Appendix 1: International Trends in Sustainable Buildings
Overseas trends show that investors are increasingly diversifying their portfolios to include ethical or socially responsible funds. Ethical investment in the USA and UK has increased by 50% per annum over the past 10 years. In Australia, Socially Responsible Investment (SRI) managed funds grew by 41% in the year to date to June 2004, more than twice as fast as the overall Australian retail and wholesale investment market, which grew by 18% during the same period.
Commercial building developers in the US identify real financial benefits that come from sustainable building, including:
- lower operating costs for energy, water and waste
- increased rental rates
- marketing advantage due to point of difference
- a faster lease-up period
- higher tenant retention rates due to increased comfort and productivity
- lower liability and risk leading to lower insurance rates
- higher loan value and lower equity requirements
- higher building value upon sale and appraisal
- overall greater return on investment.
A survey (Green Building Workshops, 2003-2004) of 10 major Australian property investors' thinking and attitudes towards green building found that:
- most agreed that sustainable building credentials were well regarded
- most rated and benchmarked their buildings for energy efficiency
- most expected energy costs to increase beyond the rate of inflation
- all did not fully understand the differing rating schemes for sustainable building
- all believed that tenant requirements for sustainable building credentials would be the single major cause of growth in the industry
- all agreed that the lack of sustainable building credentials would be a contributing factor for building obsolescence
- all had empathy for the cause of sustainable building
- most believed they could not afford to pay extra for sustainable buildings unless there was a direct and compensating financial return
- all agreed that tenant demand for sustainable buildings would be a principal driver for investment in green buildings.
Central and local governments in the UK, the US and Australia are also increasingly making sustainable building a requirement for their properties.
Costs
Costs for sustainable buildings internationally show a relatively marginal cost increase for sustainable building.
Davis Langdon states that significant environmental measures can be incorporated, leading to long term recurrent cost reductions, potential increased asset valuation and a more attractive home for tenants for as little as 2-4% additional capital cost (Davis Langdon Australia, 2004).
The Californian Sustainable Building Task Force identified an average capital cost premium of 2% for sustainable building. It is notable that a similar study just a few years earlier in the US estimated extra costs of 5-15%. The rapid drop in extra costs has been attributed to the normalisation of the market (ie, growth in industry experience and availability of materials and technologies) (Kats, 2003).
Davis Langdon states that significant elements of best practice, low energy and low embodied energy design can be adopted with a premium of about 10% (Davis Langdon and Everest, Matthiessen et al, 2004, Kats, 2003, Gottfried, 2003, McDonald, 2004 and Greater Vancouver Regional District, 2004).
Tenant-driven requirements
In the commercial office market, two client surveys, by Richard Ellis and Stanhope Plc in the UK, showed environmental issues to be the second most important factor for tenants after location.
Similarly, a recent survey by BOMA/ULI of US and Canadian tenants looked at the relative importance and satisfaction of over 60 building features, amenities and services. Environmentally-friendly building systems and materials were rated as important by 90% of the respondents. The survey also found there was a gap between the relative importance to building users of indoor environmental quality (temperature, indoor air quality, acoustics/noise control etc) and their satisfaction with standards in conventional office buildings. Similarly, rental and operational cost issues were also very important with only a moderate degree of user satisfaction.
Contrary to accepted wisdom, aesthetic features were, however, considered less important and there was an established degree of satisfaction with conventional buildings. This survey reinforces the importance of building interior design and indoor environmental quality, which is an integral part of sustainable building design. It also confirms tenant pressure on total occupation costs and the need to add value in these areas of sustainable building if continued growth in rentals is to be realised.
Green leases
The Australian Government, through the Australian Greenhouse Office, is developing a model green lease that will apply to all government tenancies (Power, 2004). The green lease will be linked to the Government's new Energy Efficiency Policy, which, among other things, will set minimum building energy performance standards. The following are some of the key features of the policy:
- all new and sustainably refurbished buildings, whether Commonwealth owned or where the Commonwealth is the majority tenant, must meet a minimum energy performance standard
- funding for building construction and refurbishing will be conditional on certification, by suitably qualified persons, that the building will meet required energy standards
- new lease agreements for buildings are also likely to exclude any provision permitting building owners to recover from the tenant the cost of energy used by building central services during normal working hours. This would ensure that building owners have an incentive to improve the energy efficiency of building central services.
The following are the key concepts under the green lease schedule being finalised:
- a mutually agreed management mechanism to implement energy efficiency and environmental obligations through an Energy Management Plan (EMP)
- establishing a building management committee to develop and manage the EMP
- defining the respective obligations of tenants and landlords in relation to occupational health and safety and other relevant statutory requirements, if energy efficiency measures are implemented
- monitoring and reporting mutually agreed outcomes in relation to energy efficiency and sustainable obligations (eg, such as agreeing energy intensity targets and/or savings)
- identifying opportunities to achieve energy efficiency initiatives on lease renewal (if applicable) and/or major refurbishments
- requiring the landlord to establish a water usage target for central service plant and set a reduction in percentage terms per annum.
Incentives
As an incentive to investment in sustainable building in the UK, the Finance Act 2003 introduced first-year allowances for capital expenditure on environmentally beneficial plant or machinery meeting strict water and energy efficiency criteria.
Australia also has some incentives, particularly with regard to uptake of renewable energy technologies.
