Real-estate sustainability affects investment
Real-estate sustainability affects investment
18 OCTOBER 2012 6:01 AM

A sustainable asset coupled with eco-friendly operations can have major effects on a property’s bottom line and cash flow.

GLOBAL REPORT—Building environmentally sustainable hotels doesn’t necessarily raise their value at first sight, but hospitality players eying their bottom line know it will attract potential investors, who are starting to see the point.

Green features aren’t the first subject that comes up when discussing a transaction, but in the experience of hospitality consulting firm HVS, green features can result in higher cash flow.

“Profitability is directly influenced by a building’s environmental efficiency,” said Manav Thadani, global chairman of sustainability services for HVS. Thadani said hotels can improve bottom lines by 1% to 2% of gross operating profit by implementing sustainability initiatives.

“We believe that hotel owners who have taken a detailed, substantive look at their utility consumption and operational efficiency have a distinct operating advantage, as well as potential higher property valuations via the capitalized cost of their assets,” he adds.

In the face of climate change and rising energy costs, reducing the operational cost of real estate is paramount, resulting in a flurry of private and government initiatives to bring everyone on the same page. Green building rating systems, regulations, tax incentives and punitive carbon taxes are in place worldwide to varying extents to get developers to build or retrofit “green.”

For the first time, Jones Lang LaSalle included a survey dedicated to real-estate transparency within the sustainability realm in its latest Global Real Estate Transparency Index 2012. JLL didn’t count the amount of sustainable buildings in each country, though it could correlate, nor did it look at the strictness of energy efficiency regulations.

“We focused on understanding to what extent market specific and countrywide tools, regulations and information sources existed to provide transparency on environmental sustainability requirements and measurements of buildings to assist with investment decisions in real estate in a given geography,” said Franz Jenowein, sustainability consulting and research director at Jones Lang LaSalle.

Energy Performance Benchmarking Systems, carbon dioxide emissions reporting, Green Lease clauses, Green Building Rating Systems and financial performance indices of “green” real estate were considered.

Only one third, or 28, of the countries covered by the overall index provided enough reliable data to gauge transparency.

The U.S. and Switzerland were less transparent than other countries as regulations may vary from geography to geography and are therefore not as transparent, Jenowein said. “Regulations and tools were less developed than in other countries, such as the U.K., Australia and France.”

Franz Jenowein
Jones Lang LaSalle

The U.K. started thinking green back in the ’60s and revealed the world’s first ratings system in 1990. Australia is widely known as the global testing grounds for new environmental laws and regulations achieving fast and innovative results. France woke up a little later, but received top marks for its environmental law package ‘Grenelle,’ fostering sustainable construction and renovation.

Beyond returns
By nature, hotel operators have been more concerned with the environment than developers. It’s less about developers not being aware of sustainable practices as it is about whether they can make friends with the increased investment involved. But attitudes are changing as more construction projects are being certified by Leadership in Energy and Environmental Design and the like. 

Since there are increasing numbers of sustainable buildings being developed, costs are decreasing to the point where they are not all that much greater than building in a more traditional manner, HVS’ Thadani said.

However, there is little point of having a green design if it doesn’t translate into a sustainable operation.

“Unless the owner is committed to operating the building in an efficient manner and the staff is properly trained and empowered, a sustainably-designed building may be no more efficient than the traditional building next door,” Thadani said.

“Energy is the second largest cost in a hotel, so green initiatives can have huge business benefits,” said Ignace Bauwens, VP of operations for InterContinental Hotels Group in the United Arab Emirates, Near East and Africa. “It puts us in a strong position to respond to rising energy prices and any future carbon taxes IHG may face,”

Investors have slowly warmed to the idea that starting with green features is much more economical than retrofitting hotels with them.

Ignace Bauwens
InterContinental Hotels Group

“It is important—that’s why we support the development of new-build hotels by providing advice on every aspect of the hotel lifecycle,” Bauwens said.

Brazil and the United Arab Emirates found themselves at the end of JLL’s index but continue to push forward. Brazil has a green building council, and Rio de Janeiro is about to write into law tax incentives that foster more green development.

 “These countries are all on the right track, and we hope that we’ll have more information available for our next survey in a couple years’ time.” Jenowein said.

“Governments are active in Dubai and Abu Dhabi to provide additional tools to improve the transparency of their markets,” he added. “Market forces also play an important role, such as seen by the ever increasing penetration of voluntarily certified green buildings.”

Abu Dhabi and Dubai have their own green rating systems; Dubai’s will be enforced by 2014. Carbon-low city projects, such as Abu Dhabi’s Masdar could lead the world’s sustainability efforts in the future.

It is a similar picture with tax breaks. Australia, which was deemed most transparent, has no incentives for green hotels, although they exist for buildings in general, according to the country’s Green Building Council. However, according to the GBCA, Australia is currently working on draft legislation to offer concessionary tax rates for foreign investors and managed investment trusts, which includes hotels, to be passed by the end of the year.

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