Recently a prospective corporate occupier of repute transacting a lease with a landlord of a commercial building sought details on some of the parameters like sustainability and energy-saving measures within the building. While the landlord was not ready to fulfil the requirements, the occupier saw potential in having those measures in place before finalising the deal.
This is where asset enhancement (AE) initiatives come into play. The purpose of AE is to upgrade a building in order to generate a higher income from an existing space, while freeing up more space for better efficiency.
Optimising building efficiency can significantly increase the occupancy ratio and market value of a building, even in the short term. With the workforce and the occupiers demanding climate-responsible real estate from the building owners and investors, green upgrades will be primary drivers of asset value along with the physical upgrades.
In the commercial market, both grade A and grade B office spaces are in demand. Grade A office building is mostly new, equipped with high-end amenities and good connectivity in a posh locality. These buildings are professionally managed with sufficient parking space for tenants, employees, and visitors. In India, such spaces are built in around one lakh sq.ft. area. Reputed corporate companies and Multi-National Companies (MNCs) are its clients. Grade B buildings are slightly older and may not have the same sophistication as grade A buildings, but would have good quality management and practical facilities. Most companies make their home in grade B buildings due to the cost-effective rent rates and availability.
However, occupiers also wish to offer a quality user experience to their section of people by taking up spaces in grade A office complexes. In the post-COVID-19 era, with a renewed focus on sustainability, user experience is of prime importance. Data on existing office stock suggests that AE presents a great opportunity for the industry.
In the Asia Pacific, for example, over 50% of the office real estate is now over two decades old, which was designed basis old building standards. And, 416 mn sq.ft. of office stock in India is non-green certified. This is 58% of India’s total office stock. It means, a huge share of our offices falls in the grade B category. In just four big Indian metros, the investment potential is ₹237.4 billion.
Why upgrade?
Intuitively, old buildings are a natural target for energy efficiency upgrades. With proper AE of ageing properties, it’s possible to extend the life of a building. It can result in a lower capital cost over the lifetime of the building. Futureproofing buildings around us could make them environmentally friendly and operationally efficient. However, AE initiatives should be taken up at a fast pace. But why do we need to do this? Here are the reasons:
The world has to achieve net zero: Countries, especially developed nations, need to reduce carbon dioxide emissions to net zero by 2050 and give our world a fair chance of limiting the global temperature rise to 1.5 °C by the end of the century. The pandemic has proved that humanity needs to put health and family first. In such a scenario, the 17 identified Sustainable Development Goals (SDGs) are the blueprint of our future action. India’s case is not an isolated one. The journey to carbon neutrality will rely on measures that make the business more sustainable and flexible to the changing needs of our environment and communities. With its contribution of over 40% of the global annual CO2 emissions, built environment in emerging economies like India will play a critical role.
Making the building energy-efficient: Older buildings consume significantly higher energy in comparison to newer ones. And there are no signs of reducing demand for newer buildings any time soon. As such, there’s an abundance of retrofit solutions like insulation, lighting upgrades and HVAC (heating, ventilation, and air conditioning) system overhauls that can help facilities become more sustainable. Retrofits can be applied to every part of a building that consumes energy, including the structure itself, mechanical systems, HVAC, lighting and plug loads.
Enriching the user experience: Supporting existing communities and enhancing user experience are key for occupiers. Designing existing properties that allow movement, comfortable standing and conversations could be a great way to make the space more liveable. For example, placing the garbage bins, kitchen, and printer rooms slightly farther from the working stations may give people time to walk a little and meet others in the office.
Financially attractive: Retrofitting existing buildings can make projects financially attractive. Investments in green upgrades for projects are likely to fetch rental premiums of 30-33% in line with what upgraded projects can command. Upgrading plays an essential role in revitalising traditional business districts. It ensures that areas with limited potential for new development receive more ‘relevant supply’ to meet the needs of occupiers.
Leads to shorter payback period: Most occupiers and landlords prefer shorter payback periods. AE work often gets completed in less time than it takes to build a new building. Technology intervention and innovation, including digitisation and automation, have made it possible. It can result in a shorter payback period, which is great news for stakeholders.
To create smarter and intelligent buildings that can diagnose and fix operational issues, upgrading requires a wider range of technology interventions. Retrofitting is a process that requires an existing building to undergo extensive changes to improve its energy efficiency. On the other hand, AE is a much more subtle approach that focuses on non-structural changes such as installing more energy-efficient measures. Building upgrades and retrofitting are now a necessity. With occupier demand on the rise, it is a hygiene factor too.
Asset Enhancement pros
1. Helps improve a building’s energy efficiency. It can lower utility bills for the owners
2. Improves indoor air quality by reducing pollution caused by appliances and building systems
3. By making existing buildings more sustainable, stakeholders can help lower the organisation’s carbon footprint and support local communities
4. Stakeholders can increase the value of the building. It can help make it more attractive to potential buyers and occupiers
The writer is Managing Director, Project and Development Services, Work Dynamics, West Asia, JLL.
