Investors are looking for "green" centers

Sustainability is gaining in importance by Dr. Ludwig Vogel MRICS

The three pillars of sustainability

Diagram The three pillars of sustainability
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“Sustainability is the concept of the ongoing, future-oriented development of the economic, environmental and social dimension of human existence. These three pillars of sustainability interact with each other and require balanced coordination over the long term.”*

The Study Commission “Protection of Mankind and the Environment” set up by the thirteenth German Bundestag describes, through its formulation of the goals of sustainable development, how social responsibility, economic performance and protection of the natural environment are inextricably linked. It is only by viewing these three pillars of sustainability holistically and considering economic requirements within the boundaries of the ecosystem that social prosperity can be achieved (see Figure 1). Looking at one of these three dimensions in isolation is sure to pose a threat to sustainable development.

* Final report by the Study Commission “Protection of Mankind and the Environment – Goals and Framework Conditions of Sustainable, Forward-looking Development”, German Bundestag: parliamentary document 13/11200 of 26 June 1998

Sustainability in the real estate industry

As part of an analysis of the possibilities for implementing environmental sustainability concepts into shopping center project development, ECE conducted a survey of 165 investors. The aim was to enquire about investors’ current requirements in the area of environmental sustainability and to assess their projects in this regard.

Diagram Motives for engaging with the issue of sustainability
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Sustainability is an important competitive factor – value preservation and running costs are key reasons for engaging with the issue

Almost 50% of investors attach a high degree of importance to sustainability within their commercial policy. For the other half, however, there are not yet really any signs of sustainability criteria impacting their investment strategy. One reason for this is the absence to date of any significant demand pressure at the level of their own investors.

Reasons given for engaging with the issue of sustainability include in particular potential savings on running costs and preservations of property values (see Figure 2). As far as energy efficiency is concerned, commitment to sustainable measures is closely related to trends in energy prices. The fact that approximately 80% of the costs of a property are incurred in the form of operating costs, whilst the ability to influence these costs declines rapidly after the planning phase, highlights the need to analyse potential energy savings in greater depth during the investment phase. Such savings on running costs could potentially lead to higher net rental income over the long term. Only 19% of investors refer to the possibility of increasing profits as a motive for engaging with sustainability. According to the responses given, improvements to the company’s image and legal consideration are also only secondary motives.

Diagram Sustainability versus initial return
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Lower initial returns are acceptable

Around 37% of German investors would accept a lower initial return as a result of environmentally sustainable investments. At 65%, the willingness shown by international investors is considerably higher. If we look at the responses by investor type (see Figure 3), the greatest willingness can be seen among the initiators of closed-end funds and the “other” group.

General willingness to invest in sustainable renovation

Diagram Implementation at portfolio properties
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Virtually all investors are willing to invest in sustainability measures. However, half are only willing to do so if running costs can be saved as a result of the measures taken, and 14% only if the investments pay off in the short term (see Figure 4). Investments must pay off within 10-15 years for a large proportion of investors. However, bearing in mind the sustainable (and therefore mainly long-term) impact of environmental measures, these required returns of 6.6-10% (corresponding to a payoff period of 10-15 years) are likely to be difficult to achieve in many cases. At the moment at least, increasing the environmental compatibility of shopping centers (and properties in general) requires more of a long-term perspective and cannot be realised exclusively with investments that will pay off in the short to medium term.

Measures within the context of environmental sustainability

Cooling is the biggest running cost

Sustainability in the area of shopping center developments often focuses on the efficient consumption of energy, the use of regenerative energy and the deployment of innovative technologies to reduce CO2 emissions. One feature of shopping centers, for example, is that the amount of energy needed to cool a center is twice as high as that required to heat it. The interior lighting, visitors to the center and sunlight give off so much heat that insulation would by and large be counterproductive. The greatest sustainability potential lies in optimised concepts for heating and cooling centers, energy recovery, ventilation of centers and the use of renewable energy.

Emphasis on solar and geothermal energy

Diagram Preferred measures with regard to sustainability
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Of the technical measures relating to energy management for shopping center projects, investors consider, in particular, the implementation of photovoltaic systems and geothermal models, such as geothermal heat exchangers, heat pumps and geothermal probes, to be promising options for the future (see Figure 5).

At present, however, it is only possible to imagine photovoltaic systems playing a supporting role, as meeting the annual energy demand of a center with 30,000 m² of retail space would require a south-facing external area of roughly 180,000 m² covered in photovoltaic panels. Making exclusive use of solar energy to meet the energy needs of a shopping center appears impractical, in view of the current efficiency of these systems. From the perspective of sustainability, however, a supporting role for this form of energy should be encouraged.

Using geothermal energies to cover the heating/ cooling needs of a shopping center represents a significant step towards a “green center”, but again this statement must be qualified as far as the supply of energy is concerned. Only 30% of the energy required for cooling can be covered by this form of energy, with the remaining 70% still having to come from conventional energy sources. The demand for heating, however, can be met in full by geothermal systems.

The question of which environmental measures are actually realistic in practice naturally depends to a great extent on the conditions that apply at the project site.

There is an evident desire to realise “green centers”, and requirements are increasing.

We can gather from the views expressed in the survey that the possibility of implementing sustainability criteria in shopping center projects is essentially regarded as positive. The assumption is even made by 44% of investors that shopping centers are particularly well suited to meeting future sustainability criteria. One thing that is certainly true is that shopping centers as a property type have enormous environmental potential, on account of their size and function. While successful project developers have already ensured that the economic pillar of sustainability is firmly embedded, the environmental pillar has yet to follow suit. There is no doubt that sustainability will be an important factor in future investment decisions, although more in-depth discussions about the issue and the formulation of standards appear necessary. A willingness in principle to invest in sustainability is in evidence, however. Reasons such as reducing running costs and maintaining or increasing the value of properties are particular areas of focus in investment decisions.

Ultimately, sustainability appears to be a theme that is discussed intensively within the investor community, although it is not yet having a decisive influence on investment strategy. The requirements relating to sustainable properties, and consequently to shopping centers as well, will continue to increase, however, and will originate not only from legislators, but also from investors and tenants themselves. Even economic crises are not an argument against, but are actually an argument for giving consistent consideration to environmental principles. Ignoring these principles would have more serious consequences than any crisis, and the consequences would be irreversible.

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