Real estate investment goes green
Investors are realising that incorporating sustainability into property investment strategies can make sound long-term business sense
TODAY'S real estate investors are aware that environmental issues can have an impact on investment portfolios and that incorporating sustainability into property investment strategies can make sound long-term business sense.
So real estate investors now think about environmental issues with regard to government regulations and incentives, costly natural resources, legal risks, the rise of corporate social responsibility, changing occupier behaviour and stakeholder pressure.
Recent years have seen a growing number of institutional and individual investors, socially concerned high-net-worth individuals, pension funds and mission-driven institutions incorporate environmental concerns into the way they manage their property portfolios as energy efficiency is introduced into building codes and countries establish energy performance rating systems.
Although a direct link between green property investment strategies and increased returns on investment has yet to be proven beyond all doubt, the 'green approach to property selection' is beginning to attract a wide institutional following.
The key factor here is that investors have increasingly come to believe that a green property portfolio will offer better long-term investment return as less efficient buildings become obsolete and their prices become subject to discounting.
In Asia too, this practice is now starting to take hold, with large institutions increasingly adopting the principle of sustainability as a key part of their investment criteria. These institutions want to improve the environmental performance of buildings in their existing portfolios, while other investors launch innovative funds to invest in energy efficiency projects in buildings around the region.
Evidence linking green buildings with stronger financial performance remains ambiguous, largely due to the absence of commonly agreed measurement standards and centralised building information.
However a consensus is now growing within the real estate investment community that outdated and unsustainable investment, construction and facilities management practices will hasten the obsolescence of properties and result in declining asset values and poor financial performance.
At the same time, investors are also anticipating that tougher government regulations relating to energy efficiency and green buildings will be rapidly coming into force in various markets, both globally and within Asia.
The European Union has already introduced its Energy Performance of Buildings Directive (EPBD) for new and refurbished buildings. In Australia, new buildings must comply with the Green Star sustainable performance measures.
In Asia, under the Singapore government's Green Building Masterplan unveiled last year, 80 per cent of buildings in the city must be Green Mark certified by the year 2030.
As the move towards mandatory energy efficiency gathers pace across the region and also influences occupiers' leasing decisions, it looks highly likely that non-green buildings are gradually going to become obsolete and could see their capital values and rents trade at a discount, resulting in lower investment returns.
Such buildings could also incur additional taxes for excessive emissions and energy use. In contrast, green buildings are likely to command a rental premium in the marketplace, depreciate at a slower pace, enjoy a longer life cycle and ultimately retain higher capital values.
All of this adds up to the suggestion that Asia will ultimately witness the emergence of a two-tier market in which green properties will enjoy higher values, rental levels and therefore rates of investment return.
Among institutional investors in Asia, one of the clear leaders in commitment to sustainability in its real estate related activities in Asia is ING Real Estate Investment Management, which in 2008 formalised a corporate policy underlining its commitment to this goal.
The policy defines the company's vision, ambition and principles and serves as a sustainability framework.
The company has established a global sustainability platform with representatives from all regions around the world to support collaboration between different areas of its business, to share best practices and to incorporate sustainability as a standard business practice in anticipation of greater demand for sustainable real estate projects from its clients.
'Over the past two years, many of our investor clients in Asia have begun to implement environmental goals as part of their investment criteria. Several of our bigger clients, particularly the large pension funds, are increasingly insisting on transparency and sustainability,' says Richard Price, chief executive officer of ING REIM Asia.
Forward looking
'We also have a very forward looking environmental and corporate social responsibility commitment within the group. So we are seeing twin drivers, coming from both the top down internally, as well as externally from our clients,' he adds.
ING REIM Asia had two funds surveyed in 2009 and both finished in the top 10 of private equity real estate fund leaders in sustainable investment in Asia in a global survey undertaken by the University of Maastricht as commissioned by APG Asset Management, PGGM Investments, and the Universities Superannuation Scheme (USS).
