Green Premium: What is the Implied Prognosis for Sustainability?

Figures & data

Table 1. BREEAM credit scores and weightage.

Assessment Features	Available Credit	Weight	Max Section Score
Management	22	0.12	12
Health & Well-being	10	0.15	15
Energy	30	0.15	15
Transport	9	0.09	9
Water	9	0.07	7
Materials	12	0.135	13.5
Waste	7	0.085	8.5
Land Use & Ecology	10	0.10	10
Pollution	13	0.10	10
Innovation	10	0.10	10
Max Achievable BREEAM Score			110

Note. Based on BREEAM (2014) Table 6.

Table 2. BREEAM rating.

Note. From BRE Global (2011).

Table 3. Definition of variables for hedonic models.

Variables	Codes	Types	Description
Dependent variables
Rental	LOG_RP	Numeric	Rental per SF
Last Sales Price	LOG_PRICE	Numeric	Sales price per SF
Independent variables
Age	AGE	Numeric	Years since built
Size	SF	Numeric	Total square feet
Location	ZONE	Dummy Variable	1 – Zone 1 0 – Zone 2–6
Number of Floors	FLOORS	Numeric	Number of Floors
BREEAM Certification	BREEAM	Dummy Variable	1 – BREEAM certified 0 – uncertified
CoStar Rating	COSTAR	Numeric	1 (worst quality) to 5 (best quality)
Closest Transit Station	CLOSEST_TRANSIT	Numeric	Miles to closest transit station
Percent Leased	PERCENT_LEASED	Numeric	Percentage of the building that is leased
Typical floor size	TYPFLOORSF	Numeric	Typical floor size
LOcated out of town	OUT_OF_TOWN	Dummy Variable	0 – located in town 1 – located out of town
Located on a high street	HIGHSTREET	Dummy Variable	0 – not located on a high street 1 – located on a high street
renovated in the last 10 years	RENOVATED	Dummy Variable	0 – not renovated in the last 10 years 1 – renovated in the last 10 years
LAST sale Date*	LAST_SALE_DATE	Dummy Variable	0 – transacted 2008–2018 Except 2008, the reference category

Note. *Only used in models for price premium. It shows the last date on which the property was sold.

Table 4. Descriptive statistics.

	Rent £/Ft^2Raw Log	Price £/Ft^2Raw Log	Size (Ft^2) Raw Log	% Leased Raw Log	Number of Floors Raw Log	Age Raw Log
Overall Sample
Mean	48.07 3.80	2179.27 6.43	45471 9.73	96.84 4.55	6.28 1.70	73.87 3.90
Std. Deviation	18.41 0.39	8782.79 1.37	83844 1.42	11.60 0.32	3.68 0.52	64.67 1.00
Skewness	0.849 −0.18	12.19 0.27	4.31 0.12	−4.82 −18.70	3.62 −0.29	1.33 −0.57
Kurtosis	1.52 −0.57	198.17 1.75	25.25 -0.39	26 484.95	28.15 1.00	1.50 0.19
Observations	2842	2842	2842	2842	2842	2842
Certified
Mean	61.69 4.07	1397.47 6.86	136,175 11.34	96.69 4.16	9.39 2.12	40.63 3.06
Std. Deviation	19.82 0.32	1846.90 0.81	143942 1.01	10.13 0.13	5.79 0.47	49.12 1.22
Skewness	1.93 −0.29	6.04 0.30	2.22 −0.05	−3.53 −3.99	3.79 0.39	1.93 −0.05
Kurtosis	3.21 1.09	51.94 0.77	6.42 −0.56	12.45 16.77	21.54 2.15	3.75 −0.80
Observations	221	221	221	221	221	221
Brown
Mean	46.92 3.78	2245.19 6.39	37823 9.60	96.85 4.55	6.02 1.67	76.67 3.97
Std. Deviation	17.82 0.39	9126.97 1.40	71627.63 1.37	11.72 0.33	3.31 0.51	65.05 0.95
Skewness	0.80 −0.16	11.76 0.31	4.86 0.14	−4.88 −18.28	3.13 −0.37	1.31 −0.52
Kurtosis	1.17 −0.62	183.73 1.68	32.82 −0.29	26.51 459.36	22.70 0.90	1.41 0.12
Observations	2621	2621	2621	2621	2621	2621

Note. This table presents the descriptive statistics for the raw data and their corresponding transformed log values to provide a balanced view of the data and to resolve any anomalies created by the raw data.

