TOWARDS A GREEN BUILDING AND INFRASTRUCTURE INVESTMENT FUND
Author: Trent Berry, Compass Resource Management
Ltd.
BC Hydro, City of Vancouver, Vancity Capital Corporation, Tides
Canada Foundation and the Vancouver Organizing Committee for the
2010 Olympic and Paralympic Winter Games (VANOC), commissioned
Compass Resource Management Ltd. to investigate the potential of
establishing a Green Building and Infrastructure Investment Fund
which would invest in and/or finance green building and
infrastructure development. The goal of the scoping study was to
examine typical green construction premiums, investor return
potential, the best means of recouping investment, and the
challenges and opportunities for establishing such an investment
fund.
The authors reviewed representative costs and returns for four levels of LEED certification – certified, silver, gold and platinum; surveyed the literature and conducted interviews to evaluate mechanisms for investors to recoup their investment; and conducted interviews and reviewed case studies to identify challenges and opportunities for establishing a green building and infrastructure investment fund.
Key conclusions of the study include:
The authors reviewed representative costs and returns for four levels of LEED certification – certified, silver, gold and platinum; surveyed the literature and conducted interviews to evaluate mechanisms for investors to recoup their investment; and conducted interviews and reviewed case studies to identify challenges and opportunities for establishing a green building and infrastructure investment fund.
Key conclusions of the study include:
Buildings consume significant energy and generate
significant GHG emissions
Buildings are one of the largest consumers of resources, accounting for 30-40 per cent of energy consumption. Buildings in Canada accounted for about 19 per cent of Canada’s total greenhouse gas emissions in 2004.
In general, LEED Certification results in negligible to moderate incremental costs, depending on the certification level
Based on building owner surveys and green building cost modeling, the authors conclude that average “green” premiums for new construction range from 1 per cent to 8 per cent for LEED certified to LEED platinum, excluding the costs of the certification process. Actual premiums vary greatly depending upon the type of building and site. Some developments report no premium or savings. Some report much higher premiums for LEED platinum. In all cases, incremental costs can be minimized by incorporating green building practices throughout the design and construction process.
Buildings are one of the largest consumers of resources, accounting for 30-40 per cent of energy consumption. Buildings in Canada accounted for about 19 per cent of Canada’s total greenhouse gas emissions in 2004.
In general, LEED Certification results in negligible to moderate incremental costs, depending on the certification level
Based on building owner surveys and green building cost modeling, the authors conclude that average “green” premiums for new construction range from 1 per cent to 8 per cent for LEED certified to LEED platinum, excluding the costs of the certification process. Actual premiums vary greatly depending upon the type of building and site. Some developments report no premium or savings. Some report much higher premiums for LEED platinum. In all cases, incremental costs can be minimized by incorporating green building practices throughout the design and construction process.
Savings on energy and water provide the most significant
environmental benefits and the most direct financial
benefits
Savings on energy and water provide the most direct financial benefits of LEED certification. Based on energy and water rates in BC, energy savings for LEED buildings, compared to normal building practices, range from 24 per cent for LEED certified, to 60 per cent for LEED platinum. Additionally, their indoor water consumption is lower by almost 30 per cent compared to normal practice, rising to 50-90 per cent for outdoor potable water consumption.
Savings on energy and water provide the most direct financial benefits of LEED certification. Based on energy and water rates in BC, energy savings for LEED buildings, compared to normal building practices, range from 24 per cent for LEED certified, to 60 per cent for LEED platinum. Additionally, their indoor water consumption is lower by almost 30 per cent compared to normal practice, rising to 50-90 per cent for outdoor potable water consumption.
LEED certified buildings can achieve high rates of return;
other levels achieve lower but still significantly positive rates
of return
The internal rate of return on the incremental cost of LEED certified buildings over 15 years is above 35 per cent (before tax or financing considerations). The internal rate of return on the incremental cost of LEED silver, gold and platinum buildings is lower (2 per cent to 29 per cent over 15 years, depending on certain variables).
