The Investment Case for Sustainable Real Estate

22.04.2009 Sustainability is steadily gaining awareness in real estate. While the main focus is on energy savings, soft factors such as social responsibility and living comfort also have to be taken into account when carrying out cost-benefit analyses. Investment products such as funds or special mortgages have recently become available.
Sustainability has become a hot topic in real estate. In the past years, awareness with regard to environmental-friendly buildings has increased markedly. With global warming being on the agenda of governments across the globe, goals for the reduction of CO2-emissions have been adopted (the Kyoto-Protocol for example). Sustainability has also come to the forefront in the private sector, especially in light of the high energy costs witnessed in the past years. Beyond energy considerations, soft factors such as living comfort and corporate social responsibility play an important role in the increased availability of sustainable real estate assets.


Real Estate as Major Energy Consumer
Buildings account for a large share of energy consumption and thus of CO2 emissions. According to the MIT Center of Real Estate, real estate is the largest energy consumer in the US and responsible for over one-third of the world's energy consumption and CO2 emissions. It is estimated that buildings account for almost 40 percent of energy use in the US. It is thus sensible to focus on real estate when aiming to reduce energy use and costs. Over the past 10 to 20 years, national rating systems have emerged in numerous countries around the world. Each standard has specific requirements for a building to be qualified as "sustainable." Whilst an international standard currently does not exist, some rating systems such as the Swiss Minergie, the British BREEAM or the American LEED standards have found acceptance beyond the national borders. Certifications remain voluntary, but many governments have adopted regulations such as requirements for the energy use of new buildings and incentives such as tax advantages that favor sustainable real estate labels. Thus, environmental and political considerations clearly favor sustainable developments.


The Investment Case for Sustainable Real Estate
Demand for sustainable real estate has increased markedly over the past years, as the increase in Swiss Minergie certifications shows. Large institutional investors, including Credit Suisse, have committed to green building. Sustainable real estate also can offer investment opportunities from a purely financial point of view. On the one hand, green buildings are generally more expensive to construct than conventional ones and thus need additional up-front investments. On the other hand, the financial benefits of such buildings include lower energy, water, operations and maintenance costs, as well as improved indoor environment (including enhanced employee comfort, productivity and health).


Cost-Benefit Analyses
Various cost-benefit analyses for green buildings have been carried out. The 2003 report "The Cost and Financial Benefits of Green Buildings" by Gregory Kats, which analyzes the effects of green design on office buildings, provides one of the most comprehensive studies carried out to date. Based on a 20-year discounted cash flow model, it calculates that the average financial benefit of green buildings - approximately 62 dollars per square feet - by far outweighs the additional initial costs of approximately 4 dollars per square feet. The study estimates that energy savings alone are enough to recover the higher construction costs. But the study has some caveats. It attributes a majority of green buildings’ benefits to some socialized benefits such as increased employee productivity and health gains. It also assumes relatively low capital costs. The 2008 study "Doing Well by Doing Good? Green Office Buildings" by Piet Eichholtz found that US office buildings with a green certificates exhibit sales prices and rent levels that are respectively about 16 percent and 2 percent higher than identical non-green office properties.


Investment Conclusion
Hence, there is evidence that green buildings can be attractive investments in financial terms. However, as costs and benefits for sustainable real estate can vary markedly across regions due to the energy price outlook, subsidies, and the type of investors, Credit Suisse recommends evaluating green construction projects on a case-by-case basis. Investment products such as funds or special mortgages have recently become available to play this theme.