Median price for All Sample/Certified/Brown is £650.11/£894.57/£619.89.

Median rent for All Sample/Certified/Brown is £47/£59/£46.

Table 5. Models 1 and 2 regression results.

	Model 1 – Results For Rental Analysis				Model 2 – Results For Price Analysis
Sig F-Test	0.000				0.000
Adjusted R^2	0.459				0.455
Observations	2842				2842
Independent Variable	β	P-Value	P-Value (Glejser Test)	VIF	β	P-Value	P-Value (Glejser Test)	VIF
CONSTANT	1.683	0.000***	0.010		6.329	0.000***	0.000
ZONE	−0.065	0.000***	0.563	1.195	−0.070	0.000***	0.063	1.196
BREEAM	0. 043	0.000***	0.403	1.132	0.223	0.000***	0.333	1.133
AGE	0.000	0.000***	0.140	1.219	0.003	0.000***	0.499	1.225
SF	0.000	0.595	0.057	1.671	−0.000	0.000***	0.116	1.672
FLOORS	0.011	0.000***	0.140	1.697	0.060	0.000***	0.000	1.697
CLOSEST_TRANSIT	0.000	0.980	0.002	1.071	−0.017	0.351	0.480	1.072
PERCENT_LEASED	0.000	0.406	0.605	1.009	0.001	0.461	0.183	1.009
COSTAR	0.006	0.054*	0.071	1.480	0.048	0.028**	0.548	1.481
OUT_OF_TOWN	−0.014	0.688	0.307	1.006	0.169	0.340	0.292	1.006
HIGHSTREET	0.013	0.472	0.176	1.020	0.059	0.012**	0.083	1.020
RENOVATED	0.002	0.737	0.583	1.018	0.122	0.000***	0.027	1.018
TYPFLOORSF	0.000	0.379	0.622	1.426	0.000	0.028**	0.410	1.426
LAST_SALE_DATE	N/A		N/A
2009					−0.017	0.442	0.480	2.390
2010					−0.021	0.390	0.490	3.177
2011					−0.024	0.340	0.497	4.038
2012					−0.002	0.941	0.366	3.627
2013					0.112	0.000***	0.095	3.841
2014					0.117	0.000***	0.275	4.108
2015					0.205	0.000***	0.377	4.262
2016					0.164	0.000***	0.767	3.834
2017					0.161	0.000***	0.456	4.139
2018					−0.003	0.845	0.000

Note. *** denotes significance at the 0.01; ** and * denote significance at the 0.05 and 0.10 levels respectively.

Durbin-Watson Test: Model 1 = 1.713 and Model 2 = 2.028.

Table 6. Implied rental growth analysis.

Type of Green Effect	Target Required Return (%)
	6.91	8.5	10	12	15
PANEL A: Implied Annual Rental Growth Rate Relative to Green Effect on Price
Green Mean Rental Premium	6.56	8.16	9.66	11.68	14.69
Green Median Rental Premium	5.62	7.25	8.78	10.82	13.88
Panel B: Implied Annual Rental Growth Rate/Historical Annual Rental Growth Rate Gap (Median basis bracketed)**
CoStar Data – 3.07% p.a. rental growth rate over 16.8 years to 2Q19	3.49 (2.55)	5.09 (4.18)	6.59 (5.71)	8.51 (7.75)	11.62 (8.55)
Colliers Data* – 1.61% p.a. rental growth rate over 18.5 years to 2Q19	4.94 (4.01)	6.54 (5.64)	8.05 (7.17)	10.06 (9.21)	13.08 (12.27)
MSCI Global London Office Rental – 2.88% p.a. rental growth rate over 38 years to End 2018	3.67 (2.74)	5.62 (4.37)	6.78 (5.90)	8.79 (7.94)	11.81 (11.00)

