COMMENT After a challenging few years, the shopping centre investment market is back on track. In spite of wider macroeconomic challenges, so far this year we have seen a gentle increase in transactional activity, with a further influx of schemes hitting the market post-summer.
Additionally, the green agenda appears to be top of mind, with ESG permeating our daily conversations with investors. For instance, M&G Real Estate stated in its ESG policy that sustainable assets are better-performing assets, while Mitiska REIM estimates an 8% premium on the schemes in its European retail park portfolio with the greenest credentials.
However, despite this apparent enthusiasm, it remains difficult to isolate the specific benefits of green schemes from other factors that distinguish the cream of the crop. Is premium just premium irrespective of whether it is green, and is the issue more about lack of action and the so-called “brown discount”?
Getting a measure of metrics
This debate has occupied the office sector for some time, and you could no doubt argue that the highest-performing BREEAM-rated offices make the best investments. However, you could equally contend that the greenest developments are usually also the newest buildings in the most desirable locations with the best office configurations.
There is, however, a key differential between “green premiums” in the office sector versus retail. You could easily lose count of the number of new office developments over the past decade, each greener than the last. During the same period, no more than a handful of new shopping destinations have been built, proving it is far more difficult to measure the market using the same metrics.
Retail has had a perfect storm in recent years, with a wide array of factors affecting the market’s performance, which consequently impacts on asset valuation and investment premiums. That’s before we even start considering the environmental performance or social benefits of the building. The loss of value we have seen across many shopping centres has had nothing to do with their carbon footprints or build quality.
However, there is a sea of change and advancing legislation that is likely to flip things on their head in the next few years. ESG is driving major institutions to rethink their approach to how they manage and operate their schemes. Increasingly, there is a school of thought that retail premises that operate in line with environmental and social policies in particular will prove more favourable, by garnering support from tenants owing to operational efficiency and from customers through community engagement.
The cost of inactivity
While we may begin to see evidence of the green premium over coming years, it is, however, the notion of brown discounting that may arguably have a bigger impact on the sector. Essentially, the brown discount is a direct result of doing nothing, which is considered to have more severe negative implications for property values than the positive implications of a green premium.
The brown discount within retail is inevitably intertwined with lower-grade retail spaces, creating difficulties in that the stock most in need of improvement often receives the lowest levels of investment.
This is where the value of repurposing can really be evidenced. Where there is no longer occupational demand for the retail that is in situ, there is an opportunity to adapt through repurposing. Active repurposing provides an opportunity to improve the green credentials of an otherwise redundant building, and thereby improves its investment credentials.
So can we directly and definitively prove the green premium? In such an occupationally demanding market, not yet. On the other hand, the cost of inactivity seems clear. If bringing down emissions and aligning with ESG principles is not part of the strategy then there is, if nothing else, an elevated risk that the market will punish the worst assets and devaluation will occur.
Fortunately, however, we are pleased to see that more of the schemes we deal with have a green edge or are undergoing ESG initiatives that will improve the grade of the stock. For the best examples, as ever, this will produce an investment premium.
Mark Garmon-Jones is head of shopping centre and retail investment at Savills
