The Green Real Estate Revolution Does it provide competitive advantage?
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While green buildings are rapidly emerging as a global “mega trend”, do they give organisations any competitive edge against near or close rivals? Paul Anderson seeks to answer the question from an Australian and United Kingdom perspective.
For the past 12 months I have travelled across the
The Australian economy, with its strong growth in the
United Kingdom and Australia, in an attempt to
minerals and resources sector and its robust financial
determine if green buildings can create competitive
regulatory regime, has been somewhat protected
advantage for organisations. I have attended green
from the harsh effects of the global financial crisis,
building conferences, listened to speakers from
which has significantly impacted the United Kingdom,
international green building councils and visited some
bringing it to the b rink of a “triple dip recession’.
of the best examples of green buildings that exist. I
While the United Kingdom Government has been
have also had the opportunity to interview some of
embroiled in internal political turmoil in its attempts
the thought leaders in the green building and real
to implement a set of meaningful environmental
estate sectors to canvas their views on this subject
policies, Australia has advanced to the forefront of
area. This article shares some of my findings from my
global environmental policy. Australia was the first
personal journey to destination sustainability.
country in the world to implement the highly political
The Green Real Estate Revolution
tax on carbon emissions, which became effective
It has been widely reported, and there is no doubt,
from July 2012. This policy will have a significant
that the United Kingdom and Australia have been
impact on the way that organisations carry out
exposed to very distinct economic and political
business activities in Australia, raising the profile of
factors in recent years.
the green agenda. 2
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The Carbon Tax in Australia will ensure that the measurement of carbon emissions will become as important for corporate boards, as the liability to pay corporate taxes. There is no doubt that the United Kingdom Government and others will be keen observers of the implementation of the Australian Carbon Tax and its impact on the Australian economy. Even though commercial real estate forms the structural aesthetic of our cities, it is so often taken for granted by organisations. Buildings are frequently taken as a given without further consideration to the value which real estate can add to an organisation’s worth. The development and construction of buildings is also very important to governments, as government economic indicators are often measured by construction activity output. In addition, the energy performance characteristics of buildings are intrinsically linked to government energy and environmental policy, as buildings are widely recognised as being responsible for a significant proportion of global carbon emissions, directly through natural resource consumption, and indirectly through power consumption. In both the United Kingdom and Australia, the increased p olitical pressure on reducing green house gas emissions and the wider emphasis on environmental concerns have raised the green agenda and the focus on green real estate.
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Competitive Advantage Strategic management and the focus on competitive advantage form the staple diet for any reputable MBA and executive management course. The traditional approach to business strategy, which most M BA students and executives will learn, is that competitive advantage is attained from a business
“….it could be argued that a failing of the traditional approach to strategy is the lack of consideration towards a people proposition”
strategy that focuses on either a position of cost leadership or differentiation. However, critics of the traditional approach to business strategy have long argued the relevance and impact of broader macro factors such as environmental considerations, which are now beginning to impact and influence the way that organisations conduct their business activities. In real estate practice, the traditional approach to facilities and asset management has been to focus primarily upon cost reduction via the implementation of cost leadership strategies through upward pressure on supply chain partners. Facilities managers, asset managers and business leaders have often overlooked the importance of real estate as a source of competitive advantage for an organisation. The shift towards green real estate presents financial and symbolic benefits from a strategic cost leadership and a differentiation perspective, which organisations can exploit to their benefit. In their international bestseller and often-‐debated strategic management book Blue Ocean Strategy, W. Chan Kim and Renee M auborgne 1 identify the “reconstructionist” approach, as an alternative approach to traditional strategy to attain competitive advantage. In this book the authors outline the basis of a “reconstructionist” strategy, which is the alignment of the following three propositions:
1. A value proposition that attracts buyers. 2. A profit proposition that enables the company to make money out of the value proposition. 3. A people proposition that motivates those working for the company to execute the strategy. In contrast to the traditional approach to strategy, W. Chan Kim and Renee M auborgne present the rationale that, high performance is achieved when all three-‐ strategy propositions target both differentiation and low cost. There is an argument to suggest that the “reconstructionist” approach provides organisations with a more flexible approach to the attainment of competitive advantage, in contrast to the rigidity, which exists within the traditional approaches to strategy. In addition, it could be argued that a failing of the traditional approach to strategy is the lack of consideration towards “a p eople proposition”. The “reconstructionist” approach to strategy, in contrast to the traditional strategic approaches, focuses u pon the
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motivational characteristics of the employee in addition to the n eeds of customers. Employee engagement in green buildings can have a significant impact upon productivity and collaborative engagement, not usually highlighted in traditional approaches to competitive advantage. How Do Green Buildings Make a Difference for
“….a green building, which is capable of providing greater energy efficiency savings in contrast to a non-‐green building, becomes highly attractive.”
