Rise of green buildings


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Rise of green buildings

  1. 1. EcoLogic Consultancy EcoLogic Insights series Climate change and real estate – Rise of Green BuildingsClimate change and real estate – Rise of Green Buildings
  2. 2. EcoLogic ConsultancyImpacts of climate change for Real Estate sector in IndiaGreen buildings are gaining momentum around the world, given their financial benefits and smallerenvironmental and resource use footprint.Energy insecurity, water scarcity, and climate change pose growing risks for the real estate sectorIndia, yet the connections between these trends and financial impacts are not well understood byanalysts, investors, companies, and governments. These issues will affect the risk and returnassociated with investments in (1) commercial building projects and (2) companies involved incommercial real estate development and investing. The limited energy and water infrastructure;rapidly growing demand for energy and water resources; and physical exposure and vulnerabilityto climate change impacts, all increase the likelihood and magnitude of financial impacts. Greenbuilding investments can minimize energy and water-related risks while achieving net positivereturns in as few as three years.Evaluating the risksThe risks are in the following categoriesEnergy insecurity risks - including higher electricity/diesel prices and shortages—will likelyaffect major cities in as energy demand is expected to outpace production capacity and energyinfrastructure. India faces the great price and shortage risks, considering the already existing—andworsening—energy supply-demand gap.Water scarcity risks - including poor availability and quality—are greatest in India. Several riverbasins in the country are expected to face acute stress or shortage by 2025, and groundwatersources are rapidly declining. The seasonal shortages are expected to worsen (and already have)around major metropolitan areas due to high demand, water pollution, and climate change impacts.Climate change risks - created by more frequent and intense floods, droughts, storms, andprecipitation—are difficult to predict with certainty, but are expected to have significant physicaland economic impacts on all the focus countries over the next decade. Coastal and low-lying citieslike Mumbai, Kolkata, and Chennai face severe flood and storm risks.These three trends are interrelated, thus further exacerbating the magnitude and likelihood of theirimpacts on the building sector. For example, water scarcity can worsen energy insecurity becausewater is necessary for cooling in thermal and nuclear power plants, and as an input in hydropowerplants. Similarly, climate change can constrain water supply (through changes in precipitation, forexample) and increase the demand for energy and water during heat waves.Climate change and real estate – Rise of Green Buildings
  3. 3. EcoLogic ConsultancyThe Framework to Assess a Buildings Exposure and Vulnerability to Energy Insecurity, WaterScarcity, and Climate Change Trends is shown belowFinancial Cost Type Key Trend Building Exposure Building Vulnerabilityimpact drivers Factors (Location) Factors (Design) Water utility • Water scarcity • Limited local water • High per occupant water costs • Climate infrastructure relative to use due to water change expected demand intensive design and • Drought-prone region building features • Fluctuations in seasonal • Lack of adequate gray water availability, water storage systems in resulting in water buildings quantity and quality supply problems • Proximity to sources ofUtility Operating water pollutants (for example, industry or agriculture) Costs • High price of alternatives to local municipal water supply (for example, if substitute sources are located far away) Energy • Energy • Weak or no energy • High per occupant energy utility costs insecurity infrastructure use due to energy • Water scarcity • Insufficient power supply intensive building to satisfy area demand for systems and/or features power • Expensive sources of • Area power outages power/back up and/or energy shortages generation • Subsidized diesel fuel • Older/outdated building prices and/or country systems that may not dependence on foreign comply with new building fuel sources codes OMRR costs Climate change • Coastal area (exposure to • Architectural design or and flooding, cyclones) use of building materialsOperating Costs depreciation • Low lying locations that are vulnerable to Nonutility (exposure to flooding) water and/or storm • High recent/predicted damage frequency of climatic • Limited or no insurance events (historical coverage against flood, occurrence may not fire, and other extreme sufficiently forecast weather events future impacts) Insurance Premiums Project and • Energy • Area water and energy Inadequate budget or permit delays insecurity availability construction contract,Construction • Water scarcity • Coastal and/or low-lying i.e., one that does not account • Climate locations for delays in Costs change permitting processes and construction Material input Energy insecurity High fuel and energy costs Use of imported materials prices (long distances may result in high transportation costs)Climate change and real estate – Rise of Green Buildings
  4. 4. EcoLogic ConsultancySome of the direct results of energy insecurity, water scarcity, and climate change trends onexisting and planned commercial buildings can include:Higher utility costs - driven by increasing prices and unreliable power/water. This can lead tohigher/uncertain operating cash flows, less competitive rental rates, and lower occupancy rates.Building utility use intensity is also expected to increase as consumers demand modern buildingfeatures like air conditioning and landscaping, thus further increasing utility costs.Higher nonutility operating costs - including accelerated building depreciation, higher operationsmaintenance, reserve and replacement (OMRR) costs and higher insurance premiums—which canlead to less competitive rental rates and lower occupancy. OMRR cost increases are driven by:• Physical building deterioration due to more frequent/intense weather events; and• Obsolescence arising from energy- and water-inefficient building systems.Higher construction costs - including input costs, capital costs, and lost rental income—driven by:• Project/permitting delays caused by local energy insecurity, water scarcity, and the increased frequency of extreme weather events due to climate change; and• Pass-through