Sustainability remains a key driver for European real estate investors

Despite recent headlines, the commercial case for embedding sustainability within real estate investment strategies remains strong, especially in Europe. Even with big name departures from global net zero alliances and the rise of corporate ‘greenhushing’, European investors understand the financial and economic case for decarbonising and derisking their assets. Resilient buildings will use fewer resources, have lower operating costs, maintain occupier and investor appeal, and therefore deliver long-term value.

• 76% of respondents to JLL’s UK Investor Survey claimed sustainability considerations affected their investment decisions over the past 12-24 months.

• The biggest sustainability drivers noted for these investment decisions were financial viability to retrofit (51%), EPC and regulations (49%), and energy, emissions and NZC alignment (including CRREM) (48%).

• Sustainability criteria, such as energy inefficient buildings and buildings more likely to be affected by physical climate risk, are impacting asset value – 69% of investors saw a dip in value (decrease of 0-100 bps) due to these factors. The market is seeing a trend towards brown discounts for assets with poor sustainability credentials.

• Energy and emissions have become key market drivers – 40% of the UK office development pipeline is targeting net zero carbon in 2025.

• Investors who prioritise sustainability and climate resilience in their portfolios are likely to be better positioned to navigate market challenges, meet evolving regulatory requirements, hedge against rising costs and capitalise on the growing demand for resilient assets.

While many global firms are shying away from public statements or intent around sustainability, behind the scenes they are continuing to embed these strategies within their overall investment processes, understanding the commercial implications.

Data from Morningstar shows that global ESG funds attracted US$16 billion in Q4 2024, driven mostly by European investors. Although not necessarily all earmarked for real estate, this capital must be allocated to environmental, social or governance aligned activities, and among these, decarbonising real estate presents a significant opportunity. Recent JLL research shows a low carbon supply-demand gap of 54% for European offices by 2030 and 28% for industrial. With 2030 the year when many countries and companies have interim carbon reduction targets, this capital could support the longer-term low carbon transition of our buildings and cities.

For today’s investors, sustainability is impacting decision-making. In February 2025, JLL ran an investor survey to gain insight on how sustainability has affected investment decisions over the past 12-24 months. While the survey was sent to UK investors, the predominant source of capital based on responses is 46% UK, 23% rest of Europe and 19% global.

According to our survey, 76% of respondents claimed sustainability considerations impacted investment decisions over the past 12-24 months, with 35% stating they decided not to bid based on sustainability considerations and 30% saying they decreased their offer. From JLL’s proprietary data, core capital has previously been the most sensitive to sustainability during transactions, yet increasingly more opportunistic capital has shown similar sensitivity as the market evolves.

At the same time, 69% of investors in our survey noted a dip in value (decrease of 0-100 bps) for assets that did not meet a certain level of sustainability criteria – be they energy performance, poor EPC rating or high physical climate risk. Coupled with the impact that sustainability is having on decisions, this indicates that brown discounts are being seen for less sustainable assets. This aligns with JLL’s proprietary transaction evidence, which shows for the most part that where sustainability has influenced a deal, it impacts liquidity and pricing negatively as investors shy away from inefficient or at-risk assets. However, green premiums still exist for best-in-class, low carbon assets.

From our survey, the biggest sustainability drivers for these investment decisions were financial viability to retrofit (51%), EPC and regulations (49%), and NZC alignment (energy, emissions and CRREM) (48%) – with 35% also stating physical climate risk and 24% occupier requirements.

The cost of retrofits being cited as a barrier to investment is not new – retrofit rates are well below the level needed to align with most net zero targets, largely due to upfront costs. Rising inflation and construction costs have a significant impact on capex allocation, which requires investors to make strategic decisions when it comes to prioritising building upgrades. JLL calculates the EMEA industrial market alone could require US$80 billion of debt funding to retrofit existing stock that is over 10 years old, and the estimated aggregate cost to retrofit potentially obsolete office stock in Paris, London, Berlin and Munich is between US$85-170 billion.

