CBRE: Energy efficiency immaterial to performance of UK industrial assets

The consultant’s newly launched sustainability index finds industrial properties are less impacted by sustainability than offices and retail.

Investments in UK energy efficient industrial assets are performing less well than industrial assets with low standards of energy performance, research from property consultant CBRE has found.

Between the first quarter of 2021 and the second quarter of 2023, energy efficient industrial properties, defined as assets with Energy Performance Certificate ratings of ‘B’ or higher, delivered a total return of 3 percent compared to 3.5 percent for properties with an EPC of C of lower.

The findings were revealed on November 9 as CBRE launched its Sustainability Index, due to be updated twice a year. For the current version, 1,000 regularly valued UK properties across the industrial, office and retail sectors were analysed to show how energy efficiency ratings impact investment performance.

Inefficient industrial assets also delivered stronger rental growth, recording a rental value increase of 25 percent over the last ten quarters and 9.3 percent per annum. Efficient assets, by contrast, delivered 19.7 percent rental growth, equating to 7.5 percent per annum.

Capital growth for the latter group was also weaker at 4.3 percent compared to 5.7 percent for inefficient industrial.

Sam Carson, head of sustainability, UK valuation and advisory services, CBRE explained: “The reason that greater energy efficiency has not been reflected in better investment returns is likely because other, stronger forces have been driving performance in the sector. Demand has been high for industrial space, while supply to date has remained constrained. Therefore, energy efficiency is not yet valued to the same degree as in offices, and pressures to upgrade existing assets that would entail capital costs have been more limited.”

He added: “Occupier preferences for energy efficiency are not as important as in offices, where it is a buyers’ market. Meanwhile, the cost of upgrading an industrial unit is not as much as it is for offices so that risk isn’t as present, which means the pressure to incorporate discounts [for inefficient assets] are not as severe.”

Capex cost impact

However, the findings of the research showed energy efficiency is a key driver of performance in the office and retail segments. Offices with high EPC ratings delivered better returns, with stronger rental growth and smaller declines in capital values, relative to inefficient offices. Annualised total returns for efficient UK office assets were -1.4 percent compared to -4.6 percent for offices for which energy efficiency is poor.

Over the same period, rental values for efficient offices increased by 10.9 percent across 10 quarters, and by 4.2 percent per year compared to 7.4 percent and 2.9 percent per year for inefficient assets.

Carson said this was due to the oversupply of outdated and energy-inefficient secondary stock for which “demand is low and capex costs have a lot more uncertainty.”

Retail displayed the same trend, with stronger total returns of 2.6 percent for the assets with highly-rated EPCs compared to -0.6 percent for inefficient properties.

Carson said the findings, which cover properties with a combined capital value of £17.7 billion ($22 billion; €20.3 billion) demonstrated the nuances involved in linking energy efficiency to investment performance: “There’s now such a demand from market participants to figure out what the return of their green investments is.

“The idea of a green premium has been around for a while and that has, thus far, helped create an investment case for green buildings. But this data shows why that approach has been such a one-dimensional take on what is an incredibly complex problem,” he said.

“It is easy to think of the green premium as a fixed number but what we are seeing is there is a really dynamic pricing arrangement, whereby both the market and the asset are influencing value.”

The need for greater levels of analysis around the way a property’s environmental credentials impact its market value is one other industry participants recognize, as explored in a deep dive by affiliate title Real Estate Capital Europe. During the course of 2023, industry bodies the Urban Land Institute and the Royal Institute of Chartered Surveyors, in association with several commercial real estate lenders, have both launched efforts to help the industry collate this data.

CBRE, which intends to publish the next set of updated figures in May 2024, hopes the sample size of the index will increase. “The index will hopefully motivate others to supply more data and feed into the findings. I expect the sample to grow significantly from here. If the market is able to provide a more accurate explanation around pricing it helps to provide more clarity of how to invest in the future and a clearer picture on how that investment will perform,” said Carson.