By Sebastian Stevens and Sjoerd Hubregtse
With sustainability a key trend in real estate and construction, BDO International asks, what are the key drivers of this trend, and what are the results?
Every year seems to bring with it more news of natural disasters around the world: hurricanes, forest fires, flooding and typhoons to name a few. Trump’s recent decision to back out of the Paris climate accord was swiftly followed by massive floods in the state of Missouri, so the battle against climate change is certainly a hot-button issue. In the global real estate and construction (REC) sector, green targets and environmental policies have far-reaching impact on the world around us and sustainability remains a key trend, worldwide.
Although sustainable or neutral building is widespread, the end results differ from country to country, driven often by profitability and the availability of space. It is easier and cheaper to build a new energy-efficient building than it is to retrofit an old one. In the U.S. or Australia, space is an accessible commodity but, in Europe, space is at a premium, particularly in its ancient cities.
Moreover, it is the older buildings that are often the root of environmental damage. In the U.K., for example, commercial properties account for 18 percent of the country’s carbon emissions. And by 2050, roughly six out of 10 commercial buildings will be more than 40 years old, according to research from the Building Research Establishment. In order to meet green targets, older buildings must be retrofitted, yet this will come with a significant cost.
Environmental Legislation
In order to combat global warming, EU-member countries have taken on binding national targets, with the goal of increasing production and use of renewable energy by 2020. These measures have had considerable impact on the REC sector. In the Netherlands, the Dutch government has sought to encourage the production of renewable energy, and the reduction of energy consumption, by subsidizing and giving tax benefits to those that opt for renewable energy.
Although the share of renewable energy has increased significantly, the Netherlands has yet to meet its 2020 goals. Consequently, yet more legislation has come into force in recent years, which obligates companies to reduce their energy consumption. Larger firms are now legally required to regularly investigate new potential methods of boosting energy efficiency. And, from 2023, Dutch office buildings will be required to have an energy label with at least a C-rating; buildings with a D-rating or below will no longer be allowed to be used as offices. By imposing a minimum level of energy efficiency for office buildings, the Dutch government aims to drastically reduce the country’s carbon footprint. As a result, we are seeing significant investment in the renovation of commercial properties.
Profitability and Cost Effectiveness
In addition to legislation, another key driver of sustainability initiatives in the global REC sector is interest in profit and cost effectiveness. In Australia, “green,” new-building property construction is on the rise. These properties run on renewable energy and often use smart technology to monitor and reduce water consumption – an expensive commodity in Australia. In Sydney, a residential development has recently been built in which all the properties use Tesla Powerwalls, which store electricity for solar self-consumption, backup power and off-the-grid use. These green buildings are sometimes more expensive to build but are considerably less expensive to run long term.
In the Netherlands, companies that demonstrate efforts to improve energy efficiency or produce renewable energy can benefit from subsidies or tax benefits. These projects are therefore planned carefully to maximize tax benefits. Conversely, companies that choose not to implement green policies must consider the consequences: government legislation influences property value and investor decisions, not to mention tenants. Sustainability can thus affect all real estate owners and tenants, be it positively or negatively.
For REC businesses interested in cost-effective construction and building management, the durability of a building will have considerable impact. Companies worldwide are increasingly looking to use building materials that require minimal maintenance and need replacing less frequently. For example, Powerhouse Kjorbo in Oslo, Norway, is constructed with fire-treated wood, which is both fire and insect resistant; the material is extremely durable thanks to its low reactivity, and is expected to last 80 years. Durable materials generate cost savings, whilst also being more green than standard building materials, like concrete.
Often, the motivation for sustainability initiatives is pecuniary – but the results are inarguably positive. For example, smart monitoring is increasingly popular in Australia, where some businesses are now using smart-meter technology across multiple buildings. This means that energy usage can be monitored and, importantly, redistributed across a cluster of properties, depending on requirements, thus reducing waste, not just in individual buildings, but across an entire community or even city.
Conclusions
Of course, more immediate concerns are also driving environmental efforts. In Australia, increasing population density has resulted in legislation that requires buildings to have minimal impact on the local area in terms of traffic, air and noise pollution. Meanwhile, in Europe, gas extraction from one of the largest natural gas fields in Europe has caused a number of earthquakes in the Netherlands. To curb demand on gas and reduce tremors, the Dutch government has set a new target to have no houses heated by gas by 2050.
Looking to the future, legislation will continue to demand that the property industry shift away from traditional methods of construction and property maintenance, and employ clean, green technologies. To its clients, BDO Global would suggest that REC companies embrace this legislation, as environmental initiatives are, more often than not, highly cost effective; whilst ignoring legislation could later be costly. And, with the importance of BREEAM sustainability ratings and similar environmental assessments on the rise, green buildings can be seen as an asset and an accolade.
This article originally appeared in BDO USA, LLP’s “Construction Monitor Newsletter (Fall 2017). Copyright © 2017 BDO USA, LLP. All rights reserved. www.bdo.com