08 June 2010 #Environment
The built environment contributes a significant proportion of total global emissions. In fact, 45% of UK carbon emissions are attributed to the built environment. It is worth noting that 80% of the buildings that will house us in 2050 have already been built today. Investment into the greening of real estate via retrofits and increase in energy efficiency will play a significant role in achieving the carbon emissions targets, now mandated by UK law, in an economically efficient and technically simple manner. As an investment asset class though, green real estate has yet to receive the investment needed to achieve such targets, though the tide seems to be slowly turning.
There are a range of factors that are creating a movement of stakeholders within real estate to face climate change head on. Three fundamental factors exist: pull from private sector stakeholders, regulatory and policy push from public stakeholders, and the inherent economic, environmental and social benefits associated with a sustainable built environment.
Increasingly, the wider public is becoming ever more informed of the impacts associated with climate change. The resulting demand for the private sector to clean up its act has resulted in organisations becoming acutely aware of the issues surrounding climate change. In addition to greening of operations via procurement and supply chain management, energy efficiency and green buildings are now seen as a sensible approach that has economic, social and environmental benefits, some of which include:
Investing in greening existing buildings or in new buildings can be beneficial both from a corporate perspective as well as a pure investment. Green buildings generally tend to trade at premiums to regular buildings and can command higher rents, which could potentially make the sector attractive both for new builds as well as retrofitting. According to JP Morgan Chase, retrofitted green buildings have 3% higher occupancy rates and on average are valued 7.5% higher than existing non-green buildings. This is especially important to consider as the bulk of investment opportunities within the built environment in developed countries are likely to come from existing buildings needing to be retrofitted, whilst developing countries` relatively untouched built environment will offer opportunities for new builds. There is general consensus that a green building revolution will occur soon and is likely to become a standard practice, be it via the clear economic benefits on offer or the regulatory policy push directed to the greening the built environment. It is likely to be repeated by governments globally, as it is considered to be the ‘low hanging fruit` of significant greenhouse gas emissions reductions in an economically efficient and timely manner.
With the clear economic benefits in combination with regulatory push, the asset class is beginning to gain indirect momentum in the form of increasing venture and private equity investments in energy efficiency technologies, from home energy monitoring and management systems to LED lighting solutions to heating ventilation and air conditioning amongst a host of innovative technologies. However, direct investments in green real estate seem to still remain somewhat stagnant, partly due to the economic downturn and partly because of the lack of confidence in the asset class from investors. Similar to other ‘green` investment asset classes, green real estate investments lack the solid track record and tangible evidence of performance. Due to the relatively small nature of the market, associated economic benefits are mostly based on one-off case studies and statistically significant trends are not available. Additionally, if there is a general lack of understanding and knowledge of the asset class amongst investors, they are unlikely to consider these types of investments. For example, there is a general and widespread misconception that green new builds require a cost premium, which is in fact not the case - there is ample evidence to show these buildings can be built at a cost equivalent to traditional buildings, if not cheaper. The nature of the built environment is certain to go green - investors have the chance to stay ahead of the curve and maintain their edge. There are encouraging signs of first movers beginning to realise the potential opportunities on offer. According the Financial Times, Climate Change Capital, for example, raised a £69m green property fund in the depths of the financial downturn; the Threadneedle Low Carbon Workplace Trust, a collaboration between the Carbon Trust, Threadneedle (Carbon Trust`s fund manager), and Stanhope (property developer), plans to raise £350m over the next three years ‘to refurbish up to 50 properties over the next five years to best practice low carbon standards`. These first movers will be best placed as they position themselves to learn by doing, resulting in the knowledge and skills required to reap the potentially huge rewards the asset class has to offer in the context of the green economy.