of fuel costs from transportation of material inputs, particularly importsThese effects on individual projects will pass through to the investors and developers, affectingthem adversely.Real Estate Investment Trusts (REITs) - Higher nonutility operating costs from a REIT’sportfolio—like insurance premiums and maintenance expenses—will flow directly to the REIT’soperating cash flow. Higher utility costs may be passed on to tenants although this may haveadverse impacts on rental/occupancy rates, depending on prevailing market conditions.Real Estate Developers - Regardless of market conditions, real estate developers will have tocontend with higher capital costs created by project/permitting delays. Developers who hold andlease completed projects (more common under unfavorable market conditions) will also face therisk of operating cost increases and lost rental income in the case of project delays.This therefore creates significant market opportunities for Green Buildings. Green buildinginvestments can reduce vulnerability to operational risks and provide net financial returns relativeto conventional buildings.• Energy and water-saving technologies (like targeted task lighting, solar water heating, and rainwater harvesting) can reduce utility costs for building owners and/or tenants (thus reducing operating costs and/or improving rentability).• Green building market in India are nascent, but growth is likely, especially as (1) water scarcity, energy insecurity, and climate change impacts worsen and (2) awareness of financial and social benefits grows in the private and public sectors.Climate change and real estate – Rise of Green Buildings
  5. 5. EcoLogic ConsultancyNew and retrofitted green buildings in this region have demonstrated net positive returns onenergy and water efficiency investments. According to a 2008 Asia Business Council report:• The first Leadership in Energy and Environmental Design (LEED, a green building rating system) Platinum building in India—the 2003 CII-Godrej Green Business Center (CIIGodrej GBC)—achieved a 55 percent reduction (120,000 kWh/year) in energy use, and a 35 percent reduction in potable water consumption, with an expected seven-year payback period on green investments;• More recently built LEED Platinum/Gold buildings in India, such as the Patni Knowledge Center, have achieved payback periods on green investments of just three to four years.Energy efficiency investments also protect operating costs from rising electricity prices. For atypical Indian commercial building, HSBC estimates that a 10 percent increase in power costsincreases total operating costs by 1 percent in a normal building. In a green building, the pass-through effect is only 0.50 to 0.85 percent of expenses due to the energy savings.Green buildings in IndiaGreen building investments in India have demonstrated a net positive return in as few as threeyears. Green buildings provide a range of cost and revenue benefits over their lifetime. Theseinclude utility cost savings, rental premiums, and longer building lifetimes. A significant sales orrental premium is currently hard to achieve, especially given the current economic downturn.However, operational savings are achievable immediately through reduced water and energy use.Although green buildings typically require additional design and construction costs, paybackperiods in recent buildings have been reasonable. In India, for example, several green buildingsconstructed since 2005 have achieved positive returns on green investments in three to five years.The following data from Indian Green Building Council shows the success stories of green buildingsin India.Building Year Area Rating % increase Payback Awarded (sq.ft.) in cost (years)CII-Godrej GBC, 2003 20,000 Platinum 18% 7HyderabadITC Green Centre, 2004 1,70,000 Platinum 15% 6GurgaonWipro, Gurgaon 2005 1,75,000 Platinum 8% 5Grundfos Pumps, Chennai 2005 40,000 Gold 6% 3Technopolis, Kolkata 2006 72,000 Gold 6% 3Spectral Services 2007 15,000 Platinum 8% 4Consultants Office, NoidaHITAM, Hyderabad 2007 78,000 Silver 2% 3Patni Knowledge Centre 2008 N/A Platinum 6% 3Climate change and real estate – Rise of Green Buildings
  6. 6. EcoLogic ConsultancyGiven the growth potential of Indian metropolitan cities with the rapid rise of IT/ITES, there isgrowing interest in green buildings. As of 2009, more than 140 buildings were expected to beawaiting evaluation and certification. It is expected that by year 2012, there will be around 1000certified green buildings. This translates into a market potential of USD 4 billion.Though the National Building Code (2005) is voluntary, Energy Conservation Building Code (ECBC)will shortly become mandatory for commercial buildings with a connected load of 500kW orgreater, and applicable to all buildings with a large air-conditioned floor area of 1000sqm orgreater, and is recommended for all other buildings. Energy Service Companies (ESCO) market isdeveloping with government support. The Government of India is planning an expenditure ofINR490m through the Ministry of New and Renewable Energy (MNRE) during 2008-12 for thepromotion of energy efficient solar or green buildings in India.Despite all these efforts, the potential to be tapped is immense as compared to the market tapped.In 2008, green buildings accounted for only around 8 percent of total Grade-A commercialconstruction in India. There remains an enormous energy savings potential. Some experts projectthat total built-up green building area will increase three-fold to approximately 100 million squarefeet by 2014. Green buildings thus represent the future of commercial infrastructure creation inIndia.Climate change and real estate – Rise of Green Buildings
  7. 7. EcoLogic ConsultancyAbout UsEcoLogic Consultancy came into existence with the purpose of “To help our clients inunderstanding, establishing sound Environment Management Systems, and pursuingsustainable business solutions through our various services to abate direct and indirectmpact on ecological balance.”We have expertise in the areas of carbon accounting and management, energy managementsystems, voluntary/compliance carbon markets, environment management andsustainability and carbon branding.To know more about EcoLogic, please visit http://www.ecologicconsultancy.inTo schedule a meeting and discussion with us, do reach us onKedar - +91-9000772462 – kedar@ecologicconsultancy.inIndrajeet - +91-9028788430 – indrajeet@ecologicconsultancy.inClimate change and real estate – Rise of Green Buildings