A profound transformation is reshaping London’s commercial real estate market, with sustainability emerging as a key determinant of property value. Industry experts suggest that as top ESG credentials become the norm, the market dynamic will shift from a “green premium”—where environmentally advanced buildings command higher rents—to a “brown discount,” where buildings failing to meet certain sustainability standards will be rented or traded at lower-than-expected rates, ultimately risking obsolescence.

For Nick Millican, CEO of property development firm Greycoat, this transition represents both a challenge and an opportunity. “The environmental performance of a project is increasingly important to occupiers, to lenders, to the investor that we’ll inevitably end up selling the building to, once it’s all complete,” explains Millican. “It’s all part of the rich mix of things that goes into establishing what is best in class.”

This perspective has guided Greycoat’s strategic approach to property development, with a focus on future-proofing assets against the impending “brown discount” through comprehensive sustainability initiatives. Under Millican’s leadership, Greycoat has positioned itself at the forefront of sustainable real estate development in London, anticipating the market shift that is now becoming increasingly evident.

The market evidence for Brown Discount

The concept of the “brown discount” is gaining traction as market data increasingly shows a widening gap between prime, environmentally efficient buildings and secondary, less sustainable stock. An analysis of rental trends between prime and secondary central business district (CBD) office rents shows an increasing rental premium for newbuild, energy-efficient office stock compared to older, less energy-efficient properties in comparable locations.

While rental growth for both prime and secondary CBD offices followed similar trajectories between 2014 and 2020, this relationship has diverged significantly since then, with prime rents growing by a total of 11.8% compared to just 4.8% for secondary properties. This divergence is particularly evident in specific submarkets, with the gap between prime and secondary rental growth increasing most significantly in London’s West End (32%) and the City of London (18%) in the past four years.

These differentials are largely attributed to stricter regulations on energy performance certificates (EPCs) that have restricted occupiers from leasing secondary office stock. As these regulations continue to tighten—with minimum energy efficiency standards (MEES) set to increase to EPC B by 2030—the “brown discount” for non-compliant buildings is expected to widen further.

Evidence of this shift is already emerging in the retrofit market. A study of 130 retrofitted and refurbished offices across the UK that improved from EPC C-ratings and below to EPC B-ratings and above found that, on average, these properties saw the rental gap relative to prime close by 18%. This demonstrates the tangible value created by sustainability-focused renovations and the potential penalty for properties that fail to adapt.

Greycoat’s strategic response

Recognizing the impending shift from green premium to brown discount, Millican has developed a comprehensive strategy for future-proofing Greycoat’s property portfolio. Central to this approach is a focus on refurbishment and retrofitting rather than demolition and new construction.

“It’s extremely hard to demolish a building and then use what you’ve taken to then build a new building,” says Millican. “It’s not really practical. So the more you can retain, the better the carbon footprint of what you’re doing.”

This strategy aligns with emerging evidence that retrofitting existing buildings offers significant carbon savings compared to new construction. By preserving much of the existing structure, retrofitting can reduce the embodied carbon footprint by approximately half compared to demolition and rebuild, while also improving operational energy efficiency to meet modern standards.

Greycoat’s approach also reflects changing planning regulations in London, where local authorities are increasingly requiring substantial justification for demolition. “It’s becoming increasingly hard to get permission to demolish buildings in London,” Millican notes. “Westminster’s probably taken the strongest approach, and it really is very challenging now.”

This regulatory shift reinforces the business case for Greycoat’s focus on refurbishment, positioning the company ahead of the curve as planning authorities across London tighten restrictions on demolition. “I think we’ll see over time more and more focus on retention and refurbishment rather than demolition and rebuild,” Millican predicts.

Comprehensive sustainability framework

To systematically address the risk of “brown discount” across its portfolio, Greycoat has developed a comprehensive sustainability framework that guides all of its development activities. Under Millican’s leadership, the company has created a ‘sustainable development brief’ that serves as the foundation for ensuring sustainability is integrated into every real estate project from the outset.

This brief provides design teams with a clear framework to follow, ensuring sustainability goals are embedded at every stage of development. The focus is not just on theoretical goals but on actionable, measurable steps that help Greycoat achieve its environmental objectives.

“For each new project we begin, carbon budgets are treated with the same level of rigor and importance as financial analyses or cost plans,” explains Millican. Every design decision is evaluated through the lens of long-term sustainability and carbon reduction, ensuring that Greycoat’s projects are resilient against future “brown discounts.”

The sustainable development brief sets out specific, ambitious targets for each project, including benchmarks like EPC A ratings and BREEAM Excellent certifications, as well as goals for reducing embodied carbon and enhancing energy efficiency. These targets exceed current regulatory requirements, anticipating the direction of future regulations and market expectations.

Evaluating asset purchase viability

Greycoat’s strategy for avoiding “brown discount” begins at the asset acquisition stage. Under Millican’s guidance, the company evaluates sustainability early in the acquisition process, ensuring that every investment aligns with its long-term sustainability goals.

“We consider environmental impact from the very beginning,” Millican explains. “This early assessment allows us to identify whether a property has the potential to meet our high standards for energy efficiency, carbon reduction, and overall environmental performance.”

