Readers of this year’s print edition of Planet Edge by The Edge Singapore will notice special features on two developers: GuocoLand F17 and IOI Properties Group. The former is listed on the Singapore Exchange S68 (SGX), while the latter is on Bursa Malaysia.
In a separate interview with The Edge Singapore last October, IOI Properties’ CEO Lee Yeow Seng even teased the listing of a Singapore office REIT, which could include the upcoming IOI Central Boulevard Towers and IOI Properties’ share of South Beach Tower, completed in 2016 through a joint venture with City Developments.
Investor access to these developers’ assets may be important, but the sustainability features of their properties are the main focus of this special supplement. To convince developers, tenants and investors of the benefits of “green buildings”, proponents like consultants and developers have emphasised the rental premium and energy cost savings associated with such modern structures.
One popular factoid is the claim that green buildings — an umbrella term for a large group of architectural and engineering features — can command up to 30% higher rent.
Real estate research firm JLL fronted the results of a 2022 report by claiming occupiers in Asia are paying a rental premium of “up to 28%” for green-certified offices in “11 major Asia cities”, including Hong Kong, Singapore and Bangkok.
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JLL cited data from 3,089 Grade-A office buildings in 14 cities across Asia, taking 10 national and international green building certifications into consideration. Grade-A offices are described as the highest quality of office space available.
Singapore’s Building and Construction Authority (BCA) launched its Green Mark scheme in 2005, designed to evaluate a building’s environmental impact and performance. Today, the highest certification — Green Mark Platinum — is awarded to buildings that demonstrate at least 30% savings in energy and water, along with other green features.
Green buildings are “actively sought-after” by tenants due to their corporate social responsibility (CSR) policies and commitment to decarbonisation, says Praveen Chandrashekar, director of sustainability and resilience at Surbana Jurong.
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Aside from the purported energy savings — which will reduce tenants’ Scope 2 emissions from purchased power — green buildings are expected to offer “superior indoor environmental quality”, which boosts employee productivity and well-being, adds Chandrashekar.
However, he is less confident about the marketed rental premium. “The exact quantum of rental premium depends on the location, facilities within the neighbourhood and access to public transport,” he adds.
Chandrashekar estimates that buildings in Singapore’s Central Business District with the Green Mark Platinum Super Low Energy (SLE) rating “might fetch anywhere between 15% and 20% higher rental yield”. “However, the same building in the suburbs of Singapore is expected to fetch around 5% to 15% higher rental yield,” he adds.
The SLE label is only awarded to “best-in-class” Green Mark-certified buildings that achieve at least 60% in energy savings.
Mark Cameron, head of sustainability, Asia Pacific at Nuveen Real Estate, says rental premiums for sustainable buildings have not yet “materialised”, but he expects this to change “in the short term”, citing a “chronic undersupply of high-performing, sustainable buildings”, which are attractive to tenants in Asia Pacific.
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“A recent JLL study found that by 2030, there will be a 59% gap between the supply of sustainable building space and corporate occupier demands, bringing more focused demand for those leading assets and, with that, higher rental premiums than ‘brown’ assets,” says Cameron, who is based in Hong Kong.
Cameron says the rental premium is “more appropriately viewed” as a “brown discount”. This is applied to assets that cannot meet tenant demands and local requirements for sustainability, which cause them to be “penalised” with decreased rents.
Bigger factors
Owners, managers and tenants may be increasingly aware of green features, but to what extent are other considerations at play?
Industry observers said in April that Grade-A office rents are expected to rise around 3% this year despite new supply like IOI Central Boulevard Towers coming to the market.
However, prime Grade-A office rents broke a 12-quarter streak and remained flat in 2Q2024, according to real estate research firm CBRE. The average rent among the most sought-after offices in Singapore remained at $11.95 psf per month, ending a 14.9% hike over three years.
CBRE’s research head for Singapore and Southeast Asia, Tricia Song, says rents are “still supported by the flight to quality” despite the tide “seemingly swinging in the tenants’ favour”.
Excluding 0.55 million sq ft of committed space from IOI Central Boulevard Towers (Phase 1), there was still some 0.17 million sq ft of net demand in the Core CBD, comprising Marina Bay, Marina Centre, Raffles Place and Shenton Way.
Green buildings are important but not at the top of users’ minds. Chandrashekar reiterates that location and connectivity to public transport are key considerations. “Most companies desire to be in a prime location so that it’s easy for its employees to commute for work and attend business meetings.”
The sustainability performance of the asset and partnership with the landlord will continue to be a “top-three consideration” alongside location and pricing, says Nuveen’s Cameron. “But typically, tenants aren’t choosing an asset purely based on sustainability credentials. When presented with two assets in a similar location with comparable rents, we have seen tenants opt for the more sustainable asset.”