Organisations? Based upon the findings of the Organisation for Economic Co-‐Operation 2, people spend 90% of their lives in buildings on average, a large proportion of which is spent at the place of work. There is therefore a valid proposition to suggest that there is a likely link between the quality of the working environment and the relationship to employee performance. A compelling argument in support of green buildings is that they provide a superior working environment in contrast to non-‐green buildings and as a result generate more productive and satisfied employees and therefore provide building occupiers with added value. Recent research however, carried out by The Institute of Sustainable Development and Architecture and Bond University, in Association with the Green Building Council of Australia 3, provides an interesting analysis between the differing views of employers and employees that occupy green buildings. This research found that whilst 89% of employers considered that green buildings had a p ositive impact upon productivity and health, less than 50% of employees were in agreement that green buildings had such an impact. This research suggests some disparity between the value of employer and employee perceptions of green buildings and illustrates that an organisational “state of readiness” for change is required
to ensure high levels of employee engagement. The transition for an employee working in a non-‐green building to a green building should be managed as an important and fundamental change management project within an organisation, to ensure that premium employee engagement and performance is attained. As highlighted, the cost saving focus of facilities and asset management professionals is to reduce operating costs across real estate portfolios through supply chain efficiencies. Therefore, a green building, which is capable of providing greater energy efficiency savings in contrast to a non-‐green building, b ecomes highly attractive. There is also enormous symbolic value for organisations, which occupy green real estate. Traditional oil companies such as Royal Dutch Shell, have successfully incorporated green real estate within corporate image and b rand transformation. In Perth, Western Australia, its Australian subsidiary company Shell Australia, occupies the acclaimed 6 Star Green Star rated building Victoria Avenue, developed by Stockland. This example is not exclusive and big businesses are recognizing the significance of corporate and business strategy that aligns with green real estate.
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Similar examples exist across the globe, where organisations that take carbon reduction and corporate social responsibility seriously, are incorporating a p olicy of occupying green real estate within their corporate and business strategies. Gone are the days when green real estate was just for government departments and the public sector. Green real estate is going mainstream globally and the trend is catching on quickly. The emergence of strong lobbying groups, such as the World Green Building Council, and the implementation of green rating tools such as the Green Star Environmental Rating system in Australia and BREEAM green building rating tools in the United Kingdom, have brought the credibility of green buildings to the attention of mainstream organisations. While there may also be demand for energy efficient green buildings from small to medium sized enterprises (SME’s) as well as larger organisations, developers often overlook the green building needs of SME’s and the SME market segment could prove to be a very profitable market segment for property developers. Evidence of a beneficial “green premium” has emerged from research carried out by the recent Australian Property Institute Building Better Returns Report 4 whereby rental returns were uplifted for green buildings. While 8% and 4% green premiums were d etermined in the Sydney suburban and CBD mainstream markets, respectively, a noteworthy 21% green premium was observed in the Canberra office market. Canberra is home to the major federal government departments in Australia, which are bounded by accommodation strategies that value h igh green b uilding ratings. One explanation for the higher green p remiums in the Canberra office market is that green building owners operating in an environment where tenants value high green building ratings, can attain competitive advantage
against non-‐green building owners and therefore demand a higher rental premium against non-‐green buildings. Furthermore, green building owners that are in a position to react to changes in the macro environment towards sustainable strategies, will be well placed to attain first mover advantage in meeting the changes in building occupier demand. While reputational risk management has always been an important consideration for organisations in an ever-‐ changing external environment, the importance of business risk mitigation and opportunity risk towards corporate social responsibility takes high priority on organisational risk registers. For example, from an opportunity risk perspective, an organisation can seek alignment and reputational enhancement with a carbon reduction or carbon reporting strategy, by occupying a green building. The immediate impact of occupying a green building can be even more significant for an organisation in the services sector seeking to reduce its carbon emissions, whereby the use of its commercial property facilities may be the organisation’s primary source of carbon emissions. Therefore, where environmental