This approach is particularly important in the context of emerging “brown discounts,” as properties that cannot be upgraded to meet future sustainability standards may face significant devaluation. By thoroughly assessing the sustainability potential of acquisition targets, Greycoat minimizes its exposure to this risk.

The company uses clear sustainability criteria and certifications during asset evaluations to ensure that potential acquisitions not only meet current environmental standards but also have the capacity to perform well into the future. This forward-looking approach helps protect against future “brown discounts” by ensuring that all additions to the portfolio are aligned with long-term sustainability trends.

DIALS: A case study in future-proofing

Greycoat’s strategy for avoiding “brown discount” is exemplified by its recent acquisition and planned refurbishment of DIALS, a 6-story office building in the City of London. In partnership with Goldman Sachs Asset Management, Greycoat is undertaking a comprehensive refurbishment of the building with sustainability at its core.

“Our vision for DIALS goes beyond a mere property acquisition,” says Millican. “We are embarking on a journey to transform this 140,000 sq ft space into a beacon of innovation and sustainability. Our approach is not just about being at the forefront of design, but about pushing the boundaries of what is possible in sustainable development.”

The project is anchored in a “brown to green” approach, targeting the comprehensive overhaul of the building’s infrastructure to elevate it to the highest standards of environmental sustainability. Greycoat’s Director of Development explains: “I think because it is a very ambitious project for us, it will be really exciting to see how the extent to which refurbishment projects can genuinely deliver on some of these environmental standards. Proof that you don’t necessarily need to build a new building to have it perform in a certain way, you can actually, through sensible intervention and with a bit of thought you can get an existing building to perform.”

Millican has set ambitious goals for the project: “Our goal is to achieve BREEAM Outstanding, EPC A, and WELL Platinum ratings for DIALS. These certifications are not just badges of honor—they signify our commitment to setting benchmarks in sustainable building practices that prioritize both environmental impact and occupant health.”

By targeting these top-tier certifications, Greycoat is positioning DIALS to command a significant premium in the current market and avoid any future “brown discount” as sustainability standards continue to evolve.

Investor and lender considerations

The risk of “brown discount” extends beyond tenant demand to impact financing and investment strategies. Climate-related risks are increasingly influencing investment decision-making, with 82% of investors surveyed expressing concern about the impact of climate-related risks on their portfolios. This concern is translating into concrete actions: 40% of investors have already sold or reduced holdings in assets due to climate-related risk exposure, while 46% have avoided investing in assets with such exposure.

These shifts are reshaping lending practices in the commercial property sector, with lenders becoming more selective and prioritizing prime assets and properties that are either ESG-compliant or have a clear “roadmap to compliance.” This selective approach to lending reinforces the market advantage of sustainable properties and creates additional incentives for property owners to improve their sustainability credentials.

Millican recognizes these changing dynamics in the capital markets. “I think there’s more of a need to invest in buildings now than there has been historically, because of the environmental regulations here changing. And so people are kind of forced to make their buildings more energy-efficient,” he notes.

By proactively addressing sustainability across its portfolio, Greycoat is positioning itself to maintain access to favorable financing terms and attract institutional investors who increasingly prioritize ESG considerations. This approach helps protect against the financing aspects of “brown discount,” where non-compliant buildings may face higher borrowing costs or limited access to capital.

The Bifurcated market

Millican observes that the commercial real estate market in London is increasingly bifurcated between sustainable, high-performing buildings and those that fail to meet modern environmental standards. “It’s becoming a two-tier market,” he explains. “There’s good buildings in desirable locations with modern environmental performance that are doing very well, and rents are actually going up. Then there are properties that aren’t really fit for purpose and are in the wrong location that probably needs to be repurposed into something else.”

This bifurcation aligns with the concept of “green premium” transitioning to “brown discount,” with sustainable buildings commanding increasing premiums while non-compliant buildings face growing challenges in attracting tenants and maintaining value.

For Millican and Greycoat, the goal is clear: ensure that all of the company’s assets remain firmly in the first tier, avoiding the depreciation and obsolescence risks associated with “brown discount.” By focusing on refurbishment, setting high sustainability standards, and integrating environmental considerations into every aspect of the development process, Greycoat is working to future-proof its portfolio against this emerging market risk.

Looking ahead: A strategic vision

As the market continues to evolve, with sustainability becoming an increasingly central driver of property value, Millican’s forward-thinking approach positions Greycoat to thrive in this changing landscape. By anticipating the shift from “green premium” to “brown discount” and taking proactive steps to address it, the company is not only protecting its portfolio against future depreciation but also creating opportunities for value enhancement through strategic sustainable upgrades.

“The journey toward sustainable real estate is not just about mitigating risks,” Millican reflects. “It’s about recognizing the fundamental shift in how properties are valued and positioning our portfolio to benefit from this transition.”

For investors, developers, and property owners across London, the message is clear: the era of “brown discount” is approaching, and those who fail to adapt risk seeing their assets devalued and eventually rendered obsolete. By following Greycoat’s example and embracing comprehensive sustainability strategies, they can protect against this risk and ensure their properties remain competitive in an increasingly environmentally conscious market.

As London works toward its ambitious target of becoming a net-zero city by 2030, the pressure on property owners to improve the environmental performance of their assets will only increase. Those who, like Nick Millican and Greycoat, have already embraced this challenge will be well-positioned to thrive in this new era of sustainable real estate.

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