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Do green buildings add a premium to sales price?

A key challenge in mainstreaming a sustainable built environment is having the affordable segment of consumers come on board, as these buyers tend to value immediate gratification over long-term gains.

(Representational image) There is unsold inventory of over seven lakh homes today.

(Representational image) There is unsold inventory of over seven lakh homes today.

Chaitanya Kalia and Chaitanya Seth

The climate conversation has moved beyond fossil fuels to other big causes of emission. And the biggest among them are buildings which account for 39% of energy-related carbon dioxide emissions globally and 36% of global energy use, according to an estimate by the United Nations Environment Program.

Of this, about 11% of the emissions can be attributed to the materials used and the process of construction. But about 28% are what are called “operational carbon emissions” or the emissions caused by day-to-day energy usage in the buildings ranging from the lighting to the heating and cooling of the rooms.

Green buildings with energy-efficient design and using environmentally friendly materials can sharply reduce emissions. But do they make commercial sense given that they cost more to construct? The answer seems to be a clear Yes, no matter what yardstick one uses.

Studies have shown that the additional upfront investment required for constructing a green, energy-efficient building is more than paid back over its lifetime because of reduced energy costs.

According to a few research, studies, and discussions with architects and developers on analyzing the financial costs and benefits of green buildings, one can expect an increase in upfront investment of about 5%-18% of construction costs to support green design, which can potentially lead to 12%-20% lower operational costs.

But beyond the cost-benefit lifecycle analysis, the buildings make sense for another reason – they command a premium during leasing as well as re-sales.

This is, of course, primarily in the case of commercial and institutional buildings where the interest of institutional investors is concentrated. As leading companies set out their ESG roadmaps, having office space in environmentally and socially responsible campuses is driven by company ESG policies.

Companies that focus on ESG aspects and have long-term ESG agendas take a conscious call to go for green building certifications. Occupancy is the driver for everything, and environmental and social initiatives garner a huge reputational advantage for big corporations, which can lead to faster sales and lease, offsetting the financial burden on developers.

Data validates the same; according to a study by CBRE – institutional asset owners are leading the way, as even though they own only 22% of the total office stock in India, almost 45% of it is green certified. Whereas non-institutional asset owners hold a 78% share (539 million sq. ft) in the total stock, only 27% of it is green certified.

Basis construction and design elements, green buildings cannot command a premium directly. However, such initiatives can strongly impact the brand eminence of the developers which over time can help them reap the intended benefits of a premium price tag basis a premium brand.

Moreover, organisations that have clearly defined sustainability goals are paving the way