How much are green buildings worth?

One area where the added value of better environmental quality is out of the question is real estate. A wide range of studies indicate that green buildings can command higher prices and higher rents. Julian Zehner has now re-examined this finding for London property between 2010 and 2021.

Looking at 2,537 sales of property and 2,907 rental transactions, he could not only determine how big the premium is on green buildings in London, but he could also identify how big the premium is for different levels of the BREEAM standard.

The chart below shows the average price premium on the sales price of BREEAM-certified buildings in London compared to other buildings with similar characteristics (age, size, location, etc.). Depending on the method, he found an 8.3-26% premium for green buildings, which is roughly in line with the premia found by other studies.

Sales premium of BREEAM-certified London property

Source: Zehner (2023)

The key driver for these premium valuations is the higher rents that can be achieved. The chart below shows that in the case of London property, the premium on the rents achieved is somewhere between 7.9% and 37%. The upper end of these estimates is well above anything that has been documented in the previous literature.

Rent premium of BREEAM-certified London property

Source: Zehner (2023)

Clearly, it pays to upgrade an existing property to achieve green certifications like BREEAM. Or to build new properties with high green standards. However, one thing should be kept in mind by property developers: It is not always better to aim for higher environmental standards.

In general, higher BREEAM certification standards were rewarded with higher rental premia and higher sales values, but there was hardly any difference between the highest BREEAM certification (‘Outstanding’ or five stars) and the second highest certification (‘Excellent’ or four stars). It seems as if tenants are unwilling to pay for additional green standards, once a certain level of environmental standard has been met. In terms of value for money, a rating of excellent by BREEAM seems to be excellent indeed.