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considerations are important to an organisation; green buildings can assist in a business strategy to attain competitive advantage. The “Sustainability Equilibrium” Given the lengthy incubation and construction period of commercial building projects and the long term commitment both building owners and tenants make to a commercial property asset, the risk of obsolescence in real estate is an important business risk. The “sustainability equilibrium” is therefore an important consideration. The “sustainability equilibrium” is whereby rival companies are at an equal stage of sustainability management maturity and therefore any competitive advantage attained by an organisation through its sustainability initiatives h ave been cancelled out. From a green buildings perspective, the construction of the carbon neutral “Pixel” building by Australian Developer Grocon in Melbourne is an example of how an organisation can break the “sustainability equilibrium”, by creating a product that has an additional differentiator as a carbon n eutral building. This does not currently exist elsewhere within the competitive marketplace. Analysis Between United Kingdom and Australia A key part of my journey has been to understand the approach and attitudes of property professionals, building owners and tenants in the United Kingdom and Australia towards green real estate. While there are some fine examples of green buildings in the United Kingdom, it is really Australia where building owners, developers and consultants are pushing the boundaries in green real estate. This pioneering approach to real estate in Australia is, in turn, captivating the imagination of both large corporate and SME occupiers.
The increasing availability of green buildings in Australia, the levels of which do not appear to exist in the United Kingdom, has also stimulated b oth building owner and occupiers towards a more equitable type of lease arrangement, most commonly referred to as the “green lease”. The key b enefit of the green lease from an environmental perspective is that the green lease goes a long way to transform the behaviours of both building owners and occupiers, towards a more collaborative approach to property asset management. In contrast to Australia, green lease awareness appears to be very low in the United Kingdom and heavy reliance is made upon more traditional lease arrangements, which incorporate inequitable obligations and wasteful practices upon tenants. One such practice is lease expiry dilapidations, whereby building occupiers are requested b y building owners to strip out “internal fit out” which can often be reused by a new occupier. Yet so often, unnecessary ceiling, plasterboard and carpet waste ends up in landfill. This is generally perceived as an unjustly cost to a business occupier and an even higher cost to the environment. Again more equitable approaches to property leasing such as Green Dilapidations should
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be considered and agreed at the outset of a lease. The general perception in the United Kingdom seems to be that green buildings do not provide an increase in rental or investment value in contrast to non-‐green buildings. In Australia, however the general perception is that green buildings do provide an increase in both rental and investment value and are also considered to be a source for competitive advantage. One theory behind this is, in contrast to Australia is that research in to the value of green real estate in the United Kingdom is very limited and as such, is why such scepticism exists towards green buildings in the mainstream United Kingdom commercial real estate markets.
So, this brings me back to my original question: Do
While in the future, international commitment to
green buildings provide competitive advantage for
reduce climate change will continue to influence and
organisations?
motivate world governments to destination
In summary, businesses in Australia are far ahead of
sustainability, a key difference to resonate from my
businesses in the United Kingdom in recognizing that
experiences over the past 12 months is that in the
green buildings can assist in achieving competitive
United Kingdom, sustainability and green buildings in the
advantage for building owners and occupiers alike.
mainstream have been parked on the “hard shoulder”.
Businesses in Australia are realizing the financial benefits
Due to the poor economic climate in the United
of cost savings and enhanced differentiated value
Kingdom, it is clear that business survival has taken
through “reconstructionist” strategic approaches. These
priority above other factors and has caused
benefits are evidenced through green premiums, which
organisations to look internally rather than to the
are enhanced even further when the operating
external environment. From my journey, the unexpected
environment is “super-‐focused” towards the green
view from the mainstream in the United Kingdom
agenda, such as that seen in the Canberra office market.
appears to be that green buildings will become relevant,
Furthermore, the fact that six property investment
but at some point in the future. This should be a cause
organisations from Australia are identified within the top
for concern for the United Kingdom Government and
ten as world leaders in green real estate in the Global
construction industry leaders, when organisations in
Real Estate Sustainability (GRESB) Report 2011, 5
Australia are using green real estate and green
illustrates the importance which large property
technologies to attain competitive advantage now.
