When preparing a business case for sustainable commercial buildings, it is important to identify and communicate where there are opportunities for increasing bottom line profit, and also to identify areas where profit may be reduced. The commercial property and construction industry has begun to warm up to the sustainable building agenda, 'not necessarily because its members have miraculously developed an insatiable urge to save the planet, but because they have begun to see a viable new investment opportunity' (Building Design+Construction, 2006, p.5).
Perceived additional cost of sustainable buildings
The perceived additional cost of sustainable buildings is often cited as a barrier to the uptake of sustainable practices. Bartlett and Howard (2000), of the UK Building Research Establishment, found that 'cost consultants seriously over estimate the capital costs of energy-efficient measures and seriously under estimate the potential for cost savings and value-added as trade-offs' (p.324). Their view is that cost consultants 'have a perception that more energy efficient and environmentally friendly buildings cost between 5% and 15% more to build from the outset. This common assumption is not backed up by recent research and should be questioned' (p.315). They suggest that the real cost is, or should be, in the order of 1%, even if the design is 'exuberant with environmentally friendly features', and that 'construction professionals need to be informed of the whole life cost and environmental impact of buildings so that they can encourage key stakeholders to make more sustainable choices' (p.315).
A mindset of cutting up-front costs has long been established as standard practice when developing, designing, constructing, managing and occupying commercial buildings. However, sustainable commercial buildings require a different kind of budget approach — one that takes into account life cycle costs — as the majority of potential savings will likely result after the initial construction. Less then 10% of the total life cycle cost of a building lies in construction, while 60% to 85% lies in the ongoing expenses, including such things as continuous maintenance, and energy and repair costs. However, while the majority of cost savings accumulate over the life of the building, shorter-term financial gains are also achievable by the developer or builder by using a least first cost approach.
Allocation of cost saving benefits is an important business case consideration; one of the barriers to sustainability uptake continues to be the disassociation of benefits and costs. The developer and owner pay the capital cost of sustainability features (passive or active) — costs which may not flow through to increased rental levels — while many of the operational savings accrue to tenants by way of reduced occupancy costs.
Cost savings are capped at 10 or 20 times their value, but repay the owner from three to five times their value (e.g. an investment of $1 million can generate savings of $250,000 p.a. However, if the $250,000 additional income is capped at say 6%, then it adds almost $4.2 million to the capital value of the building. So an investment of $1 million in energy efficiency that produces savings of $250,000 adds over $3 million to the value of a building after repaying the investment).
This article outlines the business case value factors that are profit-driven and examines how they affect the various industry groups. The table below, which is based on the matrix developed by the ASBEC Building Case Sub-committee, summarises profit-motivated business case factors and indicates the industry groups that are impacted on by each of them.
Major factors leading to increased profitability
Commissioning, operating and maintenance costs may occur across a number of building systems. They will become more important as companies are increasingly forced to internalise costs of energy and water use, waste disposal and carbon emissions.
Typical areas of cost savings include:
- reduced energy consumption through a change of energy source, and through increased efficiency and effectiveness, particularly of mechanical and lighting systems
- reduced capital costs of mechanical systems, as control systems, building envelope and building tune-ups reduce the need for over-sizing
- water savings, through more efficient fixtures and fittings and recycling
- waste reduction and resulting disposal savings.
Indicative savings
Sustainable commercial buildings are designed to use fewer resources in order to operate them, thus providing savings on building outgoings. Investments in operational efficiencies can have shorter payback periods (less than three years) and will continue to deliver value throughout the entire life of the building. In Australia, data shows that energy efficiency investments can produce internal rates of return of over 39% and payback periods of one to two years (Victorian Government, 2002).
Investment in energy efficiency needs to look beyond simply picking the low hanging fruit (for example, 5% savings) to avoid inhibiting more ambitious savings later, and should instead be used to contribute to higher order savings (30% to 50% savings). In their experience, Szencorp has found that, in terms of sustainable buildings, energy and maintenance savings of 30% to 50% can be achieved within five year payback periods, while 50% to 70% savings can be achieved within seven year paybacks (i.e. with a positive Net Present Value).
Energy savings
Energy efficiency projects, even those with a modest return, should be a low-risk investment, because the return on investment is relatively certain and potential savings can be calculated with relative accuracy (Kaplan & Norton, 1996). However, one of the barriers to improving energy efficiency is still the perceived risk.