There are a number of ways in which institutional investors have begun reflecting their greater concern about sustainability directly into the way they manage their portfolio.
Most begin by identifying and sorting existing buildings in their portfolio that may breach current or future legal requirements relating to energy efficiency or other green standards.
Next, they examine ways of making these buildings more environmentally friendly. Steps adopted can range from implementing relatively straightforward smaller initiatives, such as installing energy saving light bulbs, to major projects, such as the full scale en-bloc sustainable retrofitting of entire buildings.
They can also talk to their tenants and other stakeholders and agree on actions and goals related to energy or other resource savings.
ING REIM Asia followed such a model. 'We firstly audited our existing portfolio and sorted our assets into different categories, according to how much control we had, to make sustainability improvements,' says Arjen Seckel, senior vice-president at ING REIM Asia and Asia coordinator of ING Real Estate's global sustainability platform.
'We identified buildings that can achieve LEED certification (Leadership in Energy and Environmental Design) and then conducted research into the costs, what needs to be done and what are the benefits obtainable from these actions. We also started to measure energy usage and see where we can achieve savings,' he adds.
The major challenge encountered in this approach is the ownership structure of the company's existing portfolio. ING REIM Asia's degree of control over its assets is varied; in some cases there will be a master lessee who will not accept changes, while joint-venture partners also need to be persuaded or encouraged.
There are only a limited number of buildings in its portfolio over which it has full control. On a macro level, the lack of standardisation in the Asian market can often be an obstacle, with the different certification regulations and standards found in the various countries.
The largest asset in ING REIM Asia's portfolio under its full control is a regional shopping centre outside Tokyo.
Here the company has been actively reducing the building's energy consumption and has introduced a number of measures that have led to significant year-on-year reductions in the use of gas, water and electricity.
Key measures introduced have included reducing the working hours of escalators, installing sensors in emergency stairs, using of a water well, reducing the operating hours of air conditioners, cutting the use of backyard lighting and incorporating an inverter controller.
Other measures to be incorporated in the near future include the installation of LED lighting and a system to generate electricity from garbage.
'The next step is to set goals,' says Mr Seckel. 'In the future we hope to have a system where we can benchmark our portfolio against global and regional green building standards and use this as a basis for making intra-regional comparisons. But at the moment we are restricted to measuring where we are, so we can determine where we can go.'
ING REIM Europe recently launched a test system called 'Green Rating' to rate and benchmark the environmental performance of its portfolio together with GE, AXA and AEW.
The company contributed 30 buildings from 12 different funds to the pilot project and the ING RE European Office Fund is surveying the energy, water and transport performance of all of its properties. Should this new rating system prove successful, the system will eventually be rolled out in Asia as well.
Along with the increased focus on sustainable real estate among institutional investors in Asia, other investors are raising innovative funds to invest in energy efficiency initiatives in buildings around the region.
Sustainable Development Capital LLP (SDCL) is raising capital for the China Energy Efficiency Partners LP Fund (CEEP) to invest in energy efficiency projects being developed at energy intensive industrial sites and in commercial and public buildings and facilities in China.
The fund is the first of its kind and will seek to generate relatively high, predictable levels of income by making investments in projects involving the installation, operation and maintenance of energy saving solutions and equipment.
It will aim to earn investment returns by sharing in the consequent energy cost savings achieved by the site, building or facility owners. 'The technology is there and the economics make sense,' says Glen Plumbridge, director at SDCL in Hong Kong.
'Over the next five years there will be a raft of legislation tightening the efficiency of existing buildings across the region which will force people to retrofit for sustainability. At the same time, retrofitting is not as complex as it was before. Technology, measurement and verification are all becoming more advanced.'
The CEEP model aims to capitalise on the increasingly resource-constrained global economy and a growing awareness among countries that they face significant energy challenges.
