Investors are targeting UK and European office stock with poor environmental ratings in a bid to create value through sustainability upgrades, according to Knight Frank’s ESG Property Investor Survey.
Knight Frank surveyed 45 private and institutional real estate investors active in the UK and Europe with a total AUM of nearly £300bn, and found that 58% of investors are actively seeking to acquire commercial buildings that perform poorly on ESG metrics, in order to improve and upgrade them to meet future environmental standards.
The firm’s research shows £2bn (52%) of office investment in London in the first half of this year was for value-add acquisitions, with £1.2bn of office assets purchased across the UK in H1 2023 for the purpose of renovation or redevelopment.
Of the 45 investors surveyed, just 22% of owners are looking to divest poor-performing buildings, with 76% planning to repurpose or improve their existing buildings. Among core investors the number of firms looking to divest assets that perform poorly on environmental metrics rises to 40%.
Flora Harley, head of ESG research at Knight Frank, said: “Investors increasingly recognise the potential to create value by bringing older office assets into line with future regulatory requirements, such as EPC ratings and European Performance of Buildings Directive, but also to meet occupiers’ own ESG commitments and net zero objectives.
“A higher interest rate environment and lower valuations is making under-performing assets more attractive to core plus and value-add investors, while the ‘green premium’ for the best performing assets continues to rise as demand far outstrips supply, led by firms which are targeting net zero portfolios by 2030.
“The influence of social value on real estate investment decisions is undeniably increasing, applying pressure on investors and asset owners to demonstrate tangible progress in alignment with social goals. Knight Frank’s research reveals that 46% of investors aim to enhance public spaces through their assets, while 35% plan direct investments in local communities and 27% seek local employment opportunities.
“The growing emphasis on the social agenda is driven by multiple factors, including a rise in socially motivated investors pursuing value-aligned impact beyond profit, societal expectations, millennial priorities, and pandemic-induced focus on health, wellbeing, and community.”
