Green is gold in property valuation
- By Shaun Brodie
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E-mail Shanghai Daily, August 14, 2012
The Earth's average surface temperature has risen by about 0.8 degree Celsius since the beginning of the 20th century, and almost two-thirds of that increase has occurred since 1980.
Global warming is undeniable, and scientists are more than 90 percent sure that it is principally caused by ever-increasing concentrations of greenhouse gases produced by human actions, such as the burning of fossil fuels and deforestation.
From a property context, buildings in the United States, for example, are responsible for 39 percent of carbon dioxide emissions.
For some time, sustainability has been high on the political agendas of governments worldwide. Sustainability is also a critical business issue in the property sector today - as witness the potentials for carbon real estate taxes and carbon trading. What's more, sustainability is increasingly becoming part of the social responsibility strategies of companies, which need to demonstrate their green credentials by investing in or occupying sustainable buildings or neighborhoods.
In addition, investors are increasingly adopting sustainable real estate strategies for the following reasons:
Reducing potential risks to future income flow, depreciation and liquidity;
Reducing risks to future funding and financing;
Reducing risks with regard to changing occupier behavior;
Reducing risks resulting from a future legislative environment;
Future-proofing assets and portfolios.
On the flip side, sustainability is still a relatively recent aspect of the industry.
There is a lot uncertainty about how long it will take for green technology to pay back the investment in it or whether this will happen at all. Moreover, companies facing spending cuts may see green investment as a luxury and focus instead on spending that will contribute to survival and growth.
Today, the value of going green is often not understood, due, in part, to the current lack of widespread data on the financial benefits of sustainable buildings. In many instances, a "vicious circle of blame" exists.
Investors say, "We would invest in sustainable buildings, but there is no demand for them." Owners and users declare, "We would like to have sustainable buildings, but there are very few available."
Designers and contractors say, "We can build or retrofit buildings in a sustainable way, but developers don't ask for it."
Finally, developers say, "We would ask for sustainable buildings, but the investors won't pay for them."
'Virtuous circle'
But what if these perceptions were changed by evidence of the financial benefits of sustainable buildings as well as proactive government action?
We would then get a "virtuous circle."
Investors would say, "We invest in sustainable buildings because that's what occupiers want and because they give better returns and have higher value growth potential."
Owners and users would say, "We demand and occupy sustainable buildings because they are cheaper to run, increase our well-being and improve our image."
Designers and contractors would say, "We design and construct sustainable buildings and environments because that's what our clients want and what society expects." And developers would conclude, "We develop sustainable buildings because they are easier to sell, achieve higher prices and are much more resistant to obsolescence."
So if perceptions can be dramatically changed, what of the green Grade A office market in Shanghai and what of the financial benefits of going green?
To begin with, our latest report on Shanghai's green Grade A office market reveals that the first currently certified green building was completed in 2004. Today, Shanghai has a total Grade A office stock of 5.4 million square meters, of which 722,830 square meters are certified by either LEED, BEAM or China Three Star green ratings systems. By 2016, the city is expected to have total Grade A office stock of 13.5 million square meters, with 2.2 million of that certified as meeting green criteria. In addition, by 2016, there could be as much as another 1.7 million square meters of Grade A office space in Shanghai that has the potential to be certified as green commercial office space.
Green office
When looking at Shanghai's green Grade A office availability ratio, our analysis reveals that there has been a good deal of fluctuation since the first quarter of 2004. This is because there has been a smaller pool of green office space present in the city for some time, and the introduction of a large quantity of green office space at any given time has generally led to a spike in the amount of such space.
However, green office space in Shanghai has always been in demand from occupiers, and new green space has been briskly absorbed soon after completion.
Moving on to rental property, our analysis shows that during the pre-financial crisis period, there was a marked difference between rents that green Grade A office buildings in Shanghai were commanding and the rents fetched by standard Grade A offices.
Since the global financial crisis, this difference has narrowed. That is good news for potential occupiers of green offices because the occupation of quality green office has become that much more affordable. The rental gap between green and convention office space has narrowed to only 0.21 yuan per square meter per day.
Pricing differential
From a pricing perspective, though, we are now beginning to see the re-emergence of a pricing differential between green Grade A office space and conventional Grade A office space in Shanghai.
On the whole, developers who build new green Grade A offices from scratch or investors who purchase distressed assets and green retrofit them will do well and can expect to sell their space at a much higher prices than holders of conventional office space. The price gap, or capital value, of the two property types is now 7,273 yuan (US$1,141) per square meter.
Out of a basket of 95 Grade A office buildings in Shanghai, 14 are green. This number could rise to 51 by 2016.
Therefore, as perceptions change, sustainability will move more front and center. If you are a commercial office real estate holder in Shanghai, sustainability in its widest sense is something you will have to think about all the time in the future, in terms of the acquisition, management and sale of office assets.
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