January 10, 2024: Around 400-460 million square foot (msf) of existing office stock can be fully E-compliant in the next few years, according to the latest Colliers’ report, titled “Sustainable Foundations: Exploring Integration of ESG in Real Estate Development”. The report said that with the growing adoption of sustainable elements led by multitude of tangible as well as intangible benefits, existing environmentally non-compliant office stock offers an opportunity to be either E-upgraded or retrofitted. The report highlights the potential investment opportunity for developers, investors and occupiers due to this green facelift of existing office buildings to become compliant with environmental norms within the ESG framework.
According to the report, at 432 msf, 61% of Grade A office stock is currently green certified. The growing adoption of sustainable features in office buildings reflect a steady shift in preference towards green real estate portfolios amongst developers, occupiers and investors. The report suggests that developers and investors are likely to increasingly conduct ESG Due Diligence throughout the project lifecycle – pre-construction, construction and operational phases. This will increasingly ensure that built structures conform to ESG norms.
The report mentions that Grade A office buildings (less than 10 years old) of about 95-110 msf hold potential to be E-compliant upon minimal capex towards E-upgrade. At the same time, about 300-350 msf of buildings, more than 10-year-old, require a complete refurbishment. Such buildings can undergo retrofitting and eventually become E-compliant. Cumulatively, for the ESG-adept real estate ecosystem, existing Grade A office stock in India presents an investment potential of close to Rs 400 bn.
Jatin Shah, Chief Technical Officer & MD, Technical Advisory Services, Colliers India, said, “Moreover, a significant portion of the 160-190 mn sq ft of upcoming commercial developments in next three years will become sustainable from the outset, ultimately increasing green certified Grade A office stock of the country to more than 550 mn sq ft by 2026, even without considering the green certification potential of existing non-green compliant buildings. Recognizing the pivotal role of sustainability in real estate, developers are strategically emphasizing on green certification processes. In an environment of increasing E-adoption, assessments, and compliances, almost three-fourths of India’s Grade A office stock will be green certified by 2030. Green and sustainable elements will soon become hygiene factors in the Indian office market”.
E-upgrade of existing buildings leads to net cashflow benefit for developers
The report stated that the capital expenditure for E-upgrade of existing buildings (less than 10 years old) includes intervention and upgradation with respect to water flow, energy, cooling, electro-mechanical systems and uplifting interior fit-outs. It is estimated to be around 5-10% of the construction cost. Consequently, tangible benefits include about 20-30% energy savings and 5-10% rental appreciation. Such perceptible benefits are expected to offset the initial investments within the first few years of investment.
Vimal Nadar, Senior Director & Head of Research, Colliers India said “Typically, for E-upgrade of an existing commercial building, the capital expenditure has a break-even period of 2-3 years. Moreover, 3-4X net cashflow benefit over the remaining asset life is an indicative financial reward of such one-time expense. Beyond the quantifiable cost and energy savings, developers can also expect significant intangible benefits in social and environmental aspects. Furthermore, rental appreciation also enhances the overall asset value proposition of E-upgrade initiatives in commercial real estate sector.”
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