Does Going Green Pay for Commercial Real Estate?

---

The prominent role of real estate is increasingly recognized in the wider debate on climate change, and in today's society it is impossible to place real estate outside the context of the environment. Commercial and residential buildings account for a significant portion of carbon emissions and various legislation on both a national and international level is resulting in fundamental changes to building specifications and how buildings are managing to assist minimizing the negative impacts.

However, green buildings remain the exception rather than the norm and sustainability goals are easier to announce than to achieve.

Why is it important to have sustainable real estate?

Buildings and construction works have the largest single share in global resource use and pollution emission. Sustainable buildings squeeze the current maximum utility achievable for owners, users and the wider public to the lowest possible impacts and risks for the global and local environment. An increasing number of case studies and comparative analysis of environmental, social and economic performance of buildings from around the world suggest that ownership of sustainable buildings results in various benefits for investors, ranging from drastically lower operating costs to improved marketability, longer useful life-spans, significantly increased occupant productivity and well-being, as well as more stable cash flows.

Why Energy Efficient Improvements (EEI)?

Within the U.A.E., Abu Dhabi has taken the lead in developing a green building program in the form of the Urban Planning Council's Estidama (sustainability) Pearl Rating System, which stipulates that new buildings must meet strict sustainability and urban design requirements in respect of energy and water consumption efficiency to receive approval for construction. This is part of the U.A.E. government's target of achieving a 120 percent reduction in the U.A.E.'s carbon footprint by 2015.

Currently the authorities are drawing up guidelines that will make existing structures in the Emirates sustainable. These guidelines will call for more efficient water, lighting, cooling and insulation fixtures, so that older buildings and villas make the best use of the Emirates' scarce water resources and adapt better to the intense summer heat.

Investment in EEI stands out because of two important reasons:

• The upward and volatile trend of energy prices. One of the most compelling motivations for investment in EEI is to lessen the reliance on energy, and hence its cost in building operations.

• There is potential for operational savings that increase net operation income. In a typical urban office building, energy costs can range from 15 percent to 25 percet of operating expenses. Any efforts to decrease controllable expenses, like energy use, fall directly to the bottom line and can increase net income for the landlord.

Do Energy Efficiency Improvements Pay?

Energy Efficiency is about "doing more with less," rather than doing without.

Over the past 12 months, Cluttons Middle East working in tandem with a specialist energy efficiency contractor, has been researching ways to reduce the operating costs of its property management clients and make their properties more sustainable. Several refurbishment measures to existing buildings have been considered in an attempt to reduce operating costs and to improve energy efficiency.

Replacing fixed speed heating pumps with variable speed pumps is the most cost effective refurbishment strategy. The electricity saved this way will pay for the additional capital cost and give an internal rate of return more than 100 percent. Another way which energy efficiency can be achieved is to improve lighting installations - an opportunity that is the most cost effective for retail and industrial buildings.

In terms of examples of sustainable buildings in Abu Dhabi, Abu Dhabi Islamic Bank has recently announced that it has been awarded the LEED pre-certification for Gold Rating from the U.S. Green Building Council for its proposed new headquarters on Airport Road in Abu Dhabi. The building will be ready for occupancy in 2013 and will be one of the first to have received such a certification in the UAE.

In Conclusion...

Steps taken to measure and monitor energy consumption can lead to efficiency improvements that translate into real economic savings, not only through a decrease in operating expenses, but also the increase in value associated with an increase in property level revenue.

Steve Morgan is head of the Middle East for Cluttons, the international property consultancy.