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March 17, 2016

Although many investors are concerned that developing a low-carbon economy inevitably involves a financial trade off, others are turning to the sustainable real estate sector for returns that show it is part of the post-COP21 solution.

The recent COP21 talks set the target of keeping average global temperature rises below 2 degrees. Buildings account for a quarter of CO2 emissions and the real estate industry has evolved in the last decade as businesses turned their focus to sustainable practices. These practices have spawn multi-billion industries and concepts ranging from building codes, green construction materials to energy-efficient light bulbs.

With increased business interest in sustainable buildings and as awareness grow; the payback from a green retrofit can be substantial.

A virtuous circle

“Energy efficiency is one of the best investments you can make,” explains Matthew Clifford, Head of Energy and Sustainability Services (North Asia) for JLL.

A green building that takes advantage of measures such as low energy lighting and more efficient heating and cooling can bring impressive savings in a short time. The default hurdle rate for projects within the property rate is a two to four year pay back, which means a remarkable return on investment of between 25 and 50 percent. A US$100,000 green retrofit on an older building can yield cost savings of US$50,000 a year.

These figures illustrate why sustainability is already moving the Asian market, both for new green-build projects and retrofitted buildings. “Sustainability is no longer about lighthouse projects,” says Matthew Clifford. Instead, it is mainstream, and innovations continue to make significant advances in areas such as cutting waste and water use. This is reflected in the global rise of certification programmes such as LEED, which covers projects in over 150 countries. Almost 40 percent of all green jobs are already in the construction industry.

The push towards low-carbon completes a virtuous circle for sustainability in the property sector. There has already been dramatic progress, fuelled in large part by innovations that cut costs. What COP21 does is add momentum, driving government activity, feeding corporate activity and creating even more investment opportunities.

A point of difference
Such advances mean that sustainability is now an important point of difference between property companies. Investors look hard at the progress companies are making in this area, partly for their financial benefits but also because they increasingly associate sustainable practices with innovative organisations. Matthew Clifford points to one scheme pioneered at JLL, allowing solar panels to be installed on a building without upfront capital costs. He says this changes clients’ perceptions about the economic value of sustainable technology and strengthens JLL’s reputation for customer-focused innovation.

The momentum provided by the hard economic figures, allied to the push from COP21, is unlocking interest in sustainable real estate from large investors such as pension funds. As investment assets, green buildings attract the smart investment dollars. One recent Morgan Stanley survey found that almost three-quarters of investors believe that good ESG (Environmental, Social and Corporate Governance) practices were directly linked to better long-term opportunities.

The push towards sustainability does have some pitfalls. For instance, too much investment in some areas may yield marketing benefits, but not the financial return investors are seeking. Matthew Clifford of JLL advises taking a holistic view at what he calls the “real hard-nosed reality of running buildings”, rather than following fads. But the hard-nosed reality of the property business does increasingly point towards sustainability as the future, and a golden opportunity for clever investors.

Matthew Clifford
Head of Energy and Sustainability Services (North Asia), JLL

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