South Korea paving the way to a Greener Future

The momentum for greener office spaces is gaining traction in South Korea as occupiers act to mitigate environmental risks and align with global net zero goals. As corporates ramp up their green ambitions, reducing their office carbon footprint and collaboration partnerships have become key priorities.

Momentum for green-certified office 

South Korea has experienced a steady rise in political and public awareness of sustainability, driven by the recognition of the impacts of climate change. Buildings account for nearly 60% of the country’s carbon emissions, highlighting the urgent need to tackle the built environment’s carbon footprint. 

In response, the “Green Building Activation Plan for Carbon Neutral Strategy 2050” was introduced in 2018, aiming for an 88.1% reduction in greenhouse gas emissions by 2050. This includes incentives such as acquisition tax cuts based on the energy efficiency grade of buildings. Moreover, Seoul has set a Greenhouse Gas Emission Reduction Target of 32.8% by 2030, with plans to achieve Zero Energy Buildings (ZEB) for existing structures and undertake green remodeling for 1,532 public buildings by 2050. 

With mounting pressure to comply with governmental and municipal net zero carbon goals, the commercial real estate industry has seen a surge in the supply of sustainable buildings. According to JLL research, the green certified prime office stock in Seoul has doubled from 21% to 45% over the past five years (2019-2023).

Global investors adhering to ESG KPIs and consumers demanding social responsibility have further compelled corporates to embrace carbon reduction and sustainability strategies. Commitments to the Science Based Targets initiative have increased by more than eightfold to 68 Korean enterprises by 2024 Q1.

Corporates’ climate ambitions have elevated green building strategies and certifications to a coveted prerequisite when it comes to leasing office spaces. According to a JLL ESG survey, over 80% of Korea-based occupiers desire a 100% green-certified portfolio by 2030.

Furthermore, asset owners demonstrate a keen interest in sustainable strategies as they recognize the capital value of green premiums. Considering the increasing stringency of ESG policies and requirements for prospective buyers, asset owners understand that obtaining green certification before the exit phase of their current asset helps to enhance market competitiveness and appeal to buyers.

Decarbonizing operations and fit out 

Beyond occupying green-certified office spaces, companies prioritize carbon reduction through sustainable operations, which include workplace initiatives such as reducing paper printing or single-use plastic. 

Decarbonizing operations is considered a key element in carbon reduction, as 6 in ten occupiers prioritize reducing operational carbon through energy, water, and waste management along with leasing office space in ZEBs. Energy-efficient lighting and IT facilities are considered crucial in this regard. Sustainable retrofits and office fit-outs are also critical components for reducing embodied carbon emissions. Sustainable fit-outs based on circularity principles were emphasized as top priorities by more than 7 in ten occupiers.

However, sustainable fit out presents a challenge for 6 in ten occupiers mainly due to additional investment required, especially in a high-interest rate market. In response, the Building Retrofit Program (BRP) introduced in Seoul provides interest-free loans to encourage sustainable building fit-outs. Currently, the BRP is primarily focused on public buildings or outdated buildings due to budget constraints. To make this program more accessible, active cooperation between the CRE industry and the city government is essential. 

Green collaboration at the tenant-landlord level 

Beyond regulations, cooperative models between tenants and landlords are also emerging as vital enablers in achieving sustainability. Tenants increasingly demand partnerships for sustainability with landlords: nearly half of all tenants will only seek out landlords willing to collaborate on sustainability initiatives. 

To encourage greater tenant-landlord collaboration, innovative business models such as Green Leases are gaining traction. Green lease contracts go beyond the standard lease terms by including provisions for sustainable operations of the asset. Green leases are a top priority for more than 2 in 5 occupiers who recognize the benefits and by 2030, more than one in three tenants will only partner with landlords who are willing to agree to Green Lease contracts. 

Compared to its Western counterparts, South Korea’s green lease market is still nascent. There are varying opinions regarding the legal enforceability of lease provisions amid the lingering uncertainty about cost-sharing. Nonetheless, the recent introduction of green lease agreements by a prominent domestic AMC highlights the growing interest and potential in this approach.

Looking ahead: ESG as investment quality

As societal awareness regarding environmental concerns continues to permeate across various sectors, South Korea’s real estate market is transforming profoundly towards sustainability. While the fundamentals of the Seoul office market remain robust, it is essential to proactively develop ESG as a mature and standalone investment quality.

Implications for real estate stakeholders