By Morag Beers
Going Dutch does not always have particularly positive connotations; but Going Dutch in green investments is a whole other matter. The Dutch do it well, and the results are increasingly being recognised as beneficial.
How do the Dutch know how to do this? I learned a joke about developers when I arrived in Holland: ‘
What is the first thing a developer does? He makes the land’. Ha ha.
The Dutch grow up to the national tune, Living with Water, not taking it for granted that our land is permanent and knowing that we are together collectively responsible for its stability. There is also the inbuilt advantage of being brought up on bicycles: as soon as you are old enough to sit up straight at a few months old, you can expect to be riding along on a seat out front on your parent’s bike. Being a very small baby projected into town traffic makes you brave in life. It is hardly surprising that these people grow up to be creative engineers and responsible investors, intuitively understanding environmental protection and not being easily fazed by life. Some of the most innovative, sustainable and thought-provoking investments and construction projects stem from Dutch activities which have served Dutch investment returns well. It is no accident that GRESB, the leading sustainability performance measurement, has its roots in Holland working with that other seat of innovation, California.
Creating Common Ground
Not so long ago, sustainability in investments, including real estate, was something that received only tokens of attention. That situation has changed dramatically: sustainability is now a predominant element of business reports, championed by that other Dutch creation, the Global Reporting Initiative (GRI). From whichever perspective in real estate – occupiers seeking productive and cost-efficient accommodation, or for investors seeking returns – sustainability in real estate is a key factor requiring skilful analysis for both investment and valuation purposes. Industry bodies – including RICS, ULI and INREV amongst others – are all on board here, proactively embedding sustainability into valuation, investment and development.
Each combination of building, market, owner and occupier is unique: a simple standard measuring the impact of sustainability on value is consequently impossible. To overcome this, standards & certifications creating a basis of consistency, allowing useful comparison and clearer differentiation, are now readily recognisable and reaching significant adoption levels.
Single-issue certifications in energy consumption:
- The US based EPA’s Energy Star programme
- The European based Energy Performance Certificate (EPC).
- The Building Research Establishment’s (BRE) BREEAM
- International Well Building Institute (IWBI)
- The Green Building Council’s LEED standards being the recognisable
Whilst certifications provide comparable indicators, there is no single definition of ‘The Sustainable Building’. What is emerging though, with increasing consistency, is evidence that speaks of higher rents, lower voids and higher yields in buildings with green credentials.
It is not straightforward: a specific certification does not lead to a specific and directly correlating value impact. Analysing the complex array of elements involved in sustainability into a single, simple to grasp, value or return figure demands that analysts and valuers are conversant not only with the range of factors involved but the relative scale of their impact within a set of unique physical and commercial circumstances. And then how to appropriately work these into a simple financial measure of value or return.
Whilst it may still feel abstract to grasp a measurable benefit of elements such as air quality and natural daylight; the contributions made to asset value actually work very logically from the occupier appreciating the benefit and their willingness to pay for it, to investors seeing the advantage in an asset with good credentials that appeals to occupiers. The chain of events is not hard to follow: efficient, flexible and resilient buildings have lower costs of occupation; well-designed green & healthy buildings breed productive and happy employees; retaining talent leads to better business performance; leads to a better tenant covenant; leads to higher capital values for building owners. Owners, occupiers and users benefit simultaneously.
Whilst green credentials give good indicators, they also demand more complexity and robustness in due diligence to ensure the value and return impacts are accurately assessed. Development and investment appraisals need to take a long-term view, fully appreciating occupier requirements in both development and operational phases. Those with good training and agility in the complexities of translating the investment narrative into the analysis across a building’s life cycle are best placed to create meaningful and reliable financial appraisals. And since real estate by its nature is valuable and never standard, being well trained to create a transparent, audit-worthy trail of financial analysis is important for all analysts and valuers.
Going Dutch – Balanced and Aligned
Understanding that occupiers and investors alike are increasingly demanding and valuing the more sustainable building is easy to comprehend. With more alignment of returns evident, it is exciting to imagine that the drive to provide sustainable and green buildings will allow for far more natural collaboration between corporate occupiers, building owners and developers throughout a building’s lifecycle. With some sensible discussions on Going Dutch on the investment based on sound robust financial analysis.
Cambridge Finance offers RICS accredited courses in Real Estate Financial Modelling, Introduction to Property Investment & Development and Commercial Property Valuation in Excel. Incorporate the drive towards more sustainable accommodation into your financial models and stay one step ahead. Take a look at our course calendar and book a course today.