UK commercial property assets deemed energy inefficient continue to underperform in terms of total returns and asset growth, according to CBRE’s latest Sustainability Index.
Since CBRE published the first Index results in November last year, energy efficient commercial property assets recorded total returns of 11.2%, compared with 7.0% for the inefficient sample.
However, in H1 2024 inefficient total returns were slightly stronger than for the efficient sample at 2.3% and 1.7% respectively. In H1 2024, capital growth was -0.4% for efficient assets compared with -0.3% for inefficient assets and rental value growth was marginally higher for the efficient sample at 1.7% compared with 1.5% for inefficient properties.
Jennet Siebrits, head of UK research at CBRE, said: “Taking a view over the history of the index, we see that inefficient assets have underperformed efficient in terms of total returns and capital growth across all sectors. This performance gap is still evident despite narrowing marginally over the first half of 2024. The slightly stronger performance of inefficient stock in H1 2024 could reflect a perception that some inefficient assets are good value for money after significant discounts throughout 2022 and 2023.
“Moreover, some investors are increasingly adopting ‘brown to green’ value-add strategies whereby less efficient assets are acquired at a discount and retrofitted for improved efficiency, increasing asset value. An interest in some less efficient assets may account for the slight uptick in performance for inefficient samples. Despite these trends, we do not expect they represent a fundamental change in the relationship between sustainability and investment performance.”
Sam Carson, head of sustainability for valuation and advisory services at CBRE UK, added: “The third iteration of the CBRE Sustainability Index continues to be a valuable tool for describing the relationship that sustainability features have with the commercial real estate market. Given the low transaction volumes of the past year, it should not be surprising that the results if the first half of 2024 have been less conclusive than in the past. However, by maintaining updates to the index we can continue to reflect how ESG risks are being priced by asset investors and occupiers.”
