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Green office buildings: the new norm?

While they don't necessarily command a rental premium, they are becoming the minimum standard that major tenants now demand
Monday, October 19, 2015 - 05:50
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More green office buildings are sprouting up in Singapore's central business district - not just in response to tenant demand, but also simply because they are set to become the new norm, consultants say.

Singapore

MORE green office buildings are sprouting up in Singapore's central business district - not just in response to tenant demand, but also simply because they are set to become the new norm, consultants say.

This is because the Singapore government has targeted at least 80 per cent of all buildings here to be certified green by 2030 by the Building & Construction Authority (BCA). Going forward, this leaves little room or option for non-green buildings to be built.

Since the BCA Green Mark scheme began in 2005, the number of green buildings in Singapore has burgeoned from 17 to more than 2,500 today (see chart). This is equivalent to more than 70 million square metres of gross floor area (GFA), or nearly 29 per cent of the total GFA.

Buildings owners tell The Business Times that green-conscious tenants tend to be multinational corporations (MNCs) and large domestic-listed organisations, owing to their carbon commitments and climate policies, as well as the need to demonstrate their corporate social responsibility to stakeholders - shareholders, clients, employees and the public.

The financial services sector especially is very strong in its commitment to pursue green office space; other sectors include natural resources, information technology, construction and real estate, as well as energy and commodities.

Anthony Goh, senior vice-president of property and facilities management at City Developments, says some companies have made environment-friendly features a criterion when shortlisting spaces to lease.

Sumit Agarwal, professor at the National University of Singapore (NUS) School of Business, said MNCs can also claim tax subsidies in their home countries in Europe and the US - two regions which are zealous advocates of environment-friendly corporations.

It is, however, difficult to determine if green buildings command a rental premium over their non-green peers because of their "green-ness".

For example, Cushman & Wakefield research director Christine Li points out that since most of the newer buildings are green buildings and command higher rents, this is really due to a suite of factors ranging from location, connectivity and amenities to floor plate efficiency and technical specifications.

As a result, small and medium- sized enterprises (SMEs) continue to be slow to jump on the bandwagon of green office spaces. These businesses (with comparatively thin profit margins and more cost sensitivity) have no qualms about staying put in older, non-central, non-green buildings which charge lower rents - not so much because these spaces are not green as it is because they are old.

Yu Shi-Ming, associate professor at the NUS School of Design & Environment, says: "If you look at the top range of the Green Mark commercial buildings, they also tend to be the prime Grade A offices; so the rentals are higher. For SMEs, if there is no reason to pay a higher rent, they wouldn't.

"Although research has shown that there may not be a lot of difference in rental premiums for Green Mark buildings in Singapore, the Green Mark ones today are definitely also the better-quality buildings which tend to charge slightly higher rentals."

As a building owner itself, Keppel Land also says that it does not charge a rental premium for its green buildings. Its president (Singapore) Tan Swee Yiow says: "Rentals are still predominantly determined by factors such as market demand, the location of the property and reputation of the developer, to name a few."

Consultants point out that not having a green certification may not necessarily be a deal breaker for tenants if a building meets its other requirements. After all, there is also a BCA Green Mark award for office interior which tenants that adopt pro-green fit-outs are eligible for, even if they are not situated within a green-certified building.

However, Tim Shen, director, sustainability, Asia at CBRE, says more companies are at least asking about green options when it comes to leasing new space, and are therefore factoring it into their decision-making process.

"Green buildings have already become an industry expectation in advanced markets. It's almost inconceivable that an international Grade A office building would be constructed in a developed urban setting today without achieving a green building certification of some kind," said Mr Shen.

There are several reasons why green buildings will become the new norm, he says.

First, in some cases, it is perceived as a minimum standard that leading landlords should be offering.

Second, property developers have an incentive to pursue green certification to preserve an asset's competitiveness in the marketplace.

"There is evidence in some cities that the proposition quickly turns from questions about the potential benefits and 'green premiums' to an issue of ring-fencing risk, and avoiding a 'grey discount' for not having a green building," Mr Shen says.

Third, green buildings can enjoy easier access to institutional capital, as real estate investors increasingly demand transparency on sustainability performance from property operators and managers.

Reports such as the annual Global Real Estate Sustainability Benchmark (GRESB) survey update investors on the environmental, social and governance performance of the funds they invest in, at both the portfolio and asset level. The GRESB survey also includes a category of questions about building certification.

In its 2015 report, GRESB says: "Increased taxation, fines, energy costs and carbon pricing will potentially affect financial valuations, as analysts start to account for environmental externalities. Property companies and funds who ignore these externalities run the risk of being left behind, as Asian regulators catch up with policies already established in other regions."

It notes other oft-touted benefits: operational cost savings through less energy and water consumed; lower long-term maintenance costs; higher rental rates in some markets; lower vacancies; and better marketability.

Fourth, another reason for the private sector to obtain higher tiers of Green Mark ratings is to take advantage of the array of incentives offered by the Singapore government, says Mr Shen.

For example, the Urban Redevelopment Authority (URA) grants additional floor area over and above what the master plan's gross plot ratio allows to developments going for the top ratings of Green Mark Platinum or GoldPlus.

To set the right example, some government agencies have also taken the lead in their contracting practices, such as by holding events at Green Mark buildings and leasing space from green office buildings.

"As the demand for Green Mark spaces will only increase over the long run, it makes business sense for building owners to green their buildings so as to future-proof their long-term competitiveness," BCA says.

READ MORE: New lease of life for old, non-green offices

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