-related decisions which tend to lead development actors to make seemingly 'irrational' choices, building and buying energy-intensive offices beyond the 'needs' of actual occupiers.…”

“…building investors, managers and tenants) might not pay a 'green premium' or avoid a 'grey discount' (De Jong & Parkinson, 2013;Elliott, Bull, & Mallaburn, 2015;Kontokosta, 2013;Oyedokun, Jones, & Dunse, 2015;Surmann, Brunauer, & Bienert, 2015). The link between energy efficiency or green certification and higher rents is, however, taken for granted in the industry and evidenced as a 'willingness to pay' for a certified 'eco-label' (Fuerst & van de Wetering, 2015). Such forms of green certification have indeed been found globally to correlate with a (small) rental price premium (Fuerst & McAllister, 2011a;Wiley, Benefield, & Johnson, 2010) used to support this model (Axon et al, 2012;Fuerst, van de Wetering, & Wyatt, 2013).…”

Are Green Labels More Valuable in Emerging Real Estate Markets?

“…The final hypothesis derives from the literature on the economic benefits of voluntary certification programs in developed countries. The objective of H3 is to empirically estimate realized value, if any, in a market with lower environmental performance (Hsu, 2016) and relatively smaller diffusion of green buildings (Sanderford et al, 2017;Robinson and McAllister, 2015;Fuerst and Van de Wetering, 2015). We initially assume the overall context of third party audit schemes, a mechanism of economic governance (Sedlacek and Maier, 2012), does not translate into quantitative pricing discrepancies relative to past research.…”

“…Some authors criticize the use of latent variables as they summarize a bundle of objective and subjective attributes Robinson and McAllister, 2015). Nonetheless, we leave these best available controls as they add relevant information with regards to overall building quality (Fuerst and Van de Wetering, 2015).…”

“…Given some level of eco-label maturity in the real estate markets of developed countries, investigation of developing economies may yield new and meaningful insights. For example, inflated premiums could be found through the introduction effect caused by the relative scarcity of labelled properties and the lag between supply and demand for green buildings (Fuerst and Van de Wetering, 2015).…”