Introduction
Sustainability has now firmly been incorporated into the boardroom agenda. Globally, as firms look to create a roadmap towards their net zero carbon commitments the built environment, which contributes -40% of global carbon emissions becomes an important tool for reducing such emission for environmental sustainability. Various strategies are being devised, and key among them, are building certifications where the real estate portfolio is being “green-ed” and green leases, which include identifying sustainability responsibilities and putting measurable outcomes in a collaborative partnership with landlords. Given that 70-75% of all building carbon emissions arise from operations, we continue to see occupiers transitioning from chasing sustainability certifications to emphasizing on sustainability reporting. This shift rests on the reform of the current leasing system- from ‘traditional leases’ to ‘collaboration-based green leases, enabling data sharing between building owners and occupiers By utilizing such datasets, corrective measures can be taken to achieve net zero targets at a holistic level.
Green-certified buildings
• Requires fulfilment of pre-defined criteria for building owners to get various sustainability certifications for sustainable development goals
• These certifications are indicative of responsible real estate, but additional instruments are required to achieve net zero carbon targets.
Green leasing
• Agreement to ensure continuous collaboration between building owners and occupiers to deliver on ESG goals throughout the life of the lease.
• Flexibility can be maintained to cater to the unique objectives and challenges of different organisations.
• Clearly defined responsibilities for both parties.
• Ensures transparency through data capturing and sharing.
Rising penetration of green-certified buildings
Green coverage increased from 39% in 2020 to 53% in 2023
The real estate market in india is making significant strides towards sustainabale development and the increasing green-certified office stock in a clear indication of this change. Moreover, the penetration of green certification in Grade A buildings is expected to further rise at a strong pace. It also highlights how landlords are aligning themselves with the needs and preferences of occupiers. Importantly, there is strong evidence of a 9-13% rental premium and a 300-500 bps higher occupancy level in green-certified assets.
250 mn sq ft of green-certified stock under REIT or institutional ownership
Institutional landlords with their global learnings are leading the way in terms of green certifications for new projects as well as green upgrades through retrofits. Out of the total grade A office stock under the three listed REITs in India, nearly 96% is already green-certified. Additionally, the stock owned by institutional players also has a higher green-certification penetration with 86% of their stock being green-certified
Towards Responsible Leasing
Green clauses are often not a part of the main lease agreement
Out of a total leased area of 226.8 mn sq ft analyzed during Jan 2018 – Sep 2023, green leasing accounted for ~9% of the area leased. It is important to note that the share of green leasing has a downward bias – in certain cases, the green clauses are included as a part of a memorandum of understanding, which is not necessarily legally binding.
Green Leasing is yet to reach widespread adoption
Increased adoption of green leases post-COVID; widespread adoption is still distant
The amplified focus on sustainability and well-being in the post pandemic world led to a significant increase in the share of green leases in overall gross leasing activity.
However, widespread adoption is still a long way off and this can be attributed to the lack of industry-wide guidance on minimum standards, lack of transparency, legal complexities, split incentives, and unrecognized value.
Legal teams often exhibit reluctance in agreeing to green lease terms, driven by risk avoidance or a desire to simplify and expedite the negotiation process. As a result, clauses related to sustainability are frequently redlined without thorough consideration.
Moreover, even when finalized, green clauses often become mere check-box exercises and promises of best efforts being undertaken towards improving the environmental performance indicators of the asset under consideration.
Shades of green clauses
Light Green
• May not be legally binding.
• Limited commitment and scope mostly extending to improving energy efficiency.
• Compliance on a best-effort basis or a memorandum of understanding that is usually outside of a lease.
Dark Green
• Legally binding.
• Require a significant level of commitment and cover a wider scope including social and governance aspects.
Global companies lead the way in sustainable practices
Hyderabad and Bengaluru account for 64% of the green leasing activity in India.
Final reflections
1 – 53% Penetration of green-certified stock in overall office stock
The penetration of green-certified buildings in India’s office market is increasing at a rapid pace. While developers can design a green-certified building, environmental performance results will be lackluster if the building is not operated efficiently. Hence, occupiers play an extremely important role in maintaining and improving the environmental performance of an office asset. Given the collaboration required, the lease contract becomes an important instrument to achieve sustainability targets.
2 – 4% to 16% Increase in the share of green leasing in overall office leasing; Pre-COVID (2018 –19) to post-COVID (2022 –Sep)
India has a long road to travel on the green lease continuum, but the beginnings of a change are already evident. The share of green leases has quadrupled in the 2022- 2023 period and is a clear sign of landlords/ asset owners and occupiers working together. Global occupiers and institutional landlords are leading the way in the adoption of green leasing, but the clauses are still limited to basic energy conservation and waste management aspects.
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