New research confirms the return on investment that can be achieved through energy efficiency projects

01 Nov 2009Archived News Climate Change Matters

In difficult and financially constrained times, careful and considered investment in improving energy efficiency, coupled with capital investment in fabric and plant maintenance, should be integral to any building’s ongoing asset management strategy.

 

However, with increasing energy and operating costs and indications that returns on property investment are on a downturn, it can be difficult justify any solutions to reduce energy use through capital investment.

Typically companies therefore begin the search for the so called "low hanging fruit" and other operational improvements. But what can companies do if they’ve already harvested this low hanging fruit? What justification might support an investment-led solution?

A proven reduction in energy use and associated savings through the presentation of payback or Internal Rate of Return hurdle rates can often be enough to obtain capital investment. This principle can also be used to justify performance contracts from energy service companies (ESCO’s). Energy performance contracts can provide an excellent vehicle for financing investments in energy efficiency, particularly where the building owner is capital constrained.

Investing in energy can have a number of collateral benefits for a property owner, or indeed a head tenant, not just cost savings. In cases where a business case for capital investment in a project is less than optimal, taking into account any additional benefits may be sufficient to build a winning business case for investment.

We continue to see strong market signals that tenants now expect certain levels of energy efficiency to be in practice in a building. Examples include the introduction of initiatives such as the Federal government’s green lease program which requires their significant leases to have a 4.5 Star NABERS Rating – against the current Australian average of 2.5 Stars. To attract and retain Government tenants, they will require a 4.5 Star Rated building.

This desire to move up the NABERS rating chain is a trend that is not limited to Government tenants, but is also emerging amongst commercial tenants. Large tenancies across Australia that are part of The CitySwitch initiative are making public commitments to energy and carbon targets via Corporate Responsibility Statements.

Finally, the planned introduction in 2010 of mandatory disclosure of a building’s energy performance will act as a catalyst for building owners to re-appraise the energy performance of their building, its marketability, value and their rental expectations. Prospective purchasers or tenants will have transparency of a building's energy performance.

New research finds investment in energy efficiency improves the financial performance of the asset

Recent research from the Royal Institute of Chartered Surveyors (RICS) suggests that tenants are willing to pay more for a tenancy in an energy efficient building. The results of the research suggest that an otherwise equal commercial building with an energy certification will rent for about three percent more per square foot; the difference in effective rent (rents adjusted for building occupancy levels) is even greater, and is estimated to be about six percent per square foot.

To substantiate this finding, for each commercial building in the USA with a LEED and/or Energy Star label, the researchers also identified a control group consisting of all commercial properties located within about 450 meters (1,300 feet). The control group totaled some 10,000 buildings. It was also found that the scale of energy efficiency displayed by the building was also an important element and that a 10 percent decrease in energy consumption (or improvement in efficiency) over the control sample led to an increase in effective rent of about 0.2%.

In addition to the rental premium the researchers also considered the link between a certified energy efficient building and its asset value. The finding was surprising: the asset’s selling price was improved by as much as 16 percent.

To quote RICS: “The average selling price for the 1,617 control buildings in the sample of buildings sold in the 2004-2007 period was $34.73 million. Ceteris paribus (??), the average incremental value of a green building is estimated to be about $5.7 million more than the value of a comparable unrated building nearby.”

Finally the analysis also showed that a $1 saving in energy costs from increased thermal efficiency yields a return of roughly $18 in the increased valuation of an Energy-Star certified building.

Therefore in addition to achieving reductions in operating costs and greenhouse gas emissions, there is evidence that energy efficiency measures yield rental premiums and increase the value of your asset.
It would certainly seem that even in these constrained times there is a very good case to be made for investing in energy efficiency. 

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