Two years ago, in a well-publicised disagreement with Kermit the Frog, then prime minister Boris Johnson told the United Nations General Assembly in New York “it’s easy to go green”.
But with the built environment responsible for two fifths of carbon dioxide emissions and the majority of buildings still a long way from being energy efficient, the realities of getting to net zero by 2050 seem far from simple.
Is green the new prime?
An increasing body of evidence suggests office buildings that achieve green certifications and ratings are more attractive to occupiers, let more quickly to stronger covenants and benefit from reduced obsolescence.
Our own research at Gerald Eve shows that central London office buildings with a BREEAM ‘Outstanding’ rating have rents 23% higher than the average headline rent (see graph). Similarly, buildings with an Energy Performance Certificate (EPC) ‘A’ rating have rents 17% above average headline figures.
Allowances or reliefs need putting in place to avoid disincentivising tenants from taking green buildings
This may not be a surprise, as these buildings are often the newest and are fully aligned to the requirements of larger occupiers with strong environmental, social and governance (ESG) credentials or aspirations. So, these headline rents may reflect the new prime rather than a green premium.
This is good news for landlords, and clearly gives them an incentive to go green, as they can be sure they will achieve a good return.
The tenants, while having to pay a higher rent, benefit from the reduction in operational costs associated with green buildings and space that reflects their own occupational objectives. So it seems like a win-win situation.
Paying more tax to go green
However, occupying a superior, green building and in turn paying a higher rent exposes occupiers to higher business rates. This seems counter-intuitive – why should occupiers pay more in property tax to go green?
If you put solar panels on your house, would it be reasonable for you to be moved up a band or two and pay more in council tax? Surely that is a disincentive in the drive towards net zero?
However, our property tax system is based on the premise that rates follow rents, so a 20% rise in rent for offices with the best green credentials or most efficient energy ratings will inevitably result in a 20% increase in business rates.
In the drive towards net zero, we’re going to need all the imaginative thinking, ingenuity and inventiveness that we can garner, but all of that will be of little value if we are going to be penalised by the tax system for trying to do the right thing.
That is not to say that we should decouple rateable values from rental values. There is general agreement that this fundamental principle has worked well over the years. However, some system of allowances or reliefs needs to be put in place to avoid disincentivising tenants from taking green buildings and only leaving the large tenants in the position of being able to afford to relocate to them.
The government should also carefully consider the role that changes to VAT on refurbishment could play in encouraging improvements to existing buildings to save embodied carbon.
These initiatives would offer much-needed support to landlords and tenants and encourage investment in our existing stock, where a rapid improvement in energy performance is required to achieve the goal of net zero. After all, if the government wants to prove Kermit wrong, it needs to lend a helping hand wherever it can.
Paul Messiter is a partner in the London City office of chartered surveyor Gerald Eve