2020 UK Budget promises a greener and more connected future

Digital Infrastructure

The government’s plans for a £5bn upgrade to the national digital infrastructure are encouraging. However, the existing digital infrastructure is in need of significant upgrades and investment, particularly in London, where varied digital connectivity could contribute to building obsolescence.

With respondents representing 10% of the capital’s office market, or 25 million sq ft, our 2020 London Landlord and Investor Survey found direct fibre connections (FTTP) to be the second most important amenity in an office building, behind end of trip facilities.

As the city positions itself as a global tech hub, ensuring we are equipped with next generation gigabit-ready broadband will help to bolster London’s position as a magnet for people, businesses and investors. The capital’s variable digital infrastructure lags many other global gateway cities, such as Singapore and New York, and considering the part this plays in attracting and retaining best talent, London cannot afford to be complacent.

We have seen that Wired Certified office buildings in London can command rental premiums of almost 5%, on average, compared to similar uncertified schemes. As these digital rental premiums rise the further away from the core you get, investors will likely be keeping a close eye on how well the city is able to embrace higher levels of digital connectivity. Wired Score ratings do not currently alter a building’s valuation, however we expect this to change, with a building’s ‘digital wellness’ ultimately impacting its pricing, ‘letability’ and value at point of sale.

The ‘green’ agenda

The £33bn earmarked to help the government realise its target of the UK achieving carbon-neutral status by 2050 marks the first step in a bold road map and underscores the commitment to delivering a “budget for climate & nature”.

Within commercial real estate, ongoing consultations to improve the energy efficiency standards of all commercial buildings to EPC B rating will undoubtedly be causing frustrations for some landlords and investors. With 64% of commercial buildings in London completed prior to the year 2000, there is an opportunity to enhance value by innovatively ‘greenifying’ these buildings.

London’s commercial real estate market is a key target for global investment and thus one of the most exposed to evolving developer, investor and occupier demands. As ESG investment strategies become increasingly developed, the capital must ensure it can provide the appropriate stock. Green credentials of businesses as well as the workspaces they occupy is something we expect will come under increased scrutiny. And with unfulfilled job vacancies running just shy of an all-time high, businesses are turning ‘greener’ in a bid to attract and retain the best staff.

The government’s £33bn commitment to help deliver a greener future is welcome news, however the challenge will be preventing building obsolescence and fostering a market that currently does not necessarily prompt green rental premiums, but one that will likely see brown discounts become more prevalent; i.e., rental discounts on buildings that have not been ‘greenified’. The danger of the latter will be the fine line between the avoidance of improving a building’s green credentials to maintain returns, albeit with declining incomes, and the threat of rising voids and eventual obsolescence as businesses and indeed investors, shy away from ‘ungreen’ assets.

Globally, assets totalling USD 120tn, including commercial real estate, are already managed by financial firms signed up to voluntary climate change disclosures. This is driving some of the growth in green investor demand, especially as there is an expectation that these standards will likely become mandatory.