The Impact of Sustainability Metrics on Financial Performance in Corporate Real Estate

Date: 20th January 2014

Part 4 – Benefits of sustainable and energy-efficient buildings

There are several obvious benefits to having any item replaced, as their effective life can be increased, their performance improved, maintenance costs reduced, and other such benefits. However, in the area of energy efficiency there is little work done to account for the full effect of any potential projects. IMTAI (2012) reports, after following some market examples that even standard energy projects can increase property value by as much as 10%. However, it is unclear to the authors what exactly influences market value and in what manner.

VDP (2008) reports that the IPD index (an index of a wide range of property portfolios) shows a very high growth rate for the UK real estate sector, far greater than most other EU markets. This is based on observing historical growth rates over a long period of time and noticing a steady trend of increasing returns. Lighting and air conditioning, both highly energy-intensive systems, are quoted as some of the highest sources of potential energy efficiency improvements, which can help lower innate energy consumption by around 60% on average. These findings show that UK building investors in particular should be concerned with energy efficiency projects, as they provide fairly low risk, high return investments, despite their considerable initial payment values. The article also notes that there is considerable room for investment into sustainable building projects, of up to 50% of the current market size, when comparing to similar markets and the more developed US market. Such opportunities could become a signal for both existing and new investors that the UK real estate sector holds ample room for expansion and a migration of funds to this economic area should occur in the following period.

Jones Lang LaSalle (2009) reports the results from their survey as indicating an over 40% rate of adoption of green labels and certification by investors in the real estate market. Furthermore, over 20% of respondents said that they would be willing to pay a premium, up to even 10%, to rent a more sustainable space if such improvements are made towards reducing costs and improving efficiency. As many as 60% of respondents quoted problems with quantifying benefits and analysing projects as the main issues faced when undertaking sustainability related investments. While survey results are certainly not as rigorous as other objective analysis, these help give researchers an idea of what market participants feel and see as their operate under actual market conditions. There is no binding agreement between those surveyed to uphold to their word given the opportunity, however if sufficient market sentiment points in one direction it is reasonable to assume that market conditions might be heading towards a shift in views. In my opinion, the results presented in this report help identify the fact that there is a growing concern for energy efficiency in the marketplace, but that most participants are still at odds with the lack valid data and instruments for analysis.

Ellison and Sayce (2006) and Chappell and Corps (2009) both identify 5 main areas of value which can be potentially improved through sustainability investments: rental growth, depreciation, cash flows, duration to let and duration to sale. For rental growth, they suggest that any reduction in operating costs for clients can be translated into an increase in funds available for rent payment. Since most companies operate on long-term budgets, it is reasonable to assume that funds freed up will be used within the same expenditure class and rental payments is a natural alternative. The authors do make a note that the relationship is not perfect, but that for every pound saved through energy efficiency systems only a fraction can be translated into higher rent (so that net benefits are distributed between both tenant and owner). The depreciation aspect of sustainability investments is reflected through the actual refurbishment costs, which for large projects that change the structure or characteristics of the building significantly can be written off over time through depreciation. Cash flows are improved directly by lowered need for risk insurance, or reduced coverage requirements, given that any improvements will most likely be new systems less prone to issues and of considerably higher quality. This means that not only is the actual appliance malfunction risk reduced, but also energy quality and supply risks for energy efficiency projects. The duration, described by the authors as the median transaction for sale, would be considerably lowered, as “green” buildings tend to be viewed positively by the market and command a certain degree of assurance. Furthermore, the void period at the end of each let would also be lowered, due to the rising demand for sustainable space. BRECSU, (2003) notes that savings of up to 6.2 £/m2 of floor can be obtained in office buildings by implementing industry-approved improvements to energy systems and bringing them closer to sector best practices.

Eichholtz et al. (2010) also hypothesize on the benefits of energy efficiency system implementation and find that corporate social responsibility also plays a major role in decision making. For once, CSR can help bring in more clients and justify a higher fee for services. This is due to the prestige factor gained when a company engages in activities with a positive impact on society. The authors also point to the fact that CSR can help companies avoid pressure from certain activist groups by improving their public image in areas other than their innate business ones (e.g. tobacco companies that focus a lot of eco-friendly projects, etc.). And of course, the risks associated with new regulations are also mitigated, as discussed on other chapters, since modern governments appear to be keeping a close eye on sustainability projects in the corporate environment. The article talks about energy efficiency from the perspective of lowered input costs as well, mentioning that overall costs for any building that has such systems installed are smaller than their less modern peers. Their final argument in favor of energy efficiency systems, in particular lighting and air control, is that they have a positive impact on employee productivity.

Finlay (2010) makes a case for increased productivity and biophilia (natural environments increase human responses) as some of the less tangible benefits of eco-friendly investments. The author mentions that there are several studies which indicate that more natural lightning, higher quality air and organically adjustable temperature controls have significant impact on employee productivity, especially for office buildings. This means that investments in energy-efficient lighting and heating systems which correctly adjust themselves dynamically based on other conditions inside or outside the building. The article also points to the use natural lighting, climatisation and plants to help control humidity, air flow, daylight exposure and other features in order to create a more natural ambiance for tenants. It is stated that such enhancements have been proven to be beneficial from not only a productivity point of view, but also for long-term fatigue management, stating that such environments reduce psychological stress.

Kats (2006) reports that survey results indicate over 70% of all company executives, even those with little experience in “green” buildings, believe that health benefits for energy-efficiency projects are considerable, and would look into opportunities to invest into such projects. The subsequent study reports that power outage and power quality problems were estimated at over $100 billion in the US, a problem greatly tackled by energy efficiency projects. While no particularly clear numbers are given in favor of such investments, the author believes that the benefit if considerable, and that more and more buildings are now migrating to more efficient and stable systems to minimise costs and reduce risks .

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