Green buildings will soon be standard but for this to happen efficiently both the industry and government need to demonstrate more joined-up thinking, as Martin Lemke reports
Before the end of the decade, virtually all new buildings in Europe will be green buildings by law. However, appraising the sustainability of a given property can be difficult.
HQE, MINERGIE, ITACA, Green Globes, CASBEE, Energy Star - the global variety of labels for so-called green buildings is vast. There are now more than 50 different labels, tools, and other instruments that use a wide variety of approaches to achieve a single objective - to certify the sustainability of the property under review. To talk of a certification jungle is quite justified.
The great number of certificates underlines the importance of the subject of sustainable construction. The motivation on the part of investors to address the issue of green buildings is enormous; a survey conducted by consultants Roland Berger revealed that seven out of every 10 principals and investors are prepared to accept higher investment costs to have the use of sustainable real estate. According to a poll that IPSOS conducted among 174 real estate companies and institutional investors, 62% of all investors intend to step up their investments in sustainable buildings.
In the clear lead in this respect are French investors, at 82%, compared with German and British investors at 60% each. The average was 66%. In this context, the industry makes virtually no distinction between new and existing buildings. While 48% of all respondents said they intended to invest in new ‘green' developments, 52% stated their intention to pursue the modernisation and redevelopment of their proprietary real estate stock.
There were manifest differences in the way respondents perceived their respective national markets. While 63% in France believed that a national market for green buildings is forming, only 33% of the poll participants in Germany shared this view.
Despite the great interest among investors, the question of whether profitability and sustainability can be combined has not yet been definitively answered. Meanwhile, several international studies on the subject have been compiled. These suggest, at least for the US, that investments in buildings with a demonstrably high standard will achieve higher rents and occupancy rates, and thus an accelerated appreciation. A survey done at the University of Reading, for instance, found that a LEED or Energy Star certificate will translate into a rent premium of around 6%. The survey suggests that LEED and Energy Star-certified buildings will sell at a 36% and 31% premium respectively.
However, these findings do not necessarily apply to Western European countries, because building standards are higher here than in the US. A survey by Hypovereinsbank and Finance-Research concluded that, while returns for the extra capital employed do exist, there is no verifiable way to quantify that return. And yet real estate surveyors will have to try to factor in the sustainability of a given property in their expert opinions.
With this in mind, there are no general rules for the appreciation - or impairment, for that matter - with regard to the sustainability of a property. Several European research projects are under way to look for a more adequate way to reflect the sustainability of a building - and one approach that comes to mind here is the international ‘Immovalue' project by the European Union. Within the framework of this project, the impact of the energy consumption of office and residential properties on the net rent was demonstrated using sophisticated valuation methods such as hedonic price models and multiple regression, among others. It is the first empirical evidence demonstrating the ways in which the sustainability of a property will have ramifications on a building's rent and thus ultimately on its price.
Irrespective of whether the value of sustainability can be identified with any degree of precision, real estate sustainability will play an increasingly important role because the pressure from both tenants and competitors is mounting. Comparable processes can be observed after the introduction and certification of quality management systems. As soon as a number of prospering companies on the market had introduced quality management systems, other companies decided to follow suit, effectively endorsing a new market standard within a relatively short period of time.
The development is driven, on the one hand, from inside the real estate industry while, on the other hand, government policy is exerting influence by setting targets and sponsoring incentives. In recent years there has been a regular competition for climate targets. As early as 2002, the EU passed the Energy Performance of Buildings Directive (EPBD 2002) to raise the efficiency standards for new buildings and redevelopment properties. The subsequent directive, EPBD 2010, came into force on 8 July 2010, and needs to be enacted into national law by 9 July 2013. The Directive provides that all new buildings in the EU will need virtually no energy for heating, hot water, ventilation and cooling as of 2020. Government buildings are supposed to meet this requirement by 2019. This would make green buildings the de facto standard.
However, these changes of the regulatory parameters will necessitate a constant adjustment of subsidy programmes which, in Germany, for instance, creates confusion rather than an incentive. The increasing complexity of the subsidy requirements might actually hinder investment activities. Moreover, a wild blend of incentives coexist side by side, rather than being meaningfully coordinated.
The situation is compounded by the fact that the subsidisation policy fails to orient itself to economic cycles. Neither the life cycle of properties nor the holding period of the professional investor is taken into account. An economically efficient approach requires more of an effort to adjust climate-protection investments to the standard investment cycles. The situation could be remedied by differentiated depreciation and tax models.
All things considered, the coordination of direct and indirect forms of sponsorship needs to become much more efficient - including taxes, write-offs, loans, interest rates, and subsidies. The future objective will have to be to achieve the greatest possible leverage by sensibly combining investment incentives. This will also involve an improved coordination between the various levels because, so far, subsidy programmes have been implemented in a more or less uncoordinated manner on local, regional and international levels.
One factor explaining this is that the government policy tends to consider the carbon issue in isolation from other aspects that are actually important. It would be much more sensible instead to bring economic and social components into play, along with the environmental one. Here is a case in point: Newly raised zero-energy buildings receive equal sponsoring across the regions, with the region that will be affected by Germany's demographic change in the medium and long term getting the same subsidies as so-called growth clusters. Unfortunately, the question of whether one or more generations will use these houses, and how sustainable the contribution to climate protection actually is when taking this factor into account, is being ignored. In this sense, the subsidies are scattered far and wide.
Regardless of how fast the government can adjust its subsidy parameters, green buildings will count among the established standards by the end of the decade. To achieve this goal, both the government and the real estate industry will have to master a variety of challenges. For one thing, the industry needs to create a uniform certification of green buildings in order to ensure comparability. The job of government politics, in turn, will be to optimise the interaction of the various incentives.
Martin Lemke is managing director of Patrizia GewerbeInvest KAG, Hamburg