organisations in Australia place upon green buildings to
attain competitive advantage. In contrast, Hammerson
is the only United Kingdom property company to feature
in this survey. The results of the GRESB 2012 report d ue
for p ublication in September 2012 will make interesting 8
reading on the progress of UK p roperty firms. From my personal journey across Australia and the United Kingdom, it is very clear that the operating environment in the United Kingdom is currently very different to its Antipodean counterpart. Economic and political demands are without doubt out-‐playing environmental pressures at the current time, which is having an impact on the influence of the green agenda in the market p lace. The current survival focus in the
“The Green movement of this century shares the same set of principles and vision to reduce wasteful practices as did the “Lean” movement pioneers that emerged in Japan in the last century.”
United Kingdom is having a significant impact on the ability for green building owners and occupiers to achieve competitive advantage through traditionalist strategic approaches. While green buildings
The Green Real Estate Revolution:
undoubtedly enable cost savings and can contribute
Does it provide competitive advantage?
towards a cost leadership strategy, it is more difficult to
From my experience in Australia and the United
see how, in the current economic and political
Kingdom there is compelling evidence to suggest that
environment in the United Kingdom, green buildings can
green buildings as sustainable solutions in corporate real
achieve competitive advantage through a traditionalist
estate, can provide organisations with competitive
differentiation strategy.
advantage.
There is however a very strong proposition to suggest
The Green movement of this century shares the same
that building owners and occupiers in the United
set of principles and vision to reduce wasteful practices
Kingdom have the opportunity to achieve superior
as did the “Lean” movement pioneers that emerged in
competitive advantage to exceed that even currently
Japan in the last century. In 2012 however, the gospel of
being witnessed in Australia. That opportunity arises
“sustainability” appeals equally to the interests of
from the ability to apply a “reconstructionist” approach
organisations that seek to reduce operating costs by
and to obtain first mover advantage b y offering a value
eliminating “waste” and to governments worldwide
proposition through green buildings. The value
seeking reductions in carbon emissions.
proposition not only attracts buyers through its symbolic
There is no doubt that the “Green Real Estate
value, putting the organisation at the forefront of
Revolution” is upon us and the physical presence of
corporate social responsibility, it also enables the
green buildings can play both a tangible and symbolic
organisation to make money from the value proposition
role in underpinning an organisations corporate and
by facilitating significant cost savings, and provides a
business strategy.
people proposition to enhance employee engagement
The essential question that organisations today must
and motivate the workforce to execute the strategy.
answer in seeking competitive advantage is: “How can
At the beginning of my journey I set out to answer the
we afford not to occupy a Green Building?”
following question:
Copyright ©2012 Paul Anderson. All rights reserved.
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About the Author:
Paul Anderson MBA BSc. MRICS Paul Anderson is a qualified chartered building surveyor. He has a first degree in Building Surveying from UCE in Birmingham and an MBA from Manchester Business School. Paul is the founder of leasegreenbuildings.com and he is a director of CRE. Paul specialises in providing property, infrastructure and sustainable business solutions to organisations in the United Kingdom, Europe, Asia, Australia and New Zealand. Click here to connect to Paul on LINKEDIN: http://www.linkedin.com/profile/view?id=157208530&trk=tab_pro Click here to Email Paul: mailto:info@paulanderson.co
Endnotes: 1
Kim, W. C. and Mauborgne, R. (2005). Blue Ocean Strategy – How to create uncontested market space and make competition irrelevant. USA: Harvard Business
School Publishing Corporation. 2
Organisation for Economic Co – operation and Development (OECD) 2003. Environmentally Sustainable Buildings: Challenges and Policies. Paris, France: OECD
3
Institute of Sustainable Development and Architecture, Bond University in Association with Green Building Council of Australia (2010). Performance and
Perceptions of green Buildings 2010 -‐A study based upon the experiences of working, renting a nd owning Green Star certified buildings. 4
Australian Property Institute (API) and Property Funds Association (PFA). (2011). Building Better Returns -‐ A study of the Financial Performance of Green Office
Buildings in Australia. Australia. 5
Global Real Estate Sustainability (GRESB) (2011). Benchmark Research Report 2011. GRESB Foundation.
Photography: Northern Lights Photography.
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