Date: 10th January 2014
Part 2 – Market Description and background information
There has been significant change in global policies to accommodate social pressure towards the adoption of more sustainable options. IIGCC (2013) presents how the Energy Performance of Buildings Directive (EPBD) was introduced in the EU in 2009, and fully implemented in 2012, requiring all building transactions to be accompanied by an Energy Performance Certificate (EPC). Most people were already highly familiar with the energy use measurement system for household appliances, and riding on the back of their success, the directive was implemented as a way to further incentivize the development of more energy efficient spaces. These EPCs are carried out by government approved inspectors and measure the total (estimated) energy consumption level of the building by inspecting several key systems such as lighting, air permeability, type of structure, zero carbon technology implementation, etc. This information is then used in a government-approved analysis to provide the surveyor with a rating, which can go from A to G, with A being a very energy efficient building and G a highly inefficient one. Beyond these ratings, there are several other “green” labels that a building can obtain, but these are mostly managed by specific bodies and usually operate in certain areas of the world predominantly: Leadership in Energy and Environmental Design (LEED) in the US, Building Research Establishment Environmental Assessment Method (BREEAM) in the UK, Green Star in Australia, and others. Some of these have certain tiers within themselves and they usually measure more than simply energy efficiency, but rather go into health and climate impact, long-term sustainability and near-zero carbon emissions.
M & G Real Estate (formerly PRUPIM) (2011) provides an overview of green buildings worldwide, and show that improvements are being continuously made to both build new buildings with improved sustainability features and to bring old buildings to a higher eco-rating (by raising its EPC rating or obtaining a green label). The article points to shopping malls and offices as being the most active types of buildings in promoting and implementing green solutions, with warehouses tailing behind. This makes sense, given that economic and health benefits are much more relevant in places with a very high density and flux of people (such as a shop or an office). A warehouse, particularly a non-specialized one, will rarely warrant the need for complex energy efficiency systems, seeing as how its consumption would already be fairly low. However, for large shopping malls with a wider variety of different areas requiring different conditions (ventilated food court, well illuminated shops, etc.) and a very large number of people constantly moving throughout, energy costs are quite significant and efficiency investments can payoff very fast and very well. The authors also paint a worrying picture for EMEA, given that it has a considerably higher median energy use for offices and shopping malls than equivalent Northern American buildings (by 50% and respectively 20% more energy consumption) and Asia-Pacific (by 30% and respectively 10% more energy consumption). This means that there is still considerable room for improvement in EMEA, possibly due to fairly low spread knowledge of issues relating to sustainability or due to the fact that many European countries are still in development and have yet to take into consideration the ecological impact of investments.
Eichholtz, Kok and Quigley (2010) make a note that buildings account for about 40% of total energy and raw material consumption. This is due to both highly intensive resource requirements during the construction and demolition phases as well as very intensive use of resources for day-to-day operations. In fact, the authors note that 30% of operating expenses in most office buildings in the US are in fact energy related expenses, making them effectively the largest such item on a building’s expense sheet. However, they also note that energy is the most manageable expense for offices, as there are a plethora of technologies and systems designed to reduce waste and increase efficiency.
The area of real estate investments is of high interest in the finance world, given that PIA (2012) reports that the total size of the market was £5,244 bn at the end of 2012, almost triple the total market capitalization of all companies listed on the London Stock Exchange. Out of this, £717 bn are only commercial property, the very element that we will be analyzing in this series. Even in terms of government bonds, the report measures the commercial property market at more than half of the total value of UK gilts. Couple this with a very high growth rate, estimated at around 1% of GDP per annum, and the picture of the real estate sector comes into perspective. Under such circumstances, investors have begun taking into consideration new ways to ensure a continued upward trend for building investments, in particular in the sustainability area which will be discussed throughout this report. However, investors are not the only ones actively looking at this particular market, but governments as well. Not only is the real estate sector a vital part of the economic wellbeing of a nation, providing houses and workplaces for its population, but the sheer amount of resources used by buildings call for a good measure of supervision and regulation. To this end, there has been significant global change on matters of sustainability in the real estate market, and a plethora of new bills have either been introduced or are currently being discussed by various political bodies around the world. The following chapter serves to provide an overview of the legislation covering this huge market.
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