By Gary Woolf, Managing Director at ALW
There is no doubt that green building, especially energy efficiency measures are having a positive impact having on the commercial property sector in South Africa. The benefits to green building occupants is already widely established. Green buildings provide healthier, more productive environments that offer lower operating costs. Research reveals that green building owners and investors, these properties produce higher return on investment and yield sustainable investments.
Water, energy consumption and waste-disposal are the major operational costs in the majority of buildings. Green buildings provide the opportunity to significantly reduce these costs given that utilities typically account for more than 30% of a building’s operating expenses. Green building significantly reduces these expenses, making a significant bearing on Net Operating Income. Coupled with this, at a time, and in an environment where standard council services are unreliable, green buildings such as Atholl Towers for example, offers almost total water and electricity self-sufficiency, ensuring business continuation at all times.
According to Forbes, the commercial buildings sector boasts the most explosive growth in green building. In 2010 alone, Forbes tallies 1/3 of all new commercial construction being green, amounting to a $54 billion market for commercial green buildings. By 2015, green buildings in the commercial sector tripled, accounting for $120 billion to $145 billion in new construction and $14 billion to $18 billion in major retrofit and renovation projects.
Sustainability has become an increasingly important attribute of economic activities describing methods of production, but also qualities of consumption and attributes of capital investment. In part, this reflects popular concern with environmental preservation, but it may also reflect changes in tastes among consumers and investors.
Energy costs are the single largest and most manageable expense in an office space. Rising energy costs will only increase the salience of this issue for the private profitability of investment in real capital. With the built environment and sustainability being so closely linked, and a growing consideration to “green” building has greatly increased over the past decade. This reflects the potential importance of real property in matters of environmental conservation.
Green Buildings and Return on Investment
Released in July 2015 by MSCI Inc, a leading provider of research-based indexes and analytics, the IPD South Africa Annual Green Property Indicator shows that properties with top-quartile energy and water efficiency delivered an ungeared total return of 12.1. Less efficient buildings delivered a total return of only 9.4%. Green buildings therefore outperformed conventional counterparts by close on 30%.
Superior performance of green buildings was driven largely by a higher capital growth of 5.5%, compared significantly lower 1.8% reached by the rest of the sample. This capital growth was as a result of higher occupancy rates and a superior net income growth.
A definite vote of confidence that building green gives value for both local owners and occupants and that green buildings not only ‘do good’ at an environmental level, they ‘perform well’ from and economic perspective.
What I also find intriguing is that a total return of 12.1% on greener buildings illustrated in the latest above indicators result is 270 basis points (bps) above the balance of the sample of properties. In 2013, green properties outperformed normal commercial properties by 170bps, which means that the 2014 results show an even higher return for green buildings. This is remarkable and solidifies an even stronger business case for in green building investment.
Local Driving Factors
Looking at the recent study by the GBCSA and the Association of South African Quantity Surveyors and the University of Pretoria reveals that by May 2016, 180 buildings had been certified by the GBCSA and more than 7000 professionals had enrolled in GBCSA training courses.
The study also highlights that the primary driver hindering further green building industry growth locally and internationally, is the perception that green building has a significant cost premium versus conventional building. Currently the cost of green building over and above the cost of conventional construction expressed as a percentage of the total cost of the project is equivalent to x%.
According to the GBCSA, a large number of local firms and investors are driven by the desire to “do the right thing” with their future building activity, with a percentage significantly higher than the global average.
Locally, key social and environmental reasons to build green include:
Greater Health & Wellbeing
The most important social reason (66% of firms) are tied to ethical support for green building in our country
Natural Resource and Water Conservation
World Green Building Trends report that though trailing energy savings (reported by 76%), these factors are reported by 48% and 40% respectively, as the top environmental reasons, suggesting a wider environmental benefit of green, beyond energy and may prove to be a powerful argument locally.
We certainly learnt that our flagship green building, Atholl Towers in Sandton that the green build process is not quite complicated and difficult as often perceived, it’s just new. Green developments can be constructed within reasonable commercial budgets. Once our entire project team had gone through the process, going forward it will be the natural way we design and build.
Given our experience, there are important additional considerations that influence the green building costs versus benefits analysis—specifically the cost of going green and the value it will deliver. But there is growing recognition that “green” should not be considered a discreet “add-on” feature—grafted on to an otherwise normal project and evaluated independently as to its relative financial burdens and benefits. Rather, it is becoming ever clearer that sustainable building requires changes of both paradigm and process that, when embraced and applied to the entire building process, can make green building an attractive option without being an expensive one.
But investing in a green building goes beyond good will or an altruistic sense of social responsibility. Green building may help the owner comply with legal responsibilities and fiduciary duties, as well. Concern over climate change is spurring governments to enact laws mandating carbon-cutting measures. Likewise, shareholders are increasingly demanding that companies responsibly manage their environmental and carbon footprints, and address their own climate change risks. Building green may help the owner comply with these mandates.
The green building industry is growing exponentially in South Africa and as a result, we anticipate the green buildings costs to lower over time. Given this and the various research, it’s clear that for property owners, investing in energy and water efficiency, green design and building practices is economically and environmentally advisable.