Turning a concern into an opportunity - an opportunity to decarbonise

Reading a recent article expressing the concern in Hong Kong over office vacancy rates I was struck that this is completely contrary to some parts of the world where landlords are moving their tenants out to refurbish.

The motivation? To decarbonise the office space to attract tenants and save costs.

Obviously the concern in Hong Kong is well founded. JLL and CBRE shows more than 10% of Hong Kong’s best commercial floorspace was vacant as of Q4 2023 – most industry experts are saying that the current vacancy rates are historical high. B-grade assets are also suffering, according to data from the latest Hong Kong Government Property Review, with vacancy rates mirroring A-grade assets and B-grade has less ability to compete on an amenity level.

While luxurious amenities, grand lobbies and central locations were the primary drivers in the Hong Kong market with more recent emerging interest in BEAM Plus, LEED and even WELL certifications the next generation of interest is in the area of carbon reduction.

Hong Kong has been a key commercial hub within the wider Asia-Pacific region, and as such, provides a local headquarters for many of the world’s largest financial, legal and industrial businesses but how do you retain these and attract more interested organisations to reinvigorate the workplace market.

Quick statistic - Net Zero Tracker reported that as of end of the 2023 financial year, 929 companies from the Forbes 2000 list – the world’s biggest companies – had set net zero targets. And collectively, the amount of global commercial aggregate annual revenue generated by all businesses with net zero targets was estimated at USD$25.4 trillion.

So, just as Hong Kong businesses commit to the proportion of Green or Sustainability based loans, if a management board have committed to net zero their teams and agents will need workplaces they occupy to help them deliver on their promises.

This is already starting to become a deal-maker in other markets. JLL in its 2024 commercial real estate trends report stated that in the US, for example, a carbon commitment was tied to 77% of lease renewals from the top 100 occupiers (based on square metres of leased space). The data also showed that demand outstrips supply. In Asia-Pacific, JLL estimated there was a shortfall of 2,700,000 sqm of low carbon office space compared to demand.

These can be delivered in Hong Kong not only as new builds, but by retrofits and refurbishments to existing spaces, with the help of expert design thought and input. This is not just about achieving a LEED, WELL or other accreditation, these are only part of the story and may cost a significant amount of money to achieve so it’s important to discuss and understand what outcome you wish for your building first before choosing which of these to target as some will fundamentally impact a design.

Existing buildings have one major plus compared to new builds in that a retrofit retains a significant amount of the existing embodied carbon. Conversely, many existing Hong Kong office buildings have extremely poor passive thermal performance. They are generally poorly air sealed and use single glazing, so in winter they rapidly lose heat and people need a huge amount of energy for heating – I even met one resident using a hair dryer to heat his room as his air-conditioning had no heating circuit. In summer, the same is true for cooling. This is partly due to the local market not placing a high priority on energy-efficiency. Energy is relatively cheap, so while markets like Australia have seen a clear business case from an operational energy costs reduction perspective, this has not been true for Hong Kong.

Delivering lower carbon projects also enables Hong Kong property businesses to deliver on their own commitments for green and sustainability linked loans. We can see these becoming more onerous as they align with bank’s own increasing challenges from auditors and their own shareholders.

As more businesses and investors look to align with organisations that have credible sustainability targets matched by action, there is a risk of losing face, or even losing a client, for businesses that lack tangible achievements.

Here again, a retrofit can deliver a major benefit, if smart building features such as energy metering, zoning and controls, occupancy sensors and energy monitoring platforms are installed. That will deliver measurable data and help ensure that the sustainable thinking is matched by sustainability performance. A graph of energy saved and corresponding emissions reduced is a presentation slide that speaks a thousand words about a company’s ESG integrity.

Keep in mind this is not about doing all the things all at once. An asset decarbonisation plan can be developed for a five or even 10-year staged pathway of works, that starts from gaining a full understanding of the asset, and then plans works to deliver the maximum ROI while also balancing owner needs, occupant comfort and commercial realities. It is about appropriate and timely interventions – a marathon, not a sprint – towards the known goal of net zero.

This is a new approach in the Hong Kong market and needs advisors capable of undertaking appropriate technical due diligence, energy performance auditing, thermal comfort analysis and building services design for energy efficiency retrofits is still confined to a small number of consultancies like Cundall.

By working this way, together we can ensure commercial spaces are fit to meet not only all the various sustainability accreditation tools that currently exist and are also well-positioned to retain their relevance and suitability as regulations become more stringent around carbon emissions and other performance indicators.