Cobalt news
A case for greener Investment: Sustainable Real Estate
Timothy Rowe
11/02/2008
The appetite for environmental debate in the public agenda continues an insatiable proliferation. Ever increasing energy prices, together with the pressure and incentives provided by Government, regulatory institutions and insurers, attempt to safeguard against the causal effects of climate change. They appear to be contributing greatly to a growth in demand for the tightening of building energy efficiency requirements.
Buildings are the largest contributor to national energy consumption in the developed world. The UK Government’s Code for Sustainable Homes, the Building Research Establishment’s (BRE) EcoHomes assessment tool, the USA’s equivalent LEED assessment matrix, together with incentives such as REIT tax breaks and company insurance offsets, are all geared towards improving the environmental performance of building stock, both commercial and residential, new and old alike. However it is precisely because of these enviro-political movements, particularly the positive incentives, we are beginning to see newer investment opportunities arise in the real estate market, both UK and European wide.
Proactive investors and their agents are already considering the implications of energy efficiency on existing portfolios with some introducing corporate responsibility policies controlling the management, contracting and procurement involved in ongoing investments and their development strategies. Similarly whilst the range of investment funds in the sustainable real estate market remains to-date somewhat limited, having spoken to our clients we have been told to expect a marked increase in available products throughout 2008. In the UK, a number of investors have chosen to focus on large-scale urban regeneration schemes, where undervalued opportunities exist for secured profit return. In the commercial property market we have seen the establishment of individual funds totalling up to $1bn for investment in sustainable UK property – a growing asset class it would seem…
Moreover it appears that the original concerns from the construction industry over the cost implications associated with environmental improvement technologies have been in part answered by investment professionals. Recent soundings from the US market explain that whilst initial costs in the planning, design and construction phases increase chiefly due to the expense associated with eco-friendly, energy efficient materials, these costs are more than offset by the vastly improved ROI received over the course of a buildings’ life – typically operating costs; occupancy rates; sale and rental values are greatly enhanced. This news has trickled slowly through to the UK, particularly when thinking in terms of residential development and the traditional house builders. Construction has in the main, been led reluctantly by regulatory tightening rather that pioneering and championing energy efficiency and environmental sustainability.
However as we move into the future, higher energy costs together with firmer environmental compliance requirements will enact a great source of new opportunities that the proactive investor can take advantage of. The promise provided by new construction technologies to achieve healthier environments and better energy efficiency, have direct positive implications for the investment case of sustainable buildings.
Regarding matters of recruitment - how do you cope with increasing demands on human capital requirements in the face of growth in a seemingly specialist new area of real estate? The technical provision and environmental due diligence services associated with property transactions are more than covered for in both environmental and management consultancies. A decision will inevitably be made as to whether to bring more of these professionals in-house, as the need for continual strategic environment advice of property increases. However, irrespective of how the advice and assessment is sought there is a substantial skills gap between the environmental diligence that is required by investors and the information available. The number of professionals that are entering the industry on an domestic and international basis is growing but it will take time before there is a match in demand and supply of such talent.