UK landlords bet on green offices as hybrid work makes tenants picky

Top London-focused landlords are betting on environmentally compliant office spaces at prime locations that offer higher rents as tenants become more selective in their real estate investments amid hybrid work trends in an uncertain economy.

UK commercial property firms have cashed in on this trend, logging steady growth in rental incomes and occupancy rates over the last year even as elevated interest rates hamper growth elsewhere in their business.

Mark Ridley, the CEO of global real estate services firm Savills (SVS.L), said his group is seeing rental growth in prime central London offices with Japanese, Australian and European investors looking at the UK, which has outpaced other markets in pricing recovery.

Ridley said environmentally sustainable spaces have become the “real definer” of demand, particularly in the offices segment.

About 20-23 per cent of the stock of built buildings in London meets sustainability standards and that is where everybody wants to be, Ridley said.

Savills has forecast an average 2.4 per cent rental growth in 2024 for City of London Grade A spaces – property refurbished or redeveloped in the past decade – while for Grade B properties, rents could decline by 2.5 per cent this year.

For prime properties, which account for the top 10 per cent of rents, rates are forecast to grow by 2.9 per cent this year.

Demand for office spaces in London has risen to the highest level in a decade, with companies on the hunt for nearly 12 million square feet of real estate, according to a study by consultancy Knight Frank.

Major London-listed landlords are better placed to cater to this demand.

“Landlords in the listed segment have done a very good job of making sure their assets are in the right locations, and also largely own properties that are either best-in-class buildings or can be converted to premium spaces in an economical way,” said James Carswell, real estate equity analyst at Peel Hunt.

British Land (BLND.L) Chief Financial Officer Bhavesh Mistry said smooth transport connectivity and sustainability credentials have become a crucial differentiator for attracting tenants.

To be sure, the office space sector still faces some stumbling blocks, including a risk to demand from sectors such as the tech industry, which account for a significant chunk of real estate demand and are looking to cut costs.

Facebook owner Meta (META.O) last September paid 149 million pounds ($182.4 million) to British Land to break its lease on a central London office building, underscoring the pressure in the tech sector.

“If you have got 40 per cent of your building occupied by back-office functions, and you’re under pressure to reduce costs, I think those major occupiers will shrink their footprint,” said Mark Allan, CEO of Landsec.

Allan said Landsec plans to spend more on multi-let buildings going forward rather than single-let, headquarters space to avoid exposure to any single sector.

($1 = 0.8167 pounds)