Drivers for the real estate investor

1. ERES Conference, Stockholm Environmental Sustainability − Drivers for the real estate investor Authors: Helmut Schleich, University of Regensburg D. Sc. Anna-Liisa Lindholm, Helsinki University of Technology Heidi Falkenbach, Helsinki University of Technology June, 25 2009

2. Background 1 The sustainability agenda & real estate investors • The build environment has an important role in sustainability agenda • Property industry will face great changes due to newly evolving legislative requirements and changing market standards • The important role in climate change does not mean solely negative things. Previous research has reported many kind of benefits for the real estate sector’s players such as image benefits, decreased costs, happier and healthier employees etc. • But what are the drivers and benefits for the real estate investor? • There are lot of discussion about the benefits, but is there scientific evidence?

3. Objectives 2 Sustainability driver from investor´s perspective • The main idea is to break the vicious Circle by pinpointing the drivers and benefits of sustainable buildings for the real estate investor • The specific objectives are to • identify the drivers and benefits of environmental sustainable buildings for the real estate investor • evaluate the significance of the drivers for the real estate investor • identify the research gaps • Multidisclipinary literature review • Focusing mainly on previous research actually showing the scientific evidence, not just desribing about it • Focusing also to the significance of the driver for the investor

4. Objectives 2 Identifying the drivers Decreasedpropertycosts Healthierworkenvironment Increasedrentallevel How to classify the drivers? What drivers are affecting to the real estate investor? Do we have scientific evidence on the influence of these drivers? Decreasedrisks Imagebenefits for the tenants Increasedjobsatisfaction Imagebenefits for the investor Legislation Governmentincentives Betterfinancingconditions Vacancyrate Betterinsuranceconditions National standards Imagebenefits for the constructioncompany Increasedpropertyvalues Environmentalcertificates

5. Objectives 2 Development of a new categorisation framework Externaldrivers Corporateleveldrivers Legislation Financing Decreased risks Property leveldrivers National standards Image Increased rentalincome Decreased Property costs Governmentincentives Environmental and energycertificates Increasedpropertyvalues Insurance conditions

6. Corporate level sustainability driver 3 Image benefits • Focus is on the corporate level • Benefits discussed in literature, empirical evidence still very limited • Indicates image benefits • Authors were not able to find any evidence on other corporate level drivers

7. Property level sustainability drivers 4 Increased rental income • Forms trough the benefits for the tenant (better image, healthier working environment, decreased maintenance costs etc.) • Tenants’ willigness to pay has been documented through questionnaire surveys • how does the financial crisis effect the willigness to pay? • Evidence of higher rent level still limited • studies confirming the higher rental levels have been performed on U.S. data, there is still a lack of evidence in Europe • Increase in rental level ranging between 2-17%

8. Property level sustainability drivers 4 Decreased costs • Stems from the decreased energy costs • Amount of comparative research still moderate, but incidates that the operating costs of certified buildings are lower compared to the non-certified buildings • again, evidence is gathered from the U.S. Markets • Reductions in operating expenses ranging between 6-30% • Literature emphasizes importance of green features in lease arrangments to support reductions in operating expenses

9. Property level sustainability drivers 4 Decreased risks • Literature identifies two sources that might lead to lower risks • Lower risk of future obsolescence • Lower risk of vacancy • Available research results are still very limited but indicate consistently lower vacancy rates for certified buildings • Size of effect varies markedly across studies • Decrease in vacancy rates ranging between 1-18% • Risk of future obsolescence evolves from sustainable buildings becoming mainstream and from stricter future legislation • Extent of the risk is hard to evaluate

10. Property level sustainability drivers 4 Increased property values • Forms through higher rental level, reduced costs and decreased risks of the investment • On the other hand, impact on construction costs has to be taken into account • Questionnaires by Sayce et al. (2007) indicate that the effect of investment yields has not yet actualised • Research consistently documents price premiums for certified properties, however quantity of studies is still limited and focused on U.S. Markets • the size of premium varies, premium ranging between 5-31% • Investors willigness to pay has been documented through questionnaire surveys

11. Conclusions 5 Summary & Future research • Number of published academic journal articles is still low • Most of research articles are industry studies and working papers • Most studies providing empirical evidence focus on U.S. market, use CoStar data and apply LEED/Energy Star as sustainability measurement • No empirical evidence from other markets • Other sustainability assessment methods than LEED have different requirements and emphases • Increasing model specification led to lower premiums in rent and price • Worthwhile future research • Provision of empirical economic evidence in other markets than U.S. • Research on drivers on corporate and portfolio level

12. The End 6 Thank you Contact details: Helmut SchleichUniversity of RegensburgUniversitätsstrasse 31, 93053 Regensburg, Germany+49 941 943 6025helmut.schleich@irebs.de D.Sc Anna-Liisa LindholmHelsinki University of TechnologyP.O.Box 1200, 02015 TKK Finland+358 50 320 6770anna-liisa.lindholm@tkk.fi M.Sc Heidi FalkenbachHelsinki University of TechnologyP.O.Box 1200, 02015 TKK Finland+358 40 735 1181 heidi.falkenbach@tkk.fi