17. Sustainable Real Estate

Roger Baumann COO & Head Sustainability, Credit Suisse Global Real Estate

The Market for Greener Buildings

At the global climate conference in Paris in December 2015, the international community agreed on a new climate protection accord to reduce harmful greenhouse gas emissions. Since buildings account for around 40% of global CO 2 emissions, sustainable real estate can make a significant contribution towards achieving global climate protection goals. 1

“Green real estate” and “green buildings” have been gathering momentum as a theme in the real estate sector for some years and mirror the trend towards more sustainable properties. In Europe, there are now more green buildings being constructed than conventional buildings. 2 The same is true for the US commercial property market. Sustainable buildings account for between 40% and 48% of the total real estate market. 3 This is equivalent to an annual investment volume of around USD200 billion in 2016. 4 Up to USD300 billion is currently being invested in green buildings worldwide, 5 a trend that shows no sign of slowing down.

Sustainable properties can offer added value, as reflected in the higher rental and sales prices they achieve on national and international real estate markets (see Figure 21). Studies show that in some cases rental prices are more than 10% higher and sales prices up to 30% higher when compared with conventional properties. 6 Apart from financial factors, such as securing and enhancing the risk-adjusted return, the main advantages are environmental benefits, resulting from lower energy and resource consumption, as well as positive social aspects. Sustainable real estate therefore integrates environmental, social, and governance (ESG) factors into investment decisions. The general assumption is that sustainable properties are better equipped to meet the challenges of the future, help to reduce risks, and offer the prospect of superior returns. In addition, building regulations and disclosure obligations are getting stricter worldwide, turning green buildings into a necessity rather than a luxury.

Sustainability Certificates and Green Labels

Green buildings often carry sustainability certificates or labels that allow users to judge the quality of their sustainability performance. Certificates

Figure 21. Market Studies Highlight Financial Success of Sustainable Real Estate

A. Sales Price Premium for LEED and Energy Star Certified Goods Premium (%) 35

30

25

20

15

10

5

0

Fuerst McAllister (201 1) Eichholtz et al. (2010) Fuerst McAllister (201 1) Jafee et al. (201 1) Eichholtz et al. (201 1) Fuerst McAllister (2008) Miller et al. (2008) Fuerst et al. (2012) Zhang and Hongyu (2014) W alls et al. (2016) Kok and Kahn (2012) B. Rental Price Premium for LEED and Energy Star Certified Goods Premium (%) 18 16 14 12 10 8 6 4 2 0

Fuerst McAllister (201 1) Eichholtz et al. (2010) Fuerst McAllister (201 1) Eichholtz et al. (201 1) Fuerst McAllister (2008) W iley et al. (2010) Reichar dt et al. (2012) Kok, Jennen (2012) Deng, Li, Quigley (2012) Zhang and Hongyu (2014) Hyland et al. (2013) Bond and Devine (2014)

LEED Sales Price Premiums Energy Star Sales Price Premiums

Source: Credit Suisse (2017).

LEED Rental Price Premiums Energy Star Rental Price Premiums

are predominantly awarded to new buildings, often with a focus on energy and resource efficiency. Also, certification for existing properties is becoming increasingly common. Sustainability labels improve marketability, act as a control instrument, allow for better risk management, and offer competitive advantages. Finally, green labels signal real commitments in the area of corporate social responsibility and can contribute towards a positive image.

In Switzerland, the “Minergie” label is well established, with more than 44,000 certifications in total, and is used mainly for residential properties. Compared with other countries, the “Minergie” label is relatively widely

distributed. Therefore, on a per-capita basis, Switzerland has a very high penetration rate of building certifications, compared to its international peers. 7

Key Performance Indicators for Sustainable Real Estate

In addition to sustainability certificates, key performance indicators (KPIs) are used to measure the sustainability performance of green buildings. 8 The real estate sector therefore follows the international reporting standards of the Global Reporting Initiative (GRI), in conjunction with the Construction and Real Estate Sector Supplement (CRESS). 9 Key aspects measured include end energy consumption, primary energy use, CO 2 emissions, and water and waste consumption. From this basis, portfolio-specific and property-specific opportunities for optimisation can be derived.

Benchmarking Green Real Estate

Benchmarks have been established in order to assess the sustainability performance on a portfolio level in both national and international peer groups. Leading providers include the Global Real Estate Sustainability Benchmark (GRESB), which brings together over 700 participants for their assessment. In 2017, GRESB represented real estate worth more than USD3.7 trillion. 10 In Switzerland, all leading real estate companies and real estate asset managers already participate in the GRESB assessment. GRESB’s goals are to make the real estate sector’s sustainability performance more transparent and to improve it. End investors and real estate investors can thus monitor the sustainability performance of the asset managers and objectively assess their performance.

Sustainable or green real estate is increasingly becoming the default option. The transparency of the sustainability performance will continue to improve. To remain competitive, sustainability performance must be systematically reported and optimised.

Further Reading

• Faust, M., & Scholz, S. (Eds.). (2014). Nachhaltige Geldanlagen: Produkte,

Strategien und Beratungskonzepte. Frankfurt: Frankfurt School Verlag. • Schäfer, M. (9 June 2016). Das bessere Betongold. NZZ. Available here: https://www.nzz.ch/finanzen/immobilien/nachhaltige-immobilien-dasbessere-betongold-ld.87647. • UNEP FI. (2016). Sustainable real estate investment implementing the Paris

Climate Agreement: An action framework. Available here: http://www. unepfi.org/fileadmin/documents/SustainableRealEstateInvestment.pdf.

Endnotes

1 International Energy Agency. (2016). Homepage. Available at: http://www.iea.org/. 2 European Commission. (2013). The European construction sector—A global partner. Available here: http://www.efcanet.org/Portals/EFCA/EFCA%20files/PDF/The%20European%20 construction%20sector_A%20global%20Partner_European%20Union_2014.pdf. 3 Hamilton, B. A. (2015). Green Building Economic Impact Study. U.S. Green Building Council. Available at: http://go.usgbc.org/2015-Green-Building-Economic-Impact-Study.html. 4 Wharton, The University of Pennsylvania. (2013). The rapid rise of green building. Available at: http://knowledge.wharton.upenn.edu/special-report/the-rapid-rise-of-green-building/. 5 UNEP FI. (2016). Sustainable real estate investment implementing the Paris Climate Agreement: An action framework executive summary. 6 Wiencke, A., & Enskog, D. (2015). Green real estate—A significant value proposition. Credit Suisse Research. Available at: https://www.credit-suisse.com/corporate/en/articles/newsand-expertise/green-real-estate-a-significant-value-proposition-201510.html. 7 Minergie. (2017). Homepage. Available at: https://www.minergie.ch/. 8 KPIs are best practice; see EPRA Best Practice Recommendations. 9 Global Reporting Initiative. (2016). Homepage. Available at: https://www.globalreporting. org/Pages/default.aspx. 10 Global Real Estate Sustainability Benchmark. (2017). Homepage. Available at: https://www. gresb.com/.