Buildings are now routinely achieving energy savings in the range of at least 20% to 30%, compared to industry standards (Building Design+Construction, 2006). Melbourne City Council's CH2 building, for example, is predicted to reduce energy consumption for cooling by 83%, compared to the strictest energy benchmark, and 18% compared to the toughest benchmark for lighting (Cheung, 2006). Likewise, after the first two months of monitoring the performance of its refurbished building at 40 Albert Road, Szencorp has reported a 61% reduction in electricity use, although this higher than average saving is partly attributed to lower than design building occupancy (Szencorp, 2006). Monitored results of post occupancy commissioning and optimisation have seen this increase to over 80% energy savings after 12 months of operation (Szencorp 2007). Similarly, capital efficiency is Investa's most compelling justification for the pursuit of energy savings, as many of their efficiency improvements have been achieved through management control and capital investments with payback periods of less than three years (Investa, 2006) (see snapshot case study on Investa's return on energy investments).
Waste reduction and disposal savings
By implementing a waste reduction program, through the re-tendering of all its waste management services in November 2005 under a 'highly innovative diversion-focused contract', Investa achieved significant improvements in their waste reduction goals, diverting 57.4% of waste to recycling. In Sydney, where landfill charges are noted to be highest relative to recycling, this strategy resulted in a saving of approximately $1,000 per month (Investa, 2006).
Whose business case benefits?
Owners, occupiers and managers are most likely to benefit financially from operational efficiencies, because savings will accrue over the life of the building. The distribution of the financial benefit between owners, occupiers and managers will depend on the leasing arrangements (i.e. whether outgoings are included in or excluded from lease premiums). Developers also have the potential to benefit from operational efficiencies by increasing their return on investment for a property through the implementation of sustainable design features, such as chilled beams, which may allow reduced riser and plant room areas and floor-to-floor heights, therefore maximising the net lettable area achievable within the overall building envelope.
Who has the most impact?
Designers are crucial to ensuring that building designs and specifications maximise operational efficiencies and reduce resource use. Managers play a vital role in ensuring that a building is operating at its optimum level by monitoring its performance and correcting operational inefficiencies (see snapshot case study on 'The Pringle Initiative' below). Occupier fit-outs can have an impact on the efficiency of the overall building, and managers and owners therefore need to work closely with their tenants to engage them in delivering sustainable fit-outs (for more information about sustainable fit-outs, see Investa green lease guide or Commonwealth green lease guide). Leasing arrangements, such as green leases, may assist all parties involved.
Whose business case benefits?
Developers are most likely to receive direct financial gain from reduced development costs. According to Bordass (2000, p.343), developers 'will always be interested in saving money', however 'capital cost is not the biggest thing. What counts is return on investment, which means maximising lettable area and rental value; and minimising time to completion and occupancy'. Owners and occupiers may receive flow-on cost savings from reduced carrying costs.
Principles for Responsible Investment
The Principles for Responsible Investment (PRI) are an initiative of the United Nations Environment Program (UNEP) Finance Initiative and the UN Global Compact. The principles were developed in 2005 to provide institutional investors with a framework to consider the environmental, social and corporate governance (ESG) issues of investment portfolios when fulfilling their fiduciary duty. The principles are voluntary and aspirational. They are not prescriptive, but instead provide a menu of possible actions for incorporating ESG issues into mainstream investment decision making and ownership practices.
The United Nations Principles for Responsible Investment:
- We will incorporate ESG issues into investment analysis and decision-making processes.
- We will be active owners and incorporate ESG issues into our ownership policies and practices.
- We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- We will promote acceptance and implementation of the Principles within the investment industry.
- We will work together to enhance our effectiveness in implementing the Principles.
- We will each report on our activities and progress towards implementing the Principles.
Australia/NZ/Asia Pacific signatories:
ARIA
Australian Council of Super Investors
CARE
Catholic Superannuation Fund
CBUS Super Fund
Christian Super
Government Superannuation Fund Authority
HESTA
Local Super
New Zealand Superannuation Fund
Statewide Superannuation Trust
Trust Waikato
Vic Super
View the full article and report here at http://www.yourbuilding.org/display/yb/Profit+and+the+business+case+for+sustainable+commercial+buildings
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