Real estate decisions driven by ESG strategies tend to require an average of 4.2 amenities for employees, with the most in-demand being food and beverage services, mental health spaces, and gyms, according to data from Knight Frank. The global real estate advisor has released a new report series titled Meeting the Commercial Property Retrofit Challenge, addressing the increasing challenges posed by sustainability requirements in commercial real estate.
The report emphasises the rising threat of property obsolescence, particularly as regulations around energy performance standards tighten. Around 70% of commercial space in the UK currently has an EPC rating of C or below, placing it at risk of becoming unlettable if proposed energy standards come into force. The findings show that commercial space rated EPC B or higher has been increasing by 8% annually since 2019, with 2 billion square feet expected to meet these standards by the end of 2023. However, this growth rate will need to double to meet the proposed standards by 2030. Notably, in cities like Leeds and London, there is a mismatch between the supply of high-rated properties and demand, with substantial office space still needing upgrades.
Investors are responding to these challenges by adopting strategies to mitigate risks. According to Knight Frank’s 2023 ESG Property Investor Survey, over three-quarters of European investors are focusing on improving their portfolios through refurbishments, with 58% targeting underperforming properties for upgrades. Despite this, the financial risks associated with obsolescence are not yet fully reflected in market pricing, offering potential opportunities for those able to stay ahead of the curve.
Occupier demand for buildings that support corporate sustainability goals is also growing. Companies prioritising ESG strategies tend to seek out properties with multiple amenities for their workforce. Knight Frank’s data suggests that retrofitted offices with higher sustainability certifications, such as BREEAM Outstanding, tend to offer more amenities compared to lower-rated properties. In London, properties with BREEAM Outstanding certification averaged 5.5 amenities, with most featuring green spaces like gardens or terraces.
A key issue raised by the report is the energy performance gap. Many buildings show a significant difference between their predicted and actual energy usage, highlighting the limitations of the current EPC system in accurately reflecting operational performance. Knight Frank’s research on over 1,000 Display Energy Certificates (DECs) shows that actual energy consumption is often higher than projected, which further complicates efforts to improve energy efficiency.
The report underscores the importance of addressing sustainability in real estate, both from a regulatory and market perspective. As property obsolescence accelerates due to evolving sustainability standards, investors, developers, and occupiers alike are being forced to adapt in order to remain competitive in the changing landscape.
Real Estate Credit Investments Limited (LON:RECI) is a closed-end investment company that specialises in European real estate credit markets. Their primary objective is to provide attractive and stable returns to their shareholders, mainly in the form of quarterly dividends, by exposing them to a diversified portfolio of real estate credit investments.