Institutional investors, investment managers and REITs view EPC ratings and other regulations, as well as energy and physical climate risk, as the biggest influences on decisions, probably due to their longer-term outlook and lower appetite for risk. Meanwhile, private equity, private investors and unlisted propcos/developers in our survey stated the financial viability of retrofits, energy and occupier considerations as the biggest sustainability drivers. These investors are more opportunistic and look for value-add product with a view to exiting to core capital upon fulfilment of their business plan.

In terms of what investors see as occupier priorities, our survey showed energy performance (56%), EPC rating (45%) and employee health and wellbeing (36%) as the top three sustainability considerations. Investors believe occupiers will be seeking energy efficient space to align with corporate targets as well as space that attracts and retains talent.
 

In Hamburg, a large corporate occupier realised their current property did not align with their net zero targets and they needed to relocate. Once a new site was identified, they worked closely with the developer to procure 100% electricity from renewable energy, smart metres to reduce energy and water consumption, biophilic design to promote employee health and wellbeing, and use of sustainable materials where possible.

Based on our survey findings, the role of regulation, energy and emissions in Europe and physical climate risk in the region will drive continued investment into sustainable real estate – due not only to compliance but also the need to deliver best-in-class product to meet the expectations from occupiers and to protect exit liquidity. Yes, the initial upfront capex is high, but the cost of doing nothing will increasingly become greater.

There is a significant amount of sustainability related regulation across the EU and UK, but continued uncertainty and complexity surrounds it. The recent proposed changes to CSRD (Corporate Sustainability Directive Reporting) would mean 80% of the companies previously in scope now fall outside the mandatory reporting requirements, and those that do need to comply have an additional two years to do so. While simplification of regulation is imperative to enable widespread adoption, consistency and stability gives the market more confidence and attracts more capital.

Regulation and transparency also provide investors with clarity on how certain assets and locations align with their overall investment strategy. JLL’s Global Real Estate Transparency Index (GRETI 2024) shows that markets with more sustainability transparency (left hand side of the below chart) attract higher levels of investment, with 84% of all global real estate investment in ‘highly transparent’ markets.

49% of respondents to our investor survey flagged EPCs and regulation as one of the main drivers for sustainable investment. The UK and EU are both highly regulated markets, so investors need to adhere to a certain level of criteria when making investment decisions across the continent. MEES (Minimum Energy Efficiency Standards) in the UK and EPBD (Energy Performance of Buildings Directive) in the EU will require building owners to maintain a minimum energy performance standard and, eventually, report the energy use and emissions of their assets.

Currently in England and Wales, over half (52%) of commercial building stock is below EPC C. As commercial stock will need to be C or above by 2027 and B or above by 2030 to comply with proposed MEES regulations¹, considerable investment will need to be made to upgrade current stock if these regulations are confirmed.

The EPBD is an EU measure focused on reducing the emissions and energy use of buildings across the EU through EPCs. Under this directive, EPCs will be harmonised across the bloc to ensure consistency with how energy performance is being monitored and measured.

In addition to regional legislation, many countries are passing their own regulations specific to building performance. France has its Décret Tertiaire which applies to all commercial buildings delivered since November 2018 with over 1,000 square metres of floorspace. The law requires a 40% emission reduction by 2030, 50% reduction by 2040 and 60% reduction by 2050 against a reference year (2010-19) or defined threshold level. It also requires tenants and landlords to partner together to ensure reduction targets are monitored and met.

The demanding regulatory landscape has not been a deterrent for investors. Instead, as shown by findings from GRETI, many of the more highly regulated cities continue to attract more capital; the most transparent markets have drawn over US$1.2 trillion in direct commercial real estate investment over the last two years, over 80% of the global total.

Respondents to our investor survey put energy performance as the number one sustainability consideration for occupiers, while also citing it as a top three sustainability driver when making investment decisions. As Europe has ageing stock across all sectors, most buildings will need to be retrofitted in order to improve energy performance. Investors recognise that energy efficient buildings command green premiums – both in terms of rental and capital values – and that energy performance affects leasing velocity and exit value, as well as visibility on costs. The shortage of low carbon, efficient buildings across Europe means that demand cannot be met with new construction alone, hence the critical need for retrofits.

