Valuing sustainability: ESG integration and real estate values

Over a year on since we published the Valuing Net Zero & ESG for offices paper, how much has changed?

August 16, 2022

It has been over a year since JLL Valuation Advisory published their market-leading thought leadership on Valuing Net Zero & ESG for Offices. Since then, JLL have also published on the impact of sustainability on value in the retail, hotels, industrial & logistics and self-storage sectors.

Sustainability is one of the fastest moving trends to sweep through the real estate market in recent years. So how much has changed since JLL’s original report?

Three major shifts have rocked the real estate valuation industry in 2022.

1. The RICS publishes updated guidance on Sustainability and Commercial Valuation

The RICS’ updated Guidance Note gives far more detailed advice to valuers on incorporating ESG considerations into valuation methodology and reporting. For the first time, valuers are speaking directly to Sustainability teams of real estate landlords, to harness the data that landlords are gathering on the performance of their properties and benchmark current and future value risks.

2. Peter Pereira Gray publishes the RICS Independent Review on Valuation

Whilst PPG made no specific recommendation on ESG, he made sure to highlight its importance to value and risk. He writes, “a valuation must reflect the valuer’s best estimate of the exchange price at which an asset will trade, and sustainability and ESG factors relating to that property will be inherent in that valuation as the market digests these factors”.

3. Markets move steadily towards integrating ESG into underwriting

Valuers cannot lead the market – they must reflect current market conditions. However, we are now seeing early signs of market indicators and transaction data in some markets showing ESG factors impacting liquidity and pricing. JLL’s UK Offices Research team estimates that the supply pipeline of Net Zero Carbon buildings between today and 2030 represents an undersupply of 87% of Net Zero Carbon offices in Central London, when compared to space currently occupied by tenants with a Science Based Target, indicating a potential for premium rents. Ambitious real estate investors are now assuming a sustainability exit uplift and allowing for premium rents and lower Opex for sustainable products in their underwriting.

With the market and valuation standards all shifting towards ESG integration, JLL’s predictions of value impacts are standing the test of time.