This article first appeared in City & Country, The Edge Malaysia Weekly on July 25, 2022 - July 31, 2022

As countries shift towards the endemic phase, most office occupiers in Asia-Pacific are embracing the emphasis on real estate strategies that recognise the Covid-19 pandemic is here to stay. According to the CBRE Research July 2022 report: Landlords and Tenants Must Collaborate to Achieve Sustainability Goals, most tenants are implementing or considering the implementation of related initiatives in pursuit of wellness and sustainability in the workplace. This report was built upon information extracted from the CBRE Asia Pacific’s 2022 Spring Office Occupier Survey. 

The report identified the main challenges and priorities faced by landlords and investors as they seek ways to acknowledge office occupiers’ demands for green buildings, leases and technologies.

According to CBRE, Asia Pacific countries are committed to achieving net-zero emissions by 2050, hence to this end initiatives are being made, with New Zealand, Japan and South Korea writing it into legislation. Mainland China and India plan to ensure their emissions peak by around 2030 and 2040, respectively, and then strive towards their net-zero goal in the later years. Singapore has introduced new measures whereby upcoming data centre projects are required to achieve Building and Construction Authority (BCA) Green Mark Platinum certification for data centres.

In recent times, several stock exchanges have started to demand mandatory environmental, social and governance (ESG) or sustainability reporting.

“The China Securities Regulatory Commission (CSRC) issued additional reporting requirements for public listed companies in June 2021, requiring the disclosure of pollutant emissions, procedures for preventing pollution and administrative penalties incurred from environmental issues. In Hong Kong SAR, the HKEX requires all listed companies to produce annual ESG reports on a ‘comply or explain’ basis,” the report said.

Measures to improve employee health and well-being were the top pick, having already been implemented by 61% of the survey respondents. Resource and/or waste reduction programmes came in second, with 44% of implementation (see Figure 1).

“Initiatives related to green buildings and green leases remain popular, but many respondents find it difficult to adopt such measures in their existing properties. This is driving a wave of flight-to-quality to modern, high-quality green buildings, supported by a greater willingness on the part of most leading landlords to sign green leases with tenants,” the report said.

More than 20% of the respondents were not considering energy audits, the adoption of pollution reduction measures or setting net-zero targets. The report noted that these areas will increase in importance as more markets set decarbonisation targets and legislate stricter ESG reporting standards. This would push occupiers to plan more holistic ESG programmes that comply with the required carbon emissions reductions and energy efficiency standards.

The changing trends of workplace conditions after the Covid-19 pandemic accelerated the push for green features. According to CBRE’s property management and sustainability professionals, there has been an increase in the number of landlords allocating capital to refurbish buildings with high efficiency chillers, sensors and other technologies to reduce energy costs while improving their outlook to prospective tenants.

Over the past year, electricity prices have increased by 15% to 25% in Singapore, Hong Kong SAR and Japan, while Australia’s household electricity tariff saw a staggering increase of 130%.

“A key challenge for landlords and investors in Asia Pacific is the lack of uniform ESG reporting guidelines in the region, particularly compared to the European Union (EU), which boasts a rigorous sustainability reporting landscape that provides a strong foundation for standard setting.

“Except for Australia and New Zealand, there is a lack of transparency around data and information in the region, especially regarding key indicators such as energy usage and costs at the building level. This is often because many properties lack the hardware such as standalone electricity meters to track the consumption of specific areas or individual mechanical components including elevators or lighting systems, as well as that of individual tenants,” the report said.

Therefore, many EU-headquartered investors with global portfolios face difficulties in implementing standardised reporting based on European guidelines, including their assets in Asia Pacific.

The report found that the tech and business service sectors were more structured in their plans to achieve sustainability objectives compared to other industries. The tech sector, with outstanding key performance indicators (KPIs), also performed well in setting net-zero targets and using renewable energy in office portfolios (see Figure 2).

Business services have implemented 45% of their initiatives, followed by tech (slightly lower at 44%), finance (32%) and finally, life sciences (30%). Although the life sciences sector has the lowest implementation percentile compared to the other three sectors, the initiatives they are considering to implement are at 44%, much higher than the rest.

Regardless of having strong ESG mandates, the financial sector faces challenges in achieving its sustainability goals, particularly where it involves green buildings, green procurement and pollution. “Contributing factors may include a substantial chunk of bank portfolios and the fact that they tend to occupy space in CBDs (central business districts) or older financial districts where green building availability is limited,” the report said.

The report also mentioned that occupiers from mainland China were the most keen — registering 40% of survey respondents — to implement wellness and sustainability initiatives. Despite that, the respondents noted that challenges arose primarily due to the lack of transparency and data. Likewise, India and Vietnam were also among the countries that are facing the same issue.

Some 30% of the respondents thought that sustainability was an essential criterion for new offices. The report noted the limited availability of ESG-compliant buildings, creating an opportunity for landlords to cater to the growing demand.

Despite the demand, less than 30% of the respondents stated that they currently locate the majority of their Asia Pacific portfolio in such buildings and a lower proportion in Europe. CBRE expects more ESG-compliant buildings to be completed in upcoming years, but only 9% of the respondents were planning to relocate even if rents were higher.

“While the UK and other European markets have the data to prove the existence of a green premium or brown discount, information in Asia Pacific is limited. Moreover, office markets in places with high energy consumption such as mainland China, India and Southeast Asia are currently in the midst of a downward rental cycle or supply boom, leaving landlords in a weak position to demand a rental premium for space in green properties.

“CBRE is nevertheless tracking an increase in landlords and investors looking to gather evidence of the benefits of green buildings in order to quantify the precise savings, payback periods or other cost benefits they can achieve. Several landlords have conducted energy audits on behalf of their tenants to gauge these metrics,” the report said.

The report stated that due to the recent surge in energy prices, many property owners are opting to upgrade to other methods that can help reduce costs. The efficient use of energy and utilities in ESG-friendly buildings would allow prospective tenants to willingly pay for space as suggested in the report.

According to CBRE, effective communication should be top priority for landlords in case of needed interaction with tenants or occupiers regarding green leases and other ESG-related requirements.

“While landlords do possess a theoretical understanding of what a green lease is, many have not discussed the practicalities of such agreements with their tenants or even what their ESG mandates are. Some landlords fear losing their tenants if they demand certain reporting requirements,” said CBRE.

To avoid such disconnection, CBRE advised landlords to maintain positive relationships with occupiers in order to identify those with an interest in ESG compliance and align them with their needs. Another point highlighted by CBRE is the importance of landlords having thorough knowledge of the regulatory environment, taking into account the upcoming changes to legislation in markets that implement ESG performance as a requirement.

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