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Should real estate investors be interested in energy efficiency?

The built environment accounts for over a third of total indirect CO2 emissions in the US and the UK, based on studies carried out in both countries. In a new report, “Energy Efficiency in Real Estate Portfolios” Ceres, the leading coalition of investors, environmental groups and other public interest organizations and Mercer, a global consultancy service, highlight the opportunities for investors, but also the potential risks to portfolios that don’t embrace energy efficiency.
Despite the recent negative publicity challenging the scientific evidence underpinning climate change, the consensus seems to remain that climate change must be tackled and cutting carbon emissions is critical to achieving this. As a result (and notwithstanding the global economic downturn and the depressed property market), legislation and policy developments at global and national level has continued to crystallize solutions for reducing greenhouse gas emissions (GHG), including the built environment. In the US, states and local governments have embraced green real estate initiatives, ahead of federal legislation. Since 2005 there has been an increase in approved green building polices from 13 to 31. In the UK, legislation had been introduced by the government implementing European Union Directives on energy performance. It has also introduced the mandatory cap and trade Carbon Reduction Energy Efficiency Scheme (CRC) that will compel a number of organizations to improve their energy consumption and reduce their GHG emissions. Changes to building regulations, alongside the zero carbon building initiative and the introduction of energy performance certificates are focusing the real estate market in the UK on energy efficiency matters.
The report argues that there is a business case for both investors having direct control of properties and indirect owners who invest in real estate related funds investing in energy efficiency. They believe that the market demand for energy efficient real estate is growing, based on a 2008 US study by McGraw-Hill Construction. This study ‘s findings are reinforced by a UK study conducted by the Henley Business School of Real estate and Planning, that found 10% and 31% increases for Energy Star and LEED-certified buildings. The report states that this demand is being reflected in a price premium.
The report assumes that specific energy savings measures will increase the value of the building over the long term and also that other potential green attributes (sustainable building materials, renewable energy, etc) add value over time. According to the report there is a misconception (exacerbated by the credit crunch) that improvements in energy efficiency require expensive technologies. If these assumptions are correct, investors should be looking for ways to become engaged with asset managers and portfolio companies, or tenants directly to carry out energy benchmarking exercises and carry out improvements to poorly performing buildings.
Even if one questions the assumptions on value, whether direct or indirect, property investors can afford to ignore the momentum being created for energy efficiency, is likely to be driven by the potential risks of inaction. The report identifies these risks as:
  • Expected rises in energy costs, including the cost of waste consumption.
  • Existing and new, more stringent, legislation.
  • Competitive and financial risks of not responding to market demand.
The report also points out that with certain types of real estate; there are limits on how energy efficiency can be achieved. For example, in commercial buildings, landlords can make changes to common areas, but without explicit leasing terms that clearly define responsibilities for energy management or without full co-operation of the tenant, it becomes difficult to regulate how occupants consume energy.
Both UK and US Investors may not have a choice if the energy efficiency momentum becomes enshrined in legislation, but they are going to have to consider what action to take.