June 5, 2020
Episode 12 - New real estate value standards for office buildings -

In the previous episode, we looked at the project changes in the office building market from the expansion of telework and described how it was unlikely that needs in Tokyo’ would suddenly decline in the end. There is now a worldwide movement to rethink and redefine the value standards for office buildings including the impact on telework, and we will focus on this theme in this episode.

 

ESG investment is an investment approach that aims to incorporate environmental, social, and governance considerations into investment decisions, improve risk management, and generate sustainable, long-term returns. The United Nations Environment Programme Finance Initiative (UNEP FI) and the United Nations Global Compact (UNGC) put forward guidelines for ESG investment in 2006.

 

In 2017 it was pointed out that Japan was lagging behind other developed countries in the degree (progress) of ESG integration in the investment process, and it was not until March 2018 that a final domestic report was released, and the physical impact, such as the impact on rents, gradually began to be reported. Several performance evaluation tools for office buildings have been developed, and in fact, it has been reported that rents for new contracts have already increased by about 4.4% for ESG certification in the 23 wards of Tokyo.

Allowance rent increase %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
*Source: Excerpt and figure prepared by International Interface based on the “Questionnaire Survey on Office Buildings in Japan with Excellent Environmental Friendliness, Comfort, and Health” conducted by the Ministry of Land, Infrastructure, Transport and Tourism

 

The figure above shows that tenants are most likely to accept rent increases in the 4-6% range, and this suggests that it is likely that your office building will higher rent with CRE certification. One of the reasons for this is that companies that move into such a building can expect to reduce their utility bills in many cases, while also promoting their corporate image through environmental considerations and improvements in the environment for employees.

 

With the increase in satellite offices due to the expansion of remote work and the adoption of ESG real estate as a standard, properties that have not been considered as investment targets in the past may be able to generate tremendous yields depending on the strategy (assuming renovation, etc.). As these initiatives take root, they will also work to improve the value of Tokyo as whole, and we look forward to seeing Tokyo continue to change in the future.

 

Sources: April 2019 “Questionnaire Survey on Office Buildings in Japan with Excellent Environmental Friendliness, Comfort, and Health” from the Ministry of Land, Infrastructure, Transport and Tourism

July 3, 2019 “ESG Real Estate Investment Advisory Committee Report” from the Ministry of Land, Infrastructure, Transport and Tourism

 

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Disclaimer:

Neither International Interface nor its affiliated companies make any warranties or claims on the implied accuracy of the information contained herein.