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Does it make sense to invest in sustainable real estate?

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People across the globe are, arguably, more cognisant of environmental issues now than they were 50 years ago. Widespread concern for the natural world has led to renewable energy uptake, emissions reduction initiatives and sustainable buildings.

There's a lot of spectacle associated with green structures. Pictures of plant-laden facades and rooftop solar may generate positive sentiment, but do such initiatives produce a return on investment? Some parties conducting development feasibility studies may harbour reservations. 

Defining sustainable real estate

In order to understand what a green building actually is, it's helpful to have a definition. According to the US Environmental Protection Agency, sustainable real estate is a two-sided coin. In order for a structure to be considered "green", the facility itself must not only have been constructed in an eco-conscious manner, but also reduce its impact on both the environment and human health.

For example, a sustainable building may be made of either recycled materials or products that have a minimal impact on local and regional ecosystems. In addition, that same structure must operate in a manner that suppresses energy and water consumption.

This definition posits a number of concerns to commercial real estate investors. Stakeholders may benefit from lower resource expenses after construction is completed. However, they may incur higher development costs by having to source particular materials. While this is suppository, it is worth bearing in mind. An investment appraisal may show parties that they won't register a return for 10 years, for example.

Addressing the costs 

Deloitte conducted a report on this very issue, titled Breakthrough for sustainability in commercial real estate. The research firm conducted a comprehensive study of the financial obligations and benefits associated with green commercial real estate (CRE). 

Upon assessing utility costs, Deloitte noted that the sustainable structures consume between 29 and 50 per cent less energy than those that are not considered green. In addition, eco-friendly facilities utilise 40 per cent less water and generate approximately 70 per cent less solid waste. 

Deloitte also collated information which suggested that the value of green buildings is higher than those without sustainable features. For instance, the company recognised that, in markets where green CRE is quite prevalent, non-green buildings typically have lower rental rates and sale prices.

How do sustainable building characteristics impact a structure's value? Green CRE typically has a moderate, favourable potential impact on refurbishment expenses, insurance, premium on yield, utility expenses, rental growth and service charges. Investors using property valuation software will likely note that, as per Deloitte's data, debt rates, debt services and disposal fees experience "no discernable impact" in regards to green building. 

Is renting sustainable CRE space appealing? 

Of course, every CRE investor needs to put him or herself in the tenant's shoes. Like any commodity, the price of a particular good will increase in the event demand for that product increases while supply remains stagnant. The question to ask is: Why would companies want to rent space in sustainable facilities? 

For one thing, when a company moves operations to eco-friendly buildings, it does make for good PR, attracting possible investors, customers or clients. That being said, a media campaign will only go so far. Interested tenants want to experience tangible benefits as a result of establishing offices in green structures.

One report suggested that sustainable CRE may improve a business's employee retention. A joint study between Deloitte and Charles Lockwood noted that 93 per cent of surveyed companies maintained that, by retrofitting buildings with eco-friendly features, they enhanced their ability to attract talent. 

"Modest improvements to indoor environmental quality may have a profound impact on the decision-making performance of workers,"

In addition, 81 per cent experienced higher worker retention, and 87 per cent noted their employees' productivity increased. Businesses who offer health care coverage to their staff will be happy to know that 75 per cent of Deloitte and Charles Lockwood's survey participants encountered improved personnel health. Statistics such as these can play a huge part in an investor's decision-making, even when he or she compares it to data within property development programs

Higher productivity and better well-being are favourable news, but how do such results transpire? A study conducted by the Harvard TH Chan School of Public Health, SUNY Upstate Medical University and Syracuse University provided an answer. The research discovered that people who work in offices with low levels of pollutants and carbon dioxide are able to operate at a higher cognitive level. 

"These results suggest that even modest improvements to indoor environmental quality may have a profound impact on the decision-making performance of workers," said Joseph Allen, director of the Healthy Buildings Program at the Harvard Center for Health and the Global Environment.

Evidence suggests that green buildings are a wise investment. Still, stakeholders should conduct their own analyses to determine whether funding a sustainable construction project will be worth it in the long run. 

Date Published: 02 Mar 2016
Category: General News

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