The cost of going green

What it will cost investors and developers to meet their climate commitments?

February 07, 2022
  • Cameron Ramsey

There’s no doubt that we need to build and operate real estate more sustainably. It’s a well-known fact that the built environment contributes around 40 percent of the UK’s total carbon footprint. The figure is much higher in cities: in London, it’s estimated that homes and workplaces account for around 78 percent of carbon emissions. With 80 percent of existing building stock likely to still be in place in 2050, it is important to improve the energy performance of these buildings in order to meet our climate commitments.

Investors and developers are for the most part on board with this, with many laying out ambitious net-zero, science-based, or other sustainability targets. The number of real estate companies signing up to science-based targets doubled during 2021. But signing up is easy and taking action is difficult. This raises the question of what it will cost to meet these commitments, and whether investors will put their money where their mouth is.

To try and quantify this, JLL recently asked investors what short term costs they would accept in order to meet their sustainability targets in the longer term. The results were encouraging and there’s clearly a willingness to engage with the challenge.

Almost one in seven respondents would pay a premium of more than 10 percent to hit their targets, although no one would stretch to more than 20 percent.

The largest group of investors (51 percent) selected the smallest cost premium or return discount available (0 percent - 5 percent), suggesting that cost control remains very important and that, unsurprisingly, the numbers still need to stack up for an investment to be made.

What cost premium or return discount would you be willing to accept in the short-term, in order to meet sustainability targets in the medium- to long-term?

Source: JLL Investor Survey, September 2021

Balancing costs with benefits

We know that it costs more to develop a more sustainable office. The UK Green Building Council (UKGBC) estimated in September 2020 that to build to net-zero carbon standards, cost premiums of 6.2 percent for intermediate improvements and 8-17 percent for stretch improvements would apply across the total shell & core construction.

But net-zero construction is still in its relative infancy. As economies of scale increase and new construction methods are adopted, sustainable development will become cheaper to deliver. 

At the same time, new dimensions are quickly emerging to influence the conversation around value, with more focus on carbon emissions, occupant health and climate risk and resilience, according to JLL’s forthcoming Return on Sustainability paper.

The technology evolution

New technologies will be essential in meeting sustainability goals, and a great deal of funding is currently committed to developing these technologies. But at what stage of a building’s life cycle will they be most impactful?

The largest group of respondents to our survey (56 percent) believe that technology is most needed before a brick has been laid, in the design and planning phase. Technologies here include integrated renewable energy sources, insulation systems and smart appliances, alongside the choice of sustainable or biodegradable materials.

The next most popular option is at the other end of a building’s life in refurbishment and reuse (31 percent), where many plan to focus their efforts and limit the carbon impact of demolition and building from new. Technologies supporting refurbishment may include use of virtual reality to visualise any changes.

At what stage of a building’s life cycle are new technologies most needed to meet sustainability targets?

Source: JLL Investor Survey, September 2021

We have now moved past the discussion phase of sustainable development and are firmly in the action phase. Many leading developers are now on site with schemes that will greatly improve the green profile of our building stock. But this is where cost pressures will be most keenly felt, and where new technologies are most needed. How investors continue to embrace the challenge will define the success of the green revolution.