Sustainability Index Results

In Q4 2023, the first edition of the CBRE UK Sustainability Index was launched. The Index has been tracking investment performance of property assets with varying levels of energy efficiency since Q1 2021. Although the index is UK based, and does not include assets in Ireland, the UK market shares remarkable similarities with Irish commercial property market, especially in the main sectors (Office, Retail, Industrial), and the research has highlighted some interesting market dynamics.

The sample comprises 1,101 assets worth £20.3 billion, and the index categorizes assets into efficient (with a weighted average EPC of A or B) and inefficient (EPC of C or lower). EPC’s (Energy Performance Certificates) are the UK equivalent of the Irish BER (Building Energy Rating) Certs. The methodology of the UK EPC’s and Irish BER’s are considered to be reasonably closely aligned.

Industrial: The relationship between energy efficiency and investment performance in the industrial sector was somewhat reversed over the 3-year period from the start of the Index (Q1 2021). Other stronger market forces, such as high demand and supply constraints, were driving capital and rental values in the industrial sector. The high competition for industrial space likely resulted in sustainability concerns being lower on the priority list for occupiers.

Another reason may be the perceived amount of Capex that is required to get an industrial asset from an inefficient building to an efficient one. As a percentage of capital value, our experience is that the upgrade capex requirement is considerably less for the industrial sector than, say, the office sector (source: CBRE Sustainability Team). For an industrial asset, it is understood to be a much less sophisticated problem, thought to be easier to improve the energy rating, and not have any significant spend for a more prolonged period, e.g., changing to LED lights, upgrading the plant, installing solar panels, etc.

Retail: More efficient retail assets recorded stronger performance, which wasn’t surprising. However, the results were somewhat skewed due to the sample dynamics, as the efficient sample was weighted more heavily towards Retail Warehouses, which performed well over the 12-quarter period, and the inefficient sample was weighted towards High Street Shops, which performed weaker over the 12 quarters. In addition, the cost of upgrades for a Retail Warehouses is  likely to be similar  to that of an Industrial building in terms of  simplicity. (Source: CBRE Sustainability Team).

The Index has brought to light some interesting market dynamics which could be beneficial for Irish investors and market analysts. Due to the similarities between the UK and Irish markets, the index can provide useful warning signals and highlight potential exposures and opportunities to Irish commercial property stakeholders. At the very least, it facilitates more depth of discussion around sustainability and value.

Looking forward, the aim is to expand the index to track more sustainability metrics, such as physical risks like flooding, heating fuel, and certifications like LEED and BREEAM etc. The index will be updated every six months, and it is also planned to delve deeper into sub-sector analysis, as trends can vary significantly within each sector.

Link to the summary report: https://www.cbre.co.uk/insights/figures/uk-sustainability-index-results-to-q4-2023