Holistic evaluation of sustainability investments - October 2011
The environmental and social impacts of property are rapidly becoming central to its overall performance, as investors and occupiers alike recognise the importance of sustainability to the long-term viability of their business.
Several efforts have been made during the past few years to help build a consensus within the sector about the most appropriate sustainability metrics to use. A number of industry initiatives have emerged to enable property stakeholders to track this important aspect of environmental asset efficiency in meaningful ways.
One of the most significant emerging trends in property is the shift towards an increased acceptance of open plan environments and a general move away from 'private' cellular space into more agile and flexible workplaces. The goal is to reduce occupancy costs, accommodate activity growth at minimal expenses and create a collaborative space that at the same time increases staff productivity.
Sustainability investments and ROI
Identifying sustainability improvements that offer the best value
A well managed property requires regular scrutiny of the plant and equipment, and of energy-consuming practices, to identify further savings that might be achieved through sensible and timely improvements. Going beyond the low cost quick wins and behavioural changes one should involve a robust investment appraisal with a view to identifying those sustainability improvement measures that offer the best value per invested dollar. Financial modelling techniques should certainly account for important variables that are likely to impact on the commercial viability of sustainability solutions in the present day, such as for example rising utility prices, carbon emission related taxes or rising insurance premiums.
More challenging criteria to be factored into the financial model are the upside value potential that certain investments might secure for the property owner, such as attractive rental values or reduced vacancy rates, by virtue of better future-proofing the asset to changing investor/occupier requirements.
Whatever the financial modelling technique that is utilised, the aim should invariably be to evaluate the net present value (NPV) of sustainability improvement measures. Such measures can then be grouped according to their value potential to property stakeholders with differing investment horizons.
Innovative ways of overcoming what has become known as the 'split incentive' (where the owner pays for the capital improvement and the tenant recuperates the associated operating cost saving) are emerging. One example are the so-called green leases where both landlords and tenants agree on how to share some of the costs and benefits of sustainability upgrades and ensure transparency around performance data.
Planning sustainable investments into asset lifecycles
The timing at which a particular sustainability initiative is considered within the asset's lifecycle is a fundamentally important criterion in determining its commercial viability. Planning for sustainability investments as an intrinsic part of any property's asset refurbishment cycles allows the sustainability measures to be integrated within existing capital budgets by aligning the planned preventive maintenance (PPM) schedules and Asset Replacement interventions.
Holistic property performance must include consideration of sustainability. It also emphasises the important role that changing property usage, including the move towards flexible working policies can play in reducing property's exposure to rising energy prices and carbon liabilities. There is a need for robust financial models to systematically factor in complex environmental and economic parameters in the appraisal of value that can be generated from investments in sustainability improvements.