For occupiers, energy security is becoming increasingly essential for resilient operations, especially in expanding power-hungry sectors like advanced manufacturing, life sciences and data centres, and reducing energy costs through energy efficiency and onsite renewables is now a key driver for reducing overall operational costs.

From an emissions standpoint, in 2025, nearly 40% of the UK office development pipeline is targeting net zero. Energy efficient, low carbon buildings have become standard for new construction, and asset owners who want to remain competitive will need to look to upgrade existing stock to meet rising market expectations.

Cost reduction is a key driver in the energy transition. Following the invasion of Ukraine, electricity prices across Europe rose sharply and are still on average 50% higher than before. The price of electricity in the UK is more than double the EU, and in July 2024 the UK Government announced a £1.5 billion budget to deliver clean energy projects across the UK to boost the country’s energy security.

At a macro level across Europe, countries are recognising the opportunity posed by renewable and clean energy investment as a means to not only decarbonise but to also combat volatile energy prices and provide energy security. Investors can take advantage of local energy infrastructure in markets that are prioritising decarbonisation as a more cost-effective way to enhance their building performance.
 

Country-level renewable energy initiatives

Grid decarbonisation is gathering pace across the EU and UK – in 2024 the UK closed its last operating coal plant, and year-on-year change in primary energy consumption in 2023 showed an uptick in renewable sources across the EU. To meet net zero targets, grid decarbonisation will need to happen in tandem with investment in improving building performance.

Renewable energy also provides an alternative investment strategy for real estate owners. Buildings are moving beyond being consumers of energy to becoming energy solutions through the integration of new technologies, on-site generation, energy storage systems and building energy management systems (BEMS). Investors and owners looking to mitigate risk, as well as generate alternate income streams, will begin to prioritise renewable energy procurement – on-site where possible, through REGO (renewable energy guarantees of origin) or CPPAs (corporate power purchase agreements), or even investing in their own renewable energy generation source and paying for grid connection infrastructure.

Investors will be increasingly scrutinising the physical climate risk of real estate assets to protect themselves against additional maintenance costs, insurance premiums and risks to liquidity. As the cost and frequency of extreme weather events grow, adaptation and resilience measures are critical to minimising damage to buildings, maintaining business operations and managing additional costs. Research from the Graham Institute (2022) found that under current UK policies, the total cost of damages due to climate change are projected to increase from 1.1% of GDP to 3.3% by 2050 and 7.4% by 2100.

35% of respondents to our investor survey listed physical climate risk as a key sustainability driver when making investment decisions – 60% of these respondents listed the UK as the primary source of capital, while nearly 30% are global. In fact, physical climate risk was the top sustainability driver among the global respondents to the survey. In the July 2024 iteration of our survey, 94% of respondents said they were actively implementing or considering climate risk mitigation and adaptation within their portfolios. Looking to JLL’s proprietary transaction evidence, climate risk is becoming more prevalent as an influencing factor during the due diligence phases of a deal, and derisking buildings through adaptation measures is now one of the strongest business cases for implementing sustainability strategies in real estate.

JLL research found the true cost of climate change goes beyond the billions in damages we read about in the headlines. Physical climate risk will lead to increased costs through direct, indirect and consequential losses.

JLL estimates that roughly US$580 billion (37%) of European commercial real estate sits within the top 10 most climate vulnerable cities in Europe, including major metropolitans like Paris. Addressing these risks now will provide investors with more resilient assets that can withstand and recover faster from future potential extreme climate events.

The commercial drivers for sustainable real estate investment in Europe remain strong, shaped by regulatory compliance, energy efficiency and physical climate risk. JLL's UK Investor Survey reveals that sustainability is embedded in investment strategies, with most investors factoring it into decision-making. The emerging trend of brown discounts for less sustainable assets emphasises the financial implications for not taking action, while green premiums are still achievable for prime assets.

The regulatory landscape in the UK and EU continues to drive sustainable investment, with approaching deadlines and clearer legislative frameworks pushing investors to improve energy performance. Physical climate risk has emerged as a critical consideration, with the potential for increased costs related to insurance, maintenance and business continuity, underscoring the importance of climate resilience in real estate portfolios. Sustainability continues to be a driver for investors who recognise their importance for compliance, tenant attraction and long-term asset value.

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