Green-labeled assets commanding premium rents

As new laws and regulations concerning climate change and sustainability come into effect across the world, it seems vital to monitor their unintended consequences sometimes - Dr Franz Fuerst, Professor (Real Estate & Urban Economics), University of Cambridge, UK, tells Bizz Buzz

Financial prudence compels businesses to improve their Environmental, Social, and Governance (ESG) performance, when the marginal benefits, pecuniary or non-pecuniary, exceed the marginal costs.

For many firms, renting green offices is a feasible ESG activity, which may increase their willingness to pay higher rents. Analysing over 17,000 green rental contracts in India between 2010 and 2022, a study jointly conducted by Prof Anirban Banerjee and Prof Prashant Das from the Indian Institute of Management- Ahmedabad (IIM-A), and Prof Franz Fuerst, Professor of Real Estate & Urban Economics, University of Cambridge, UK, found that rents in green-labeled assets and those with health certification commanded significant premiums between four per cent and 21 per cent.

However, the rental values of green assets increased much faster compared to their non-green counterparts, and the propensity to rent green properties varies significantly across industry segments.

The study found that suppliers (landlords) benefited from the regulation by disproportionately increasing rentals. Existing tenants and foreign firms ended up paying higher rental prices while most other firms, including the assumed target groups of the new policy, redirected their green commitment away from green buildings.

Although the policy may yield more positive results in the longer run, a reduced propensity to rent green offices is the opposite of what the ESG disclosure requirement tried to achieve.

Talking to Bizz Buzz, Prof Franz Fuerst said: “As new laws and regulations concerning climate change and sustainability come into effect across the world, it seems vital to monitor their unintended consequences as well.”

Our study observed a shift in real estate tenant and rental pricing patterns in the wake of new ESG regulations in India that we found surprising, but is supported by our econometric large-scale data analysis, he added.

This study investigated a novel mandatory ESG disclosure requirement in India as an empirical setting to elucidate how commercial real estate markets would evolve in the wake of significant government regulations related to ESG. It analysed nearly 17,000 office rental contracts signed across nine major metropolitan cities of India between 2010 and 2022.

Raja Seetharaman, Co-Founder, PropStack, real estate data platform, which was data partner for the study, said: “We’re very glad to collaborate with Prof Prashant Das (IIMA) and his research team. We were always confident about the quality of our data, but it’s equally important to interpret the data correctly and in a manner that it’s useful for the industry.”

We look forward to continuing the collaborative efforts and sharing unique insights in the near future, he said.

Increased awareness about climate change has led to numerous measures taken by firms that are geared towards responding to global challenges. Green buildings are one such response. However, increased environmental performance may have cost implications, the study says.

As a result, landlords charge premium rents for such offices. Proponents of green buildings highlight their business benefits, while critics point to their hitherto limited contribution to curbing aggregate greenhouse gas (GHG) emissions.

Propensity to rent green is also significantly higher in large, domestic listed firms (Top-1000 by market capitalization), and significantly lower in smaller listed firms. Large firms can capitalize on the benefits of going green due to their economies of scale, whereas smaller firms may find it to be a negative proposition.