'Countries need to be more energy efficient because they are running out of energy,' says Mr Plumbridge. 'The growth of our industry may eventually turn out be more driven by sovereign risk and the urge to be self sufficient as opposed to climate change issues or carbon emission reductions,' he adds.
SDCL, which is involved with the UN Environment Programme, the Clinton Climate Initiative and the P8 group of the world's biggest pension funds, believes that the rising cost of natural resources makes energy efficiency simple business sense and that the sustainable retrofitting of buildings is both the primary and cheapest solution to this problem.
Challenge
The biggest challenge facing the CEEP model is scalability and the fact that most projects are too small and many banks and other investors are therefore not interested.
SDCL believes that the bigger the project value, the better, and is currently exploring opportunities to link up with big developers and fund energy efficiency retrofits across entire portfolios.
Various other green financing and investment tools are gaining traction around the globe and are gradually finding their way to Asia.
Recent years have seen an increasing number of socially responsible investors purchase local government-issued green bonds to fund the sustainable retrofitting of low income housing projects, such as the Climate Awareness Bonds issued by the European Union in 2007.
Commercial bank green loans and investment products are also being offered. In January 2010, the government of South Korea formally passed its 'low carbon, green growth' law which saw it pledge to spend 2 per cent of annual GDP on developing eco-friendly businesses and projects that will result in economic growth and the reduction of greenhouse gas emissions.
At the same time, a number of the country's biggest banks unveiled a number of new green financial products and services including loans for green residential and commercial buildings.
China tops the list of markets within the region that investors have identified as the most desirable location for investing in green real estate.
'Over the past few years, the improvement in construction standards and the quality of the final product in China has been immense and construction practices there now are more technologically sophisticated than those in many developed Western markets,' says Richard Price.
'The country will leap generations of building standards and skip inefficient technologies altogether as it continues rapid urbanisation and this will present many opportunities for investors in green buildings.'
On the energy efficiency side, China has doubled the number of energy service companies (ESCOs) and the value of energy efficiency projects each year for the past six years.
'China has some of the strongest legislation around and is acutely aware of its energy challenges,' says Mr Plumbridge.
Indeed, over the past few years China has implemented strong top-down policies including nationwide energy conservation and clean energy targets supplemented by incentives at the municipal level for developers which engage in green or energy efficient projects.
Elsewhere around the region, Singapore has good infrastructure and strong rules and regulations relating to energy efficiency and green buildings but is a small market, while in Hong Kong progress is slower due to legacy issues, fragmented ownership and a lack of government leadership.
'In general, across Asia there is a need for greater government support and in some markets there is a lack of financial incentives,' says Mr Price.
'In markets such as Australia, the government is being very proactive and that is really facilitating green investment.'
Despite the gradual shift towards investing in sustainable real estate, a number of challenges remain, not least of which is the fact that it has yet to be proven that developing green buildings is really worth the incremental cost.
'We believe that sustainable investment is important but we have to remain prudent and always keep the costs and benefits in balance,' says Mr Price.
'However, as an investor, the value in investing in green buildings will emerge in the sale, as they are far less likely to be functionally obsolete.'
In the longer term, improved data and research will illustrate whether new regulations and growing demand are actually resulting in higher prices for green real estate.
Nevertheless, there is still gradual global and regional momentum in favour of green buildings as socially responsible real estate investors evaluate and enhance the environmental performance of assets in their portfolio to prevent obsolescence and reduce exposure to future taxes and penalties associated with carbon emissions and energy use.
This is an edited version of an article that first ran in Issue 2 of CB Richard Ellis' Sustainability Asia
Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.
Environmentally friendly: Under Singapore's Green Building Masterplan, 80 per cent of buildings in the city must be Green Mark certified by the year 2030. Winners of the Building and Construction Authority's Green Mark Platinum Awards include GuocoLand Group's Sophia Residence (above) and Mapletree Anson (next), an office tower in the CBD
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