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The Value of sustainability

Authors:
  • AJL Associates

Abstract

As the market place becomes increasingly competitive and there is a need to be able to differentiate oneself as a high performer. Andrew Vaughan the CEO of Redevco stated ‘Greening ourportfolio over the next two years is not only environmentally the right thing to do, it also makes soundbusiness sense.’ Buildings built and/or managed to sustainability standards, such as BREEAM have been shown to minimise risk and generate maximum profit via: • High and continuous rental income; • Low operating & maintenance cost; • Low depreciation. UK valuers do not think we are paying a premium for green buildings but having to give a discount because the building is not performing well. This gives a convincing business case for new build where the certification process leads to a high-performance building. However, what about the existing building stock? Is the operational environmental performance of an asset reflected by its investment performance? This paper describes a new research project which aims to test the Hypothesis – Better operational performance in-use leads to improved investment performance of commercial offices. Improved operational performance goes “hand-in-hand” with environmental performance; where the performance can be illustrated by certification and labelling schemes.
* Corresponding author: LewryA@bre.co.uk
The Value of sustainability
Andy Lewry1, *, James Fisher1, and Matt Holden2
1 BREEAM Existing Buildings Team, BRE Global, WD25 9XX, UK
2 BREEAM - Operations, Management & Strategic R&D, BRE Global, Watford, WD25 9XX, UK
Abstract. As the market place becomes increasingly competitive and there is a need to be able to
differentiate oneself as a high performer . Andrew Vaughan the CEO of Redevco stat ed ‘Greening our
portfolio over the next two years is not only environmentally the right thing to do, it also makes sound
business sense.’ Buildings built and/or managed to sustainability standards, such as BREEAM have been
shown to minimise risk and generate maximum profit via:
High and continuous rental income;
Low operating & maintenance cost;
Low depreciation.
UK valuers do not think we are paying a premium for green buildings but having to give a discount because
the building is not performing well. This gives a convincing business case for new build where the
certification process leads to a high-performance building.
However, what about the existing building stock?
Is the operat ional environmental performance of an asset reflected by its investment performance?
This paper describes a new research project which aims to test the Hypothesis –
Better operational performance in-use leads to improved investment performance of commercial offices.
Improved operational performance goes “hand-in-hand” with environmental performance; where the
performance can be illustrated by certification and labelling schemes.
1 INTRODUCTION
The management of real estate investments is aimed at
maximising property value and return on investment [1]
via:
• Effective risk management;
Efficient property management;
Identification and implementation of valuable
improvements.
In the current highly competitive market place the
“Challenges for Real Estate Clients” are:
• Increasing profit;
Maintaining competitive edge;
Driving asset yield;
• Minimising voids;
‘Being the best on the street’;
High productivity workspaces.
Green buildings have always been considered high
performance because the certification schemes are based
on ratings which drive design of the asset towards th e
high end. The benefits can be seen in Figure 1; which is
further endorsed by the valuers who are changing their
position from “paying a premier for green buildings” to
“having to give a discount because the building is not
performing well”. However, to change the valuers
professional guidance from a recommendation to a
quantifiable metric, an evidence base is required.
High-performing buildings provide a solution to
discounting in that they have been shown to generate
maximum profit via:
Asset protection;
High and continuous rental income;
Low operating & maintenance cost;
Low depreciation.
For example, studies on certified buildings have shown
the increase in rentable value is to be a maximum of
25% but an average of between 5-10% is more realistic
(see Figure 2).
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© The Authors, published by EDP Sciences. This is an open access article distributed under the terms of the Creative
Commons Attribution License 4.0
(http://creativecommons.org/licenses/by/4.0/).
Fig. 1. The Stakeholders in Real estate asset management [2]
Fig. 2. Studies on the rentable value for green buildings [3]
There are also several case studies, for example the
BREEAM certified Manfield House shown in Figure 3.
The benefits were quoted as [4]:
“From an investment perspective, it also bolstered
marketability and reduced obsolescence risk. On launch
of Manfield house (see figure 3), we were able to
advertise the letting at £65 per square foot – an
improvement of some 20% on our expectations when we
first undertook the project.’
