Rent premiums for greening offices higher in Hong Kong than other cities, least likely in Singapore

[LONDON] Hong Kong landlords investing in green office refurbishments stand to pocket significantly bigger rent premiums than their counterparts in other major cities, according to a fresh analysis by property broker Savills.

Hong Kong, which offers average rent premiums of 23 per cent for green upgrades, according to Savills calculations shared with Bloomberg, is followed by Amsterdam and London, where rent premiums average 18 per cent and 11 per cent, respectively.

In Singapore, meanwhile, landlords investing in green refurbishments were least likely to enjoy a rent premium.

That is because the vast majority of buildings there already meet such standards, which are increasingly expected as a basic feature, Savills found. 

Energy efficiency investments gaining importance

Investments in basic energy efficiency measures such as better insulation have taken on greater importance against a backdrop of recurring energy crises and volatile oil and gas prices.

At the same time, there is growing evidence that tenants are willing to pay more to live in buildings that use environmentally friendly materials, the Savills analysis shows.

For investors, greener buildings can be cheaper to finance and are seen as a more reliable path to preserving value, said Georgios Askounis, a director at Savills Earth. For tenants, such buildings are often associated with greater comfort and prestige, he said.

Tenants “appreciate the positive impact of being in a sustainable building, a building that’s healthier, a building that has better quality, lower energy demand, that is less likely to overheat, possibly better access to amenities”, said Askounis. 

The study, which is based on an analysis of more than 2,000 office buildings, found that structures meeting criteria for at least one environmental standard consistently attracted higher rents.

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Savills compared rental values in Amsterdam, Chicago, New York, Hong Kong, London and Singapore and looked at the extent to which buildings in those cities adhered to the environmental standard most commonly targeted there.

The analysis controlled for factors like a building’s age and size, to focus on premiums specifically linked to environmental factors. 

In London and Amsterdam, almost all new building projects are now designed to meet high environmental standards, as regulators across Europe enforce stricter rules.

Corporate tenants are also under pressure to seek out greener buildings to meet their own sustainability reporting requirements. 

Businesses “want to future-proof their real estate portfolios against tightening regulation and rising energy costs”, said Askounis.

Against that backdrop, many Savills clients are weighing whether to invest in costly renovations to meet the highest environmental standards, he added. 

In London, buildings that meet the highest green standards – categorised as “outstanding” by Savills – can charge an extra 28 per cent in rent with tenants staying an average of almost 10 years, the report found. In the city, landlords investing in green improvements are also able to secure longer-term contracts with tenants, the analysis found.

Buildings judged to have “excellent” green standards – one notch lower than those deemed to be “outstanding” – were able to charge an additional 10 per cent in rent and to hold on to tenants for almost eight years on average.

US sees smallest green rent premium

The green rent premium was smallest in the US, where Chicago and New York only saw bumps of 6 per cent and 7 per cent, respectively. 

“I think the certifications aren’t advertised to occupiers in the same way that they might be in Europe,” said Sarah Brooks, associate director at Savills World Research, who co-authored the analysis.

In the US, green features are treated as “one small part of a broader offering”. BLOOMBERG