News and Media

Construction investors wake up to the green agenda

By Harry Cassidy

Environmental issues will become increasingly important in the commercial property sector.

Global warming, the depletion of the earth’s natural resources and the increasing price of utilities are making sustainability and environmental awareness top-level priorities for the commercial property industry.

At the same time, there is growing demand from all sectors of society for the built environment to minimise adverse impacts on the environment, and this is especially true of investors.

To capitalise on this, specialised companies are already offering green property investment funds to investors wishing to reduce their environmental footprint, while a number of more mainstream investment managers in Ireland and Britain are toying with the idea of launching similar funds.

Indeed, investors looking to make some money do not necessarily have to go down the specialised funds route, as continuous changes in environmental legislation have seen most designers, developers, occupiers and banks already striving to reduce their environmental impact.

Green issues have grown in such importance in the commercial property industry that they were a highlight at MIPIM 2008 in Cannes recently.

MIPIM is one of the world’s largest real estate forums, providing industry decision makers with opportunities to meet, transact business, develop relationships and showcase their latest projects. The challenges of sustainable development were the subject of a special ‘‘green day’’ this year, with sustainable projects showcased in the exhibition area and a series of conferences on the issue.

Investors are becoming more concerned about sustainability and, while return on investment is obviously their number one priority, more and more want to invest in properties that respect the environment. Sustainability is also being driven by government legislation, while organisations such as the UN are also having a major impact on environmental regulations.

In Ireland and Britain, for example, new building regulations will impact on the commercial sector later this year as a result of the EU Directive on the Energy Performance of Buildings (EPBD). As part of this directive, a Building Energy Rating (BER) certificate - effectively an energy label - will be required at the point of sale or rental of a building, or on completion of a new building.

This will be accompanied by a report providing recommendations for improvements to the energy performance of the building. From January 1 2007, new dwellings that applied for planning permission on or after this date require a BER when they are offered for sale or rent.

This requirement will be extended to all new non-residential buildings in July 2008 and to existing buildings offered for sale or rent in January 2009. Specific information and advice about a building’s energy performance must be provided to purchasers and occupiers at the time of purchase and will therefore impact on the sale of commercial property in future.

Meanwhile, Dublin City Council recently announced that, from July, those seeking planning permission for commercial properties over 1,000 square metres in area would have to ensure that they had an energy efficiency rating of at least B1, rising to A3 from January 2009.The best energy rating is A1, with the scale working down to G.

In Britain, certain tenants look for a building to be BREEAM-certified before they will consider renting the space. The Building Research Establishment Environment Assessment Method (BREEAM) measures best practice in environmental design and management, and is used to assess the environmental performance of new and existing buildings.

BREEAM-certified buildings can be rated pass, good, very good or excellent and many public bodies require a minimum ‘very good’ rating for properties they wish to develop, acquire or rent.

Apart from the obvious promotional advantages that a good energy and environmental performance rating will afford to building designers, owners and tenants, additional benefits include the potential for higher rental incomes and increased efficiency.

Buildings and construction account for the largest single share in global resource use and pollution emission. Buildings consume natural resources, generate waste and produce pollution - both directly and indirectly.

According to the British Property Federation, there are approximately 1.8 million non-domestic buildings and 24 million dwellings in the UK. Together, these buildings account for 44 per cent of carbon dioxide emissions, 62 per cent of waste generated and 60 per cent of water used. Thus, of all industry sectors, this has the largest potential for cutting global greenhouse gas emissions.

Increased pressure from stakeholders has encouraged many developers to implement sustainable development programmes and corporate social responsibility policies.

In France, for example, the high-profile developer Bouygues Immobilier has taken a proactive approach. It won first prize in the high rise buildings category at the 2007 EcoBuilding Performance exhibition in Paris for the Mozart Tower in Issy-les-Moulineaux, and is initiating a new generation of sustainable commercial buildings with the Green Office project in Meudon near Paris.

The design and energy-related choices made for this building will help minimise energy consumption while also producing more energy than it consumes. Work will commence on the project in 2008.

Designers are also playing a pivotal role in delivering sustainable properties, ensuring that space is used efficiently, while new technologies are helping to minimise energy consumption and to facilitate renewable energy production through systems such as photovoltaics.

Energy consumption can be minimised via the bioclimatic design of a building and the use of high-performance natural ventilation systems. Even the north-south orientation of the building (maximising heat and natural light) and the specification of external insulation, smaller windows, and motor-controlled vents for natural ventilation can help to reduce energy use.

Motor-controlled external blinds can provide good solar protection; control of lighting in the building via sensors can contribute to energy savings while still providing maximum comfort levels. The tendency over the past 10 to 15 years has been to construct buildings inefficiently, with large areas of glazing like glasshouses. This type of design is gradually coming to an end in an effort to increase buildings’ energy performance.

This change in building practices are largely driven by demand, as many organisations opt for sustainable properties in order to meet their environmental responsibilities, to increase brand reputation and to avoid any possible negative PR.

They can also provide strategic advantage for occupiers in an increasingly competitive marketplace. In addition, tenants are cognisant of the rising cost of utilities and, with oil having broken the US$100 a barrel mark, they are looking at energy efficient buildings to reduce their bills.

Investing in sustainable properties can result in win-win situations for all stakeholders. Sustainable buildings can maximise utility for both owners and tenants while reducing their environmental impact on the wider community.

In general, these buildings are not much more expensive to build than conventional ones but their benefits include lower operating costs, improved marketability, longer lifespans and increased occupant productivity.

Therefore, implementing the principles of sustainable development in property-related decision making can be a highly profitable exercise.

On the other hand, sitting on inefficient property holdings may result in investors losing out. Going forward, properties that do not meet energy rating requirements may face a scarcity of tenants, while those that do may benefit from higher occupancy and higher rental income as tenants look to reduce energy consumption.

Some may even be willing to pay a premium for renting space in such buildings. In years to come investors may find it difficult to exit if a property does not pass environmental tests.

Owners and occupiers are also under pressure to address the sustainable agenda. By investing in or renting a green property they can help to address their corporate social responsibilities, perhaps enhancing their reputation in the marketplace and improving their competitiveness in the process.

Investment managers may also find that access to finance is increasingly influenced by environmental regulations. Along with the usual financing criteria required to pass the bank’s credit committee, investors may have to ensure that properties meet certain requirements such as BER and BREEAM certifications.

As the green agenda gains momentum, the investment property industry is adapting to meet the challenges arising from changing attitudes and legislation.

The new green property investment funds currently on the market are indicative of this mainstream adjustment in the sector.

Investment managers realise that assets that are future-proofed in terms of sustainability are likely to outperform in the longer run - although they still need to ensure that sustainability rhymes with profitability and should not lose sight of the guiding principles of good property investment, notably strong covenants, good locations and rental growth potential.

Harry Cassidy is chief executive officer of the Dublin-based wealth management company, Custom House Capital

© 2008 Sunday Business Post