Note. The table displays the implicit rental growth (based on incremental Green mean/median rental premium of £2.02/ft²/£1.98ft²) relative to assumed Target Required Return (TRR) given the incremental Green mean/median price premium of £500.68/ft²/£138.24/ft². The gap between the implicit annual growth rate and the actual historic average growth rates based on data from CoStar, Colliers, and MSCI Global are also displayed in Panel B of this table.

Data cover office properties in the West End, City, and Southbank

*Based on the average rental data for West End, City, and Southbank office sub-markets.

** The gap is obtained from deducting the annual historical growth rate from the corresponding Green mean/median premium.

Table 7. Financial implications of a green premium.

B Rating	Standard*	Outstanding	Excellent	Very Good	Good	Pass
PANEL A: Same Interest Rate Regardless of Size of Incremental Loan
Value	224,519,000	299,059,308	270,545,395	281,995,864	205,883,923	261,115,597
L/V (80%)	179,615,200	239,247,446	216,436,316	225,596,691	164,707,138	208,892,478
Points (1%)	1,796,152	2,392,474	2,164,363	2,255,967	1,647,071	2,088,925
Net Mortgage	177,819,048	236,854,972	214,271,953	223,340,724	163,060,067	206,803,553
INM		59,035,924	36,452,905	45,521,676	(14,758,981)	28,984,605
MMP	1,136,334	1,513,597	1,369,283	1,427,236	1,042,019	1,321,557
IMMP		377,263	232,949	290,902	(94,315)	185,223
GRP		24,418	22,093	15,116	(368)	(101)
IMMP-GRP		352,845	210,856	275,786	(93,947)	185,122
PVA240,0.0391/12		58,685,390	35,069,695	45,868,891	(15,625,321)	30,789,601
Marginal Cost		4.62%	4.62%	4.62%	4.62%	4.62%
PANEL B: Analysis Based on Differential Mortgage Rates Relative to Size of Mortgage
M Rate	4.5%	5%	4.75	4.75	Same as A	4.7
MMP	1,136,334	1,578,927	1,398,663	1,457,859	Same as A	1,344,215
IMMP		442,593	262,329	321,525	Same as A	207,881
Rent		24,418	22,093	15,116	Same as A	(101)
IMMP-GRP		418,175	240,236	306,409	Same as A	207,780
PVA240,0.0391/12		69,551,114	39,956,194	50,962,127		34,558,093
Marginal Cost		5.12%	4.87%	4.87%	Same as A	4.82%

Note. The figures in this table show the financial implications of green premiums assuming a constant payment mortgage over 20 years at 4.5% p.a. interest rate compounding monthly and 1% points. Panel A simplifies the analysis by assuming 4.5% p.a. interest rate regardless of the size of the amount borrowed while Panel B adjusts the interest rate to reflect lenders’ exposure risk relative to quantum of loan, holding all other things constant.

INM = Incremental net mortgage, i.e., difference between standard office mortgage and green office mortgage

MMP = Monthly mortgage payment

IMMP = Incremental monthly mortgage payment, i.e., difference between standard office MMP and green office MMP

GRP = Green rental premium

* = Standard signifies “brown” office building. The value of the other categories = [Value of Standard × (1 + i)]

where i is the respective green premium.

PVA = Present value of annuities resulting from IMMP-GRP over 240 months at 3.91%/12. 3.91% is the 30-yr

Gilt yield for 20 years.

Table 8. Models 3 and 4 regression results: BREEAM ratings’ premia.

