Real Estate Companies in India’s Focus on ESG Performance
The real estate sector in India plays a significant role in the country’s overall carbon emissions, accounting for 39% of the total. With the government’s aim to achieve net-zero emissions by 2070, evaluating real estate companies based on their environmental, social, and governance (ESG) performance has become crucial in shaping the industry.
Growing Commitment to Sustainability in India’s Office Market
According to Vestian Research, an impressive 65% of Grade A office space in India’s top 7 cities is green-certified, reflecting the country’s growing commitment to sustainable construction. Out of 1,362 Grade A buildings, 805 or 59% have green certifications, showcasing the increasing focus on sustainability.
International Certifications Garnering Attention
With India’s office market attracting global occupiers, developers are prioritizing international certifications. The LEED certification, which holds a significant 74% share as of Q2 2024, stands out. Furthermore, Gold certification is prominent in the Indian office market, with 49% of buildings certified gold under LEED and 51% accredited gold under IGBC. This trend emphasizes the growing importance of sustainability in the real estate sector.
Regional Breakdown of Green Stock
Southern cities like Bengaluru, Chennai, and Hyderabad lead in terms of green-certified office spaces, accounting for 58% of the total green stock in India. Bengaluru stands out with the highest green stock of 172 million square feet among the top seven cities. Chennai, on the other hand, has the highest percentage share of green stock (83%) compared to its total Grade A stock.
Interestingly, despite having the lowest stock of Grade A office buildings nationwide, Kolkata devotes 62% of its stock to green-certified buildings. On the contrary, Pune has the lowest percentage (56%) of green-certified office buildings, highlighting room for improvement despite the number of MNCs leasing space in the city.
Impact of Built-up Area and Premiums
When analyzing green certifications based on the built-up area of office buildings, those with a size of less than 5 lakh sq ft constitute 47% of the total number of green-certified buildings. Conversely, buildings with a size of over 10 lakh sq ft account for only 19% of the green-certified buildings. Despite this, 90% of the projects within this category still qualify as green buildings, indicating a strong commitment to sustainability.
It is worth noting that green certification is relatively rare for office buildings with a built-up area less than 1 lakh sq ft. This signifies a lower preference for sustainability practices among small and medium-scale developers and occupiers.
However, green-certified buildings command a premium of 12% to 14% on average compared to non-green buildings. This demonstrates that developers are acknowledged and rewarded for their initial investment in costly sustainable development, as they can charge a premium from occupiers.
Regional Rental Premiums for Green-Certified Buildings
The analysis reveals that Bengaluru leads the pack with a rental premium of 23% to 25% for green-certified buildings. Chennai and Hyderabad follow closely behind, with premiums ranging from 12% to 14% and 13% to 15% respectively. These numbers highlight a strong focus on sustainability in these tech hubs, where companies are willing to pay a premium to promote environmental responsibility and enhance employee well-being.
Additionally, developers in Mumbai and Pune charge an 8% to 12% premium in rentals for green-certified buildings compared to non-certified areas, signaling the potential demand for sustainable spaces in these cities.
Conclusion
As India strives to achieve its net-zero emissions goal, evaluating real estate companies based on their ESG performance becomes essential. The growing commitment to sustainable construction and international certifications in the Indian office market indicates a shifting paradigm towards environmental responsibility.
While progress is visible in cities like Bengaluru, Chennai, and Hyderabad, there is room for improvement in regions like Kolkata and Pune to increase the percentage of green-certified buildings. Developers who invest in sustainable development are rewarded with rental premiums, showcasing the market’s appreciation for environmental consciousness.
Ultimately, the impact of ESG on real estate companies extends beyond the properties they develop and manage, as it contributes to India’s broader sustainability goals and the well-being of the workforce within these office spaces.
