Landlord and occupier partnerships help deliver sustainability targets

HONG KONG, 14 November 2022 – Partnerships between landlords and occupiers are crucial in the race to decarbonise commercial real estate, and eight in 10 sustainability professionals in Asia Pacific say green leases are essential to getting both parties to cooperate on sustainability initiatives, according to a new JLL survey of 340 corporate sustainability professionals in the region.

The report – titled "Green leases: Setting the tone for responsible leases" – found that strong optimism exists among sustainability professionals, with 65% of those surveyed saying that green leases – which set shared objectives on how a building is to be improved, managed or occupied in a sustainable manner – will become universally accepted and incorporated as the new industry standard over the next three years. This optimism relies in part on green certifications and green buildings becoming a market standard and the understanding that to achieve net zero partnership, between owners and tenants, is vital.

Jeremy Sheldon, Head of Leasing, Asia Pacific, JLL, said: "One of the biggest value drivers for the adoption and execution of green leases is reducing building energy. Since a green lease creates mutual value between owners and tenants by reducing overall energy consumption, which translates to overall costs savings, we are working with many clients to agree on building performance standards to achieve greater energy efficiency and reduce overall energy consumption. On top of the accelerating net zero carbon ambitions of the various stakeholders, green leases are relevant to building owners and investors who are interested in attracting higher rentals and valuations now and into the future."

Barriers to green lease adoption

Despite the optimistic forecast of green lease adoption levels in the next three years, year-on-year growth in Asia Pacific has been slow. Currently, 42% of occupiers and large developers say they have already signed a lease incorporating green clauses – a mere 2% increase from the year before. Typically, commercial leases have imposed barriers through strict obligations, inflexibility, and fostering a short-term rather than long-term view of the value that can be achieved through real estate.

According to JLL, two of the top reasons preventing greater adoption of green leases are increased costs and the limited availability of qualified properties. Cost barriers often lead to discussions on split incentives, where landlords can be unwilling to cover upfront costs if the tenants alone benefit from the improvements, or if tenants are not able to make modifications to the space due to the constraints of the lease.

As a result, demand for assets that meet sustainability criteria is likely to outpace supply, as 43% of respondents mentioned that their organisations intend to sign a green lease by 2025 either as part of the renewal process or as a new lease. Buildings that wish to avoid incurring a "brown discount" – meaning a lower price for a less sustainable property – in the future may need to turn to other means of decarbonisation, such as undertaking deep building retrofits, to significantly reduce energy needs.

JLL's research found that data sharing, transparency, energy efficiency and waste management are the most adopted themes for green leases, which are more in line with the "E" of Environmental, Social & Governance (ESG). However, organisations need to look beyond environmental factors when considering their ESG goals in the built environment.

Landlord-tenant partnership best suits Hong Kong

In Hong Kong, major developers have also begun to drive the change in sustainability within their portfolio through a partnership approach between tenants and landlords. This approach raise awareness and understanding of consumption as well as engaging tenants in driving environmental and social progress in the real estate industry.  

Helen Amos, Head of Sustainability at JLL in Hong Kong, said: "We believe a landlord-tenant partnership approach is more suitable for the market in Hong Kong with major developers such as Swire Properties and Henderson Land and others having already launched these programmes. Net zero carbon targets requires collaboration to achieve them. A partnership approach will enable the engagement required to build an understanding of the use patterns to enable actions to be implemented to deliver reductions. Consequently, commercial buildings that implement such an approach are likely to attract quality tenants with net zero carbon target."

Alex Barnes, Managing Director and Head of Office Leasing Advisory at JLL in Hong Kong, said: "Developers are increasingly building and upgrading existing assets into green buildings and are aware of the importance. The next step is to enhance the software in order to track and improve operational performance. JLL joined Swire Properties' Green Performance Pledge which helps us understand where opportunities lie via active monitoring of waste generation, energy and water consumption. Real estate is responsible for around 40% of global carbon emissions, partnerships like this can help Hong Kong reduce these emissions. These programmes can support more tenants to achieve net-zero carbon emission goals."

Download the full report here.