The internal rate of return on the incremental cost of LEED certified buildings over 15 years is above 35 per cent (before tax or financing considerations). The internal rate of return on the incremental cost of LEED silver, gold and platinum buildings is lower (2 per cent to 29 per cent over 15 years, depending on certain variables).
High returns do not necessarily translate into higher
upfront sales value. The costs of LEED certification will be easier
for investors to recoup through ongoing asset ownership. Long-term
investors are likely to be more interested in the potential to
generate longer-term rates of return
In practice, the savings from LEED certification do not often translate into higher up front sales value. This can be due in part to lack of information on savings among purchasers, but also shorter investment horizons, higher discount rates and low risk tolerance among many buyers. The research demonstrates that the most likely ways for investors to recoup their investment in the incremental cost of higher performance is through long-term ownership of green buildings or specific assets within a green development (for example, equipment or utility infrastructure).
Ownership would permit long-term investors to recoup their investment through lower operating costs, higher lease rates, lower vacancy levels and/or ongoing lease or utility payments. While green buildings may not attract a large sales premium initially, there is some evidence they can sometimes attract higher rents and lower vacancy rates. The study points to other innovative mechanisms to recover the green construction premium, including performance contracting, green financing, lease and lease purchase agreements for equipment and establishing utilities to own and operate the equipment/services. Longer-term investors such as pension funds are expected to be better positioned to recoup the financial values of green building ownership.
In practice, the savings from LEED certification do not often translate into higher up front sales value. This can be due in part to lack of information on savings among purchasers, but also shorter investment horizons, higher discount rates and low risk tolerance among many buyers. The research demonstrates that the most likely ways for investors to recoup their investment in the incremental cost of higher performance is through long-term ownership of green buildings or specific assets within a green development (for example, equipment or utility infrastructure).
Ownership would permit long-term investors to recoup their investment through lower operating costs, higher lease rates, lower vacancy levels and/or ongoing lease or utility payments. While green buildings may not attract a large sales premium initially, there is some evidence they can sometimes attract higher rents and lower vacancy rates. The study points to other innovative mechanisms to recover the green construction premium, including performance contracting, green financing, lease and lease purchase agreements for equipment and establishing utilities to own and operate the equipment/services. Longer-term investors such as pension funds are expected to be better positioned to recoup the financial values of green building ownership.
Green building funds exist in Europe, Australia and the US,
but not in Canada. Green developers do not lack access to capital
Several green building funds have been established in the US (seven are profiled in the study) and many are listed in the Dow Jones Sustainability World Index, though no similar funds exist in Canada. Green developers interviewed for this study indicate that access to capital has not been a major constraint for their projects to date; however, green development still represents a small share of total development activity in Canada.
Several green building funds have been established in the US (seven are profiled in the study) and many are listed in the Dow Jones Sustainability World Index, though no similar funds exist in Canada. Green developers interviewed for this study indicate that access to capital has not been a major constraint for their projects to date; however, green development still represents a small share of total development activity in Canada.
Fund developers should target a large fund with an
institutional anchor investor
A fund would need a minimum capitalization of $100 million and a large anchor investor. A minimum size is required to allow sufficient diversification and recover overheads associated with setting up and running a new fund. The fund should focus initially on institutional investors; partnerships are likely required, for example, with a larger renter of retail or office space with a corporate commitment to lease green premises and/or a green property developer. The Canadian Socially Responsible Investment industry provides an opportunity to target such a fund to retail investors.
A fund would need a minimum capitalization of $100 million and a large anchor investor. A minimum size is required to allow sufficient diversification and recover overheads associated with setting up and running a new fund. The fund should focus initially on institutional investors; partnerships are likely required, for example, with a larger renter of retail or office space with a corporate commitment to lease green premises and/or a green property developer. The Canadian Socially Responsible Investment industry provides an opportunity to target such a fund to retail investors.
For a copy of the study, visit the Compass Resource Management
website at:
http://www.compassrm.com/reports/greenbuildingfund/
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