Dr Steve Waygood, Chief Responsible Investment Officer
Aviva Responsible investment update, Spring/Summer
2015.
However, this is not an unbiased sample as all are new
build; built to a high standard to pass certification and
achieve high ratings; and then branded as such – of
course you would expect high asset and rental values.
Fig. 3. Manfield House, Southampton Street, London [4]
Therefore, the benefits of high performance buildings
can be realised by the use of third party certification.
As a process it facilitates:
Client engagement;
Communication within project team and between
developers and their clients;
Common language: standards, methods and data
flows.
With 3rd party certification it realises the following
benefits:
Assurance for clients, investors & other
stakeholders;
Comparability across building types and countries;
Based on sound science and standards;
One step ahead of legislation and industry best
practices.
2 PREVIOUS RESEARCH
There is a well-established body of empirical research
investigating the relationship between voluntary and
mandatory energy/environmental labels and prices in the
commercial and residential real estate markets. Most of
these studies in the commercial office sector have been
in the US. Overall there are around 50-60 local and
national level studies in the commercial and residential
sectors that have tried to estimate price effects in mainly
developed, wealthy markets such as UK, Australia,
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Singapore, Sweden, Germany, Switzerland, Netherlands,
etc.
A relatively small number of the studies have
incorporated indicators of environmental performance
in-use. In the US, some studies have identified an
“operational expense puzzle” for Energy Star rated
buildings [5]. They found that, compared to buildings
without eco-labels, operational expenses of eco-labelled
buildings are unexpectedly higher. There is also
evidence of an energy performance gap in both
residential and commercial properties between asset
ratings based on hypothetical performance and actual
energy consumption in use.
In Europe [1] and in particular the UK [6, 7] there has
been research done to investigate the relationship
between asset an d operational energy ratings – the gap
found in these UK studies is between 200 and 450%.
BRE has been at the forefront of this research [8, 9] and
is currently carrying out a research project on several
UK office buildings [10].
The initial findings from this “Mind the gap” study [11]
were:
The performance gap was confirmed as real and in
the range of 209 to 491%;
The values observed were similar to that observed
by previous studies which were between 200 and
450%;
There was no relationship between the perceived
operational status and that observed;
Another study [12] found from 62 case study buildings,
the average discrepancy between predicted and measured
energy use was +34%. In their literature review, the
most important underlying causes identified were
building modelling specification uncertainty, occupier
behaviour and poor practice in operation. However,
these were case studies and not typical; in addition,
management issues were not considered; therefore, the
real gap in the market place was probably
underestimated.
The effect on the asset and its value is just as dramatic
with:
Deterioration of value;
Service life of plant reduced;
Fabric lifetime reduced;
Costly remedial works to maintain value;
In ‘void’ periods where there is likely to be still
further deterioration through lack of use;
Loss of reputation.
2.1 BRE research
BRE last ran a study of this nature in 2012 [13], in
partnership with Nils Kok and Maastricht University.
The report showed a positive correlation between both
rental and sales prices of BREEAM rated buildings
versus non-BREEAM rated ratings. Whilst this was
taken as a positive, it was noted in the final output from
the project that whilst the numbers looked impressive,
the reason could have been related to the lack of a
building and location quality control.
Results from this study were similar to those obtained in
the American version of the same report before location
and building quality controls were implemented, a much
lower but altogether more believable number resulted
once these controls were implemented in the American
study [14].
Recent breakfast briefings held by BRE on the
Performance Gap collected the workshop observations,
which will be published in a briefing paper [15]; the
industry comments included “there is a lack of evidence
for the connection between building performance and
asset value”, although some noted that there are moves
to make this connection more apparent.
3 PROPOSED RESEARCH PROJECT
The aim of the new BRE lead project is to investigate the
relationship between environmental performance in-use
and investment performance of commercial offices.
As previously mentioned the last BRE led report in this
area was published in 2012 [13] and its focus was
heavily on new build offices in London as such it is
necessary to update this work and expand on the scope to
take account of other locations outside of the United
Kingdom, other building types and different lifecycle
stages. It is planned that the piece of work that will be
carried out will be the first in a series of annual reports
building on the existing suite of third par ty research
highlighting the benefits to various stakeholders outlined
later.
