About 60% of total energy efficiency investment lies within the property and building construction sector, yet on occasion it seems that 75% of the resistance to building in energy efficiency into new development lies within the C-suite of such companies. This is a hard, pragmatic sector to operate in and risk aversion can be a necessary survival trait as the market fluctuates.
Having grown up around family run property development and estate agency owners I had been a useful addition to site construction crews on projects as a teenager and subsequently regarded as the black sheep of the family for becoming a corporate environmental manager. My description of myself as a ‘green businessman’ cut very little ice in their commercial eyes. Only when I had honed my skills on guiding large infrastructure development through planning systems within the UK power, renewables and water sector did they become interested. I was now a useful source of advice on EIA, legislation, planning laws and explaining to them why floodplains, ancient woodlands and habitats were being actively protected by communities from their next money-making scheme.
So, this mentoring meeting on sustainability in business with the CEO of a sizeable house building company was following a predictable route. He was interested in what I had to say, but wary of what I was saying. His organisation with many others were being bombarded with the ‘sustainability’ message, but few commentators had helped him drawing linkage to what it meant for him personally and for those actively leading organisations now at the forefront of climate change adaptation hopes. He was intelligent and strategically far-sighted to understand that the way they operated now had to change, but needed help and more rational reasons to actively jump onto the sustainability wagon.
We agreed that as a ground rule sustainability initiatives had to either add +£1 to the operational profits or save £1 expended in risk. The core strategy had whatever to add a minimum of +£1 to his balance sheet.
So, we sat down and brainstormed!
First, we addressed the direct benefits of energy efficiency regarding climate change so that we could park that issue first and go on to explore other potential benefits of energy efficiency. We agreed that the building & property development sectors has an important role to play via aggressive efficiency improvements within new build (and existing) as a contributor to limiting the pace of global warming. As evidence to this we referenced a recent International Energy Agency’s (IEA) market outlook on energy efficiency that claimed that a concerted drive in energy efficiency policies could assist the world in achieving ca 40% of the emission reductions needed without requiring new technology.
We discussed the options open to his company to improve energy efficiency design. There was a lot they could do but the blockage in his mind was just how they could boost financial returns, as any benefit advantage to the buyer was dependent on increased borrowing costs, energy-efficient material costs and added construction time costs to his organisation. These added costs would have to be passed on to the buyer at the detriment of a higher purchase price. He recognised that the buyer could eventually recover those added costs in lower energy bills, but in risk terms the marketplace still revolved around ‘location, location, location, and mortgage cost. The only clearly marketable attribute was the attractiveness of a ‘green’ home to his target market – relatively successful, dual income, young and mid-life professionals. An advantage yes, but unquantifiable in the sellers marketplace or when seeking added capital for a scheme. Little progress here towards his +£1!
I then turned the discussion over to the evaluation of alternative and more sustainably innovative options to identify added value finance and business model benefits based on added energy efficiency.
Site design and placement
Asked if he ever took the alignment of new property’s into account, the answer was ‘No! the priority was housing density and profit return on a site!’. So we discussed placement for solar efficiency with housing density + return. Exploring an idea where a development was maximised for the fitting a mass photovoltaic scheme in its design as the site was constructed. The factory unit or property houses benefitting from the scheme, but ownership of the asset remained with the development company for an initial period before transferring over. How did he feel about his organisation branching out and becoming an ‘energy company’ exporting into the local grid? Monetising the potential energy benefit as part of the development return had attraction he agreed:
- It could reduce the risk profile – for even if the buildings were empty, they still produced capital returns post construction.
- A house build-carbon reduction-renewables scheme could appeal more to the third-party financier marketplace in the future.
- Such a scheme could have a predictable return on investment, and the cost in solar installation was still reducing in price.
- The energy units were reproducible on a scale that potentially made the added installation costs attractive.
- there was still the option of possible energy efficiency grants.
- The concept could help in demonstrating lower cost starter homes, and
- It had a marketable factor for those seeking a mortgage and concerned about rising externalities.
The non-energy benefits (NEBs) of energy-efficient buildings.
It was becoming clear from our session that householder or tenant energy cost savings were not always enough to drive sustainability strategies into the property market. A robust business case and ROI argument needs to consider additional factors in assigning that +£1 to the developer.
I raised the concept of ‘stranded assets’ as the organisation had a property letting arm within its business portfolio. What was the risk of these properties decreasing in value or becoming stranded if energy efficiency standards dramatically rose in the future? The scenario we discussed was a significant shift in Government policy in response to the +1.5oC temperature target. What would be the impact if this became a hard and fast target in government or global energy policy reaction?
- Could such changes render ‘bought cheap and done up’ properties a future financial liability?
- Would investors continue to lend real estate capital for properties they deemed at future risk of becoming stranded liabilities?
- What strategic criteria should now define a ‘cheap’ property in terms of its energy efficiency or retrofit profile?
These were new questions he hadn’t considered before and needed to be considered as future risk scenario.
Moving on from the risk of stranded assets we agreed that the top non-energy benefit for his organisation would lie in increased asset value within their holding portfolio and within individual buildings within that portfolio. One obvious advantage was the desirability to rent of individual properties as a reflection of energy efficiency. Anything that increased the longevity of tenants or reduced the lapse time between losing one tenant and gaining another could have a significant NEB return we agreed. A financial return that was much greater than the energy cost savings implemented into the fabric of that building originally, if a building remained empty for too long.
If a building provided tenants with a greener, more pleasant place to work/live and which also contributed to operational costs, its desirability and occupation periods enhanced during its life. Within the portfolio, we also agreed that such buildings would have a lower risk exposure to future regulatory energy efficiency challenge and the expense of retrofitting. Thus:
- increased rentability,
- lower gap periods and
- reduced regulatory risks
attached to high performing energy-efficient commercial/residential properties were all NEBs that need to be considered within future business strategies he agreed.
The session had I hoped started to alter the perception of this CEO, over his strategic options and how sustainability could assist in safeguarding the business’s longevity. It had also raised scenario that could go forward into the boardroom for further debate and consideration. That was a satisfactory start, because sustainability in business is dependant on industry leaders feeling comfortable in taking the lead on sustainability initiatives in a pro-active manner rather than reacting negatively when the opportunity has passed or when new regulation demand change.
However, the wider strategic impression I was left with after our session was that energy efficiency and investment practices remain unaligned in the UK property marketplace. The buildings sector clearly has a significant role to play in offsetting future carbon releases and in mitigating future carbon use, yet the regulatory energy policy and investment routes remain confusing as to whether they can ultimately drive a +1.5oC climate change future or just contribute locally to energy efficiency.
The regulatory preference over the last decade has clearly been aimed at direct grants and subsidies for home owners. Whilst successful in general, how much greater would have been its success if it had been aimed at achieving greater standardisation in energy efficiency within the new build developments over the last 10 years? This may reflect political caution when dealing with the sector or that policymaking is still more comfortable with the small subsidy model as they are easier to administer and communicate out to society. Yet there is clear evidence that when scaled up, energy efficiency schemes are easily replicable and just as easily scalable. They also have a verifiable ROI, help offset the switch to a low-carbon economy, low carbon cities & their air quality, and can build employment capacity within the construction service marketplace.
Let us be braver in future as the potential monetary value and benefits of energy efficiency can be just as great to developers, financiers and government as the societal value of a households energy reduction savings!
At Leading Green, our approach to sustainability in business consulting encourages our clients to look closely at their own internal leadership strengths. Helping them adopt an inquisitive state of mind and supporting them in how sustainability can support their long-term business strategy.