Investors are actively targeting assets with poor environmental performance for upgrades.
In its latest ESG investor survey, Knight Frank found that 58% of leading investors were actively looking to buy older office assets that require significant improvements to meet future environmental standards.
In London, that accounted for 52% of the £2.1bn investment for the first half of 2023.
It added that the share of value-add transactions has been rising since the end of the pandemic, despite the higher costs of development.
In the first half of 2023, £2.5bn of assets (13.4% of total real estate investment volumes) were purchased in the UK for the purpose of renovation or redevelopment. For the offices sector, the figure was 24%, or £1.2bn.
Only 22% of landlords expect to divest assets with poor environmental performance, rather than upgrade them. Some 76% of the investors surveyed plan to repurpose or improve their existing buildings.
However, the number of firms looking to divest assets that perform poorly on environmental metrics rises to 40% among core investors.
The survey, which quizzed 45 private and institutional real estate investors active in the UK and Europe, representing a total AUM of nearly £300bn, found that 41% of investors are targeting net zero portfolios by 2030.
The government is planning to increase the minimum EPC rating permitted to let a building from E, which was the level set this April, to a minimum of C by 2027 and B by 2030.
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.”
The office sector is the most exposed within real estate, with 79% of floorspace in the UK currently below EPC B.
Of the 45 investors Knight Frank surveyed, more than 50% of firms targeting EPCs as a key metric have a minimum B requirement for their portfolios, while 47% require BREEAM Excellent or Outstanding ratings.
Harley added: “A higher interest rate environment and lower valuations are 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.”
Knight Frank’s research also revealed that 46% of investors plan to enhance public spaces through their assets, while 35% plan direct investments in local communities and 27% seek local employment opportunities.
Harley said: “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.”
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