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Energy-inefficient properties suffer capital value falls

Inefficient commercial properties recorded a 6% fall in capital value growth in 2023, compared with a 3.8% decline for efficient assets, according to CBRE’s latest Sustainability Index report.

Researchers underlined a correlation between the energy efficiency of properties and their investment performance across the office, retail and industrial sectors.

Total returns were 0.8% for efficient properties during 2023, compared with a 1% reduction for inefficient assets. Rental values grew by 3.9% for both efficient and inefficient properties over the same period.

The investment performance gap was most pronounced in the office sector. Total returns for efficient offices were down by 3.2% last year, compared with a 6.5% decline for inefficient buildings.

Capital values were down by 6.6% for efficient offices compared with a 10.6% decrease for inefficient assets, while rental values were up by 4.1% for efficient assets and by 3.2% for inefficient.

Energy efficient industrial properties also delivered stronger investment returns compared with their inefficient counterparts, at 5.6% and 4.5% respectively. Capital values inched up by 0.7% for efficient warehouses and edged down marginally by 0.1% for inefficient industrial spaces.

However, inefficient industrial assets delivered stronger rental growth at 6.6%, compared with 5.6% for efficient assets over the same period. CBRE’s wider market data has indicated demand for industrial space in relation to supply started to ease in 2023, potentially contributing to the stronger performance of efficient industrial assets. However, researchers found energy efficiency did influence industrial values to the same degree as offices.

In retail, efficient stores reported total returns of 3.1% last year, compared with 0.3% for inefficient shops. Capital values declined over the period, falling by 2.8% for efficient assets and 5.5% for inefficient assets. Rents grew by 3.1% for efficient stores, compared with 2.4% for inefficient.

Jennet Siebrits, CBRE’s head of UK research, said: “2023 saw interest rates plateau and capital value movements become less dramatic than in earlier years covered by the index.

“Yet inefficient offices saw a greater decline in capital values compared to more efficient offices, which is likely to reflect the impact of the capital expenditure needed to improve the energy efficiency and overall specification of secondary stock to a level that is acceptable to occupiers.”

Sam Carson, head of sustainability for valuation and advisory services at CBRE UK, said: “This second iteration of the Sustainability Index shows the strong relative performance of efficient office and industrial assets through 2023 as we move into a new phase of the market cycle.

“Our valuers are seeing sustainability having an influence over new market conditions, even if current trading volumes are light, and the CBRE Sustainability Index provides evidence of this.”

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