The project will build on the existing available literature
adding to the assertion that obtaining a BREEAM rating
does drive value in terms of rental price, sales price,
yield, void times and lower overall investor risk. The
benefits also manifest in terms of lower utility bills and,
anecdotally, through increased occupant health &
wellbeing and productivity. This study would not look to
focus on these latter areas, concentrating instead on the
benefits related to investors, building managers, fund
managers, building owners and occupiers.
Specifically, we wish to test the following hypothesis:
“Better operational performance in-use leads to
improved investment performance of commercial offices.
Improved operational performance goes “hand-in-
hand” with environmental performance; where the
performance can be illustrated by certification and
labelling schemes.”
Figure 4 outlines potential transmission mechanisms
between operational environmental performance and
investment performance.
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To our knowledge, no studies have examined the
relationship between the buildings (certified or
uncertified) according to their environmental
performance in-use and their performance as
investments.
Fig. 4. Potential transmission mechanisms between
operational environmental performance and investment
performance.
3.1 Proposed research method
Specifically, the proposed research aims to investigate
the relationship between operational and environmental
performance in-use and the investment performance of
existing commercial offices. Operational and
Environmental performance would be measured using
the BREEAM-In-Use (BIU) certification scheme and
investment performance would be measured using rents,
capital prices and returns (total, capital and income).
The body of research on the determinants of financial
performance of eco-labelled buildings discussed above
provides a recognised basis for specifying econometric
procedures that can robustly identify the effect of
environmental performance in-use on investment
performance whilst controlling for additional, perhaps
much more important, determinants of investment
performance such as location, market conditions, tenant
quality, etc. The study will therefore require data on a
wide range of variables that could also have affected the
investment performance of the asset.
Previous studies suggest that data on the following
would be required.
1. Operation: lease terms, vacancy rates, time-on-
market, service charges, operating expenses.
2. Operational and Environmental performance: the
scope of the BREEAM-in-Use model seems
comprehensive in this respect.
3. Building attributes: specification, size, location,
age, services and facilities, design, tenant quality,
etc.
4. Attributes of urban economy: a range of demand
and supply indicators, economic growth, vacancy
rates, etc. at sector, market and national levels.
3.1.1 Data
The key challenge for a research project of this type is
assembling sufficient data to enable a rigorous
investigation to be undertaken and robust conclusions to
be drawn. Real estate data is notoriously difficult to
obtain, and the difficulty is exacerbated here because
operational and environmental performance data; and
investment performance data are likely to be held by
different organisations within the real estate industry.
This means that the two sets of data will need to be
joined at the building level and perhaps the sub-building
level for multi-let assets. The best approach would seem
to be to appr oach investors who would then provide th e
requested information.
Not surprisingly, in general private sector organisations
that hold data are commercially motivated. The samples
that they have gathered may be client driven and,
consequently, can be partial proprietary, private and
product-related. This leads to the discussion of how to
generate additional data points and homogenise datasets
to ensure comparability. We consider this would be best
done by putting all buildings into the same version of
BIU
Consequently, key data risks are:
Inadequate sample size: do sufficient observations
exist to draw statistically inferences?
Data sets are not intrinsically linked requiring the
both sets to be statistically representative and
significant.
Omitted variables: is it possible to compile data on
a sufficient number of potential determinants of
investment performance?
Data sets to be representative of that market place
and not biased because of the fact high performance
buildings need good data to be just that.
We consider the generation of alternate, primary, data as
part of study could help solve this problem. A potential
tactic here is to target financial data first and generate the
performance and environmental data for those assets.
4 SUMMARY
A critical early task to enable this research is the
compilation of data sets on the environmental and
investment performance of a sample of existing office
buildings. The sample needs to be of sufficient size and
the data needs to be of sufficient depth to allow an
econometric analysis of determinants of investment
performance. The methodology leads to the need to
obtain financial data first and then for those assets
generate the performance and environmental data.
As a consequence, BRE are actively seeking partners in
the Real Estate sector to support this project.
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