An example is Platinum Sentral, which was awarded the green mark platinum in 2014.
By Datuk Stewart Labrooy
In the fast-evolving landscape of Malaysian real estate, the Green Revolution has emerged as a pivotal factor that could significantly impact the future valuation of properties in the country. The emphasis on environmental, social and governance (ESG) principles is becoming increasingly vital for both landlords and investors alike.
Across the Asia Pacific region, governments and organisations are pledging their commitment to achieving net-zero emissions by 2050. New Zealand, Japan and South Korea have enshrined this goal into legislation, while Mainland China and India are setting ambitious emissions reduction targets. Singapore, a prominent regional player, has introduced stringent measures that mandate upcoming data centre projects to obtain Building and Construction Authority (BCA) Green Mark Platinum certification.
The push for ESG principles is not confined to regulatory changes alone; stock exchanges across the region are demanding mandatory sustainability reporting. The China Securities Regulatory Commission (CSRC) and the Hong Kong Stock Exchange (HKEX) have imposed reporting requirements related to pollutant emissions, pollution prevention procedures and environmental penalties on listed companies.
The Asian real estate market is undergoing a transformation, driven by the flight-to-quality and flight-to-green trends. With a substantial proportion of buildings in Asia-Pacific being relatively young, there are ample opportunities to develop modern, high-quality green buildings that align with the rising demand for top-tier office spaces.
The Malaysian dilemma
However, the Malaysian commercial landscape presents a unique challenge. Many existing buildings in Malaysia may struggle to meet the minimum sustainable standards required by discerning multinational tenants and investors. Initiatives related to green buildings and green leases remain popular but some landlords face difficulties in adopting such measures due to declining occupancy, falling rental rates and higher operating costs.
In response to these challenges, there is a growing trend of companies and tenants favouring green features and ESG factors in their real estate decisions. More than two-thirds of commercial real estate professionals in a recent survey stated that their focus on ESG has intensified in recent years, with a primary goal of reducing energy consumption and carbon emissions.
Over the past two decades, having sustainable, energy-efficient and end-user platform features in a building was considered a luxury or nice-to-have requirement in buildings being constructed in Malaysia. The problem was that those features could not be easily or directly translated into a return on Investment (ROI). This resulted in developers of office buildings cutting corners in the specifications of the air conditioning, glazing, water conservation and lighting opting for cheaper less energy-efficient solutions. Getting a Leed Gold or Platinum certification for their buildings is an expensive option that does not translate to rental premiums. After all, energy is still subsidised and relatively cheap.
How the tables have turned
Today the difference in the market value of ESG-compliant versus non-compliant buildings in reference to the additional investment required to fulfil ESG norms is spreading. Valuations of non-ESG-compliant buildings are falling in tandem with falling rents as customers move out to the newer Leed Platinum or Gold-rated buildings. Not only are these newer offerings extremely energy efficient but they are designed to cater for the new lifestyle requirement of the modern workforce.
Regardless of the ESG trend, we must be aware that the stock of existing non-ESG-compliant real estate is still enormous. This non-compliant real estate will still be heavily transacted for the years to come albeit at a bigger rental discount to market whereas ESG-compliant/certified buildings will command green rental premiums. The message to the market is clear and sets the stage for viable future investments in green designs.
This does not augur well for the real estate investment trust (REIT) or property investment industry where those funds or trusts with older, non-ESG-compliant buildings, will face rising vacancies and lower property yields compounded by rising electricity and operating costs. They will have to undertake a massive capital expenditure program to green their portfolios to preserve their valuations and keep their investors happy.
However, it is heartwarming to note that many Mandatory Renewable Energy Targets have already started on this journey.
For example, CapitaLand Malaysia REIT Management Sdn Bhd, recently announced that two of its retail properties in Malaysia have been awarded the prestigious Green Mark certification by the Building and Construction Authority of Singapore (BCA). Queensbay Mall has achieved the Green Mark Platinum while The Mines has obtained a Green Mark GoldPLUS (Provisional) certification. To date, 39% of CapitaLand Malaysia Trust’s properties based on gross floor area have received a green building certification. Both Sunway REIT and Sentral REIT also have an impressive portfolio of Green Mark buildings and will continue to do well in this very discerning market.
In conclusion, the Green Revolution and the increasing emphasis on ESG principles are reshaping the real estate landscape in Malaysia and across the Asia Pacific region. To thrive in this changing environment, landlords and investors must recognise the significance of ESG factors and consider adopting sustainable practices that will contribute to the long-term value and desirability of their properties.
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