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“No pain, no gain” was core to Jane Fonda’s approach to exercise and life – the idea that something can only be achieved by enduring hardship and through sacrifice. In the 21st century, this ascetism has fed through to our approach to sustainability: surely if we want to help the planet and reduce our carbon footprint we have to make sacrifices along the way, whether that’s to our comfort, our convenience, or our pockets. But Fidelity International’s latest research suggests that real estate investors, at least, have got this all wrong. When it comes to real estate investing, our models show that that greener choices are also better for final financial returns. 

Take as an example a hypothetical commercial office building in one of Europe’s main financial centres. This is not a run-down, decrepit building that requires a total overhaul to be functional, but neither is it fully fitted out with the latest green technology. For the sake of this case study, we’ll price this prime-located asset at €100m. 

If a buyer were to acquire this building, they’d have several courses of action open to them. If the building is completely functional, then one option would be simply to keep as is and not spend another cent on it. In this scenario, the office could be rented out for a maximum of €550 per square metre per year, and as nothing had been done to the building in our modelling we would expect zero growth in the capital value[1]. It’s not the most attractive figure for our investor, but there are alternatives. 

More than just a lick of paint

Another option for a buyer would be a traditional value-add strategy: renovating the building to improve its look and feel. According to our model a standard renovation, where the building’s fixtures and fittings are updated, could cost 20-30 per cent of the building’s purchase price. The rental value would increase to around €850 per sqm/year, with a prospective sale price of €150m, suggesting a total return of 8 to 10 per cent over the holding period. 

This option would have green benefits too. Even just a basic update, which might include replacing old-fashioned florescent lighting with LED alternatives, could reduce primary energy demand[2] by nearly a third. A traditionally renovated building could achieve an energy performance certificate (EPC) rating of B or C, with a BREEAM rating[3] of Good or Very Good. 

But if a buyer’s sustainability ambitions stretch beyond this, then an ESG-focused renovation may be of interest. These aim to sharpen the green credentials of a property by upgrading flooring using recycled materials, or enhancing its insulation. Primary energy demand is cut by a third again, but BREEAM ratings are Very Good or Excellent, and the buildings achieve an EPC rating of A or B.

All of these changes would, of course, cost more[4]. We estimate a figure of 30-40 percent of the purchase price for such a redevelopment. The project would take longer too, pushing up the working capital requirements[5]. However, higher costs can be balanced out by higher returns because, put simply, green buildings lease faster, achieve higher rents, and sell for more than non-green buildings[6].

As companies commit to green strategies, they increasingly want to rent sustainable offices that match their stated ESG ambitions. The largest occupiers across six European cities anticipate they will need around 3.9m sqm of green office space by 2030, but according to the current pipeline only around 1.7m sqm is likely to be delivered. 

In London, around 40 per cent of new leases signed in 2023 were for the most energy efficient properties - those with an EPC rating of A and B - up from 20 per cent in 2018[7]. Tenants are also willing to commit to longer leases if their building has an impressive sustainability profile, with those well-rated properties securing contracts that are around three years longer than their less-sustainable counterparts[8].

Research suggests this shortfall in the supply of sustainable buildings means that any green assets will be able to charge a rental premium of around 6 per cent[9]. We anticipate that if the building in our case study underwent a full green renovation it could fetch an even greater rental premium of 7.5 per cent (with a rent of €915 per sqm/year) and be sold for around €170m - equivalent to a total return of 12 to 14 per cent. 

It’s worth noting that while the rent on an eco-building is far higher, this can be mitigated by cheaper energy costs, and potentially much improved amenity value compared with brown buildings.

For a tenant choosing between expensive rent in a green building, or cheaper rents in a brown building, time and again we have seen occupiers chose the green building because all-in costs can be lower and because it’s likely to fit with their sustainability policies. 

But for the investor there are other benefits to undertaking a green renovation. Although capex is higher for this sort of process, a buyer would be able to borrow money at preferential rates under banks’ green loan strategies, and with better terms too[10]. 

Making an impact

Our model illustrates that a building that’s undergone a green renovation can offer investors both financial returns and vastly improved sustainability credentials. But what if we go one step further? What if when retrofitting a building more capex is deployed for a more rigorous, more ambitious renovation focussed on impact. Are returns improved still further?

This option would transform our case study so that the building is capable of operating at net-zero carbon. There would be renewable energy production on site, such as photovoltaic panels on the roof, while heat pumps would take natural gas usage to zero. All of the mechanical equipment would be replaced, insulation improved, even water usage would be optimised, for example by installing rain harvesting systems. 

All of this would cut primary energy demand by 50 per cent or more, the building’s EPC rating could be A, and the BREEAM rating could reach Excellent or even Outstanding. 

Yes, this strategy would cost more – capex would increase to 40-50 per cent of the purchase price, on top of the €100m needed to buy the building – and it would take longer to implement these changes. But again, this impact strategy meets or goes beyond the requirements of banks’ green loan frameworks, so preferential financing terms would be available[11]. 

But most importantly, this option would futureproof the building. An impact-led renovation would bring the asset in line with the 2050 targets of the Paris Climate Agreement and the risk of it becoming ‘stranded’ by regulatory developments over the next 25 years would be all but eliminated. The buyer would also know that on exiting their holding the building would be fully compatible with all the requirements of an SFDR Article 9 Real Estate Fund, which may be willing to pay a premium to secure net zero-capable properties. 

So, is a retrofit on this scale worth it? We would expect a €190m sale price of the impact-renovated case study - an increase of 27 per cent over its standard value-add renovation - suggesting a total internal rate of return of 15 to 18 per cent. Again, demand from tenants would be higher, with rental values increasing by an estimated 15 per cent over a standard renovation to €975 per sqm/year.

Demand for top-rated assets is so strong that green real estate enjoys a relatively liquid market - especially in downturns - and has a more stable occupancy rate[12], so this retrofitted-for-impact asset is likely to be sold and rented out quickly, accelerating the business plan for the building while boosting returns. 

Importantly, all of the options above only require renovating the building, not knocking it down to start again. Because of the carbon that’s embodied in building materials such as concrete, glass, and steel, the act of demolishing and rebuilding a property can release huge amounts of carbon dioxide. Renovating an existing asset creates 60 per cent less embodied carbon than building something new[13]. 

Retrofitting assets is now accepted as the most effective strategy to reduce real estate’s carbon footprint. It is also essential. Just over 80 per cent of existing commercial real estate stock in the European Union needs to undergo climate-driven renovation[14], but each year only 1 per cent of buildings in the region is renovated to become energy efficient[15].

The imperative to change does not mean investors have to surrender returns to contribute to net-zero aims. As our research shows, there’s a gap in the market to upgrade buildings so they have less impact on the planet while at the same time generate real growth to bottom lines. The strategy does require more time and more initial expenditure, but the outlays are more than compensated in the long run. Jane Fonda was wrong – you can make gains without the pain. 

[1] There would still be some return on investment through the rental income  

[2] Primary energy means energy from renewable and non-renewable sources that meets the energy demand associated with a typical use of a building, which includes, inter alia, energy used for heating, cooling, ventilation, hot water, and lighting.  

[3] Building Research Establishment Environmental Assessment Method 

[4] The average marginal cost to build green is 6.5 per cent. Additional expenditure required mostly in design costs, finishes and fittings. Chegut, Eichholtz & Kok, 2019.  

[5] Green construction projects take 11 per cent longer to complete. Chegut, Eichholtz & Kok, 2019 

[6] Andrea Chegut, et al., 2014; Alexander Reichardt, et al., 2012; Franz Fuerst, et al. 2009; Wiley Benefield, et al., 2010; Erin A, Hopkins, 2016; Stefanie Lena Heinzle, et al., 2012; Prashant Das, et al, 2013; Franz Fuerst, et al, 2015, Maya Papinaeu, 2017. Measuring the Mythical, AVIVA, July 2021. 

[7] Fidelity International, Knight Frank Research, DLUHC, June 2023 

[8] Fidelity International, Knight Frank Research, DLUHC, June 2023 

[9] Dalton, Ben and Franz Fuerst, “The ‘green value’ proposition in real estate”, 2018 

[10] Debt cost would be 24 to 29 basis points lower than for conventional renovation. Eichholtz, Holtermans, Kok & Yönder, 2019

[11] Brounen, Kok, 2013

[12] ‘The carbon and business case for choosing refurbishment over new build’, Aecom 

[13] ‘Energy efficiency of the building stock in the EU’, RICS, July 2020 

[14] International Energy Agency, December 2020

Aymeric de Sérésin

Aymeric de Sérésin

Director, European Real Estate

Cian O'Sullivan

Cian O'Sullivan


Nina Flitman

Nina Flitman

Senior Writer