	Model 3 – Results for Rental Analysis		Model 4 – Results for Sales Price Analysis
Sig F-Test	0.000		0.000
Adjusted R^2	0.460		0.455
Observations	2842		2842
Independent Variable	β	P-Value	β	P-Value
CONSTANT	1.682	0.000***	6.320	0.000***
ZONE	−0.065	0.000***	−0.070	0.000***
AGE	0.000	0.000***	0.000	0.386
SF	−0.000	0.523	0.000	0.000***
FLOORS	0.011	0.000***	0.060	0.000***
CLOSEST_TRANSIT	0.000	0.981	−0.018	0.318
PERCENT_LEASED	0.000	0.439	−0.001	0.457
COSTAR	0.006	0.047**	0.048	0.002***
OUT_OF_TOWN	−0.014	0.696	0.168	0.342
HIGHSTREET	−0.006	0.208	0.062	0.009***
RENOVATED	0.002	0.695	0.124	0.000***
TYPFLOORSF	0.000	0.367	0.000	0.027**
LAST_SALE_DATE	N/A	N/A	0.184	0.000***
BREEAM OUTSTANDING	0.063	0.265	0.332	0.001***
BREEAM EXCELLENT	0.057	0.000***	0.205	0.000***
BREEAM VERY GOOD	0.039	0.003***	0.256	0.000***
BREEAM GOOD	−0.095	0.143	−0.083	0.563
BREEAM PASS	−0.026	0.768	0.163	0.211

Note. *** denotes significance at the 0.01 level; ** denotes significance at the 0.05 level.

Table 9. Model 5: breeam rental premium by zone.

Independent Variables	β	p-Value
Zone 1	0.037	0.000***
Zone 2	0.001	0.960
Zone 3	0.118	0.008***
Zone 4	0.006	0.933
Zone 5	0.064	0.148
Zone 6	0.054	0.227

Note. *** denotes significance at the 0.01 level.

Table 10. Model 6: breeam price premium by zone.

Independent Variables	β	p-Value
Zone 1	0.241	0.000***
Zone 2	0.325	0.000***
Zone 3	0.381	0.040**
Zone 4	0.030	0.895
Zone 5	0.421	0.079
Zone 6	0.376	0.001***

Note. *** denotes significance at the 0.01 level; ** denotes significance at the 0.05 level.

Table 11. Factors affecting tenant and investor choice of property.

Tenants		Investors
Factor	Mean Rank	Factor	Mean Rank
Location	2.95	Location	2.38
Rental	3.95	Acquisition Price	2.56
Amenities & Facilities	4.45	Accessibility	2.88
Accessibility	4.60	Amenities & Facilities	4.50
Lease Structure & Terms	4.75	Building Design	5.56
Building Size	5.25	Building Size	6.50
Building Design	5.50	BREEAM Certification	7.19
BREEAM Certification	7.55	Developer Reputation	7.19
Building Height	8.00	Impact of Marketing	8.13
Impact of Marketing	8.00	Building Height	8.13

Note. The results of the Friedman Test (with 1 being the most important and 10 being the least important factor affecting tenants’ and investors’ decision to rent/purchase an office building) are presented in this table.

Table 12. Factors affecting tenant and investor choice of BREEAM certified office buildings.

Tenants		Investors
Factor	Mean Ranking	Factor	Mean Ranking
Lower Rent	2.75	Expected Higher Rental & Sales Price	3.94
Lower Utility Cost	3.45	Lower Utility Cost	4.44
Expected Lower Staff Turnover & Increased Productivity	3.85	Image Gain	4.44
Internal CSR Policies	4.35	Expected Lower Obsolescence	4.63
Marketing Reasons	4.50	Lower Environmental Impact	4.94
Image Gain	4.55	Marketing Reasons	5.06
Lower Environmental Impact	4.55	Expected Lower Vacancy Rate	5.63
		To Prevent Impact of Future Stricter Government Regulations	5.75

Note. The results of the Friedman’s Rank Test (with 1 being the most important and 10 being the least important reason affecting tenants’ and investors’ decision to rent/purchase BREEAM Certified office building) are presented in this table.

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