Cameron says “with certainty” that best-in-class sustainable assets in prime areas command “better rents and stickier tenants”. This, in turn, allows for greater asset enhancement initiatives, he adds.
He also notes a “shift underway”, where more capital is going towards refurbishing traditional core assets to catch a “flight to quality” following the pandemic. Assets in less prime locations may also benefit.
Cameron believes there is evidence that deploying a “brown-to-green repositioning strategy” can attract tenants who are willing to pay “marginally above local market rent”.
Aside from achieving sustainability credentials alone, he adds that the focus on sustainability can be taken as an “indicator of the overall quality” and “care” the landlord has put into the asset.
Chandrashekar says upgrading a building “can be very profitable” if done “at the right time, in the right manner”. He adds that upgrading an older building with a “legacy monitoring and evaluation (M&E) system” into a Green Mark Platinum SLE-certified building will help reduce operational energy consumption by up to 30% to 60%, depending upon the existing baseline.
The structure of an older building may be fixed, but there are still many areas for improvement, says Chandrashekar. These include the building facade, air-conditioning systems, lighting fixtures and smart controls. “Repurposing existing buildings is one of the best ways to reduce embodied carbon — [the] carbon associated with building materials.”
Power on-site
A survey of approximately 250 corporate real estate leaders conducted by JLL earlier this year claims 75% of occupiers want at least half their office portfolio to be fuelled by renewable sources by 2030.
This aspiration is slightly lower among Singapore respondents, at 57%, but is still much higher than the present-day reality; JLL estimates that just 9% of office portfolios run on renewable power today.
Chandrashekar says most developers in Singapore are “quite progressive and forthcoming” in implementing energy efficiency and decarbonisation-related initiatives. “However, not all buildings are able to achieve this due to high capex outlay, lack of alignment to higher ESG aspirations [and] competitive rental regimes.”
According to JLL, four in 10 occupiers believe on-site renewable energy will become “non-negotiable” for their organisation by 2030.
However, the same respondents also believe on-site renewables will require cooperation. Landlords and tenants will have to agree on various issues, including leasing structures, ownership of assets, payment for solar electricity production and access to renewable energy certificates (RECs).
Elke Kornalijnslijper, head of sustainability consulting, Asia Pacific at JLL, lists four ways firms can increase their share of renewable energy use. “Firstly, via a combination of on-site renewables depending on location; secondly, through purchasing power agreements (PPAs) or renewable energy from energy retailers; thirdly, through opting for a corporate power purchase agreement (corporate PPA); and finally, through renewable energy certificates.”
Chandrashekar says a typical office building in Singapore can offset between 5% and 10% of its energy use through roof-mounted solar photovoltaic (PV) panels. This also depends on the amount of roof space available, space reserved for cooling towers, water tanks, lift motor rooms and even shade from tall buildings nearby, he adds.
Cameron echoes the figure for on-site solar but notes that electricity is typically procured by commercial real estate landlords here, with sub-metering in place to determine tenants’ share of consumption. “In this case, the tenants may have less understanding of the source of the electricity consumed.”
However, an “increasing number” of tenants and landlords are working together to source more renewable energy directly from retailers through PPAs or RECs, says Cameron. Still, he adds that the “biggest game-changer” in decarbonising real estate will be decarbonising the electricity grid supplying all buildings.
Sembcorp Industries announced on June 27 that it had secured PPAs lasting “up to 10 years” with global biopharma company GSK's subsidiaries.
Sembcorp Power will supply up to 10 megawatts (MW) of electricity to all three of GSK’s global manufacturing sites in Singapore, enabling the company to achieve its 100% purchased renewable electricity target by 2025.
In a separate announcement, GSK says its on-site solar panels are already generating 3% of its facilities’ power needs in Singapore. The company aims to use 100% renewable electricity (purchased and generated on-site) by 2030.
Beyond rooftop solar PV, Chandrashekar says developers are now looking into “other innovative renewable energy sources”, such as building-integrated photovoltaics (BIPV) to maximise energy yield. These refer to PV materials that replace conventional building materials, allowing the outer layer of a structure to generate electricity.
“However, BIPVs are still less prevalent due to high cost, aesthetics [and] regulatory compliance,” he adds.
The real estate sector has a “unique opportunity” to become part of the electricity infrastructure and shape the future of renewable energy across the APAC region, says JLL’s Kornalijnslijper. “To meet net-zero carbon goals, there is no silver bullet and therefore a comprehensive on- and off-site renewable strategy is required to capture this opportunity as well as active management of demand in buildings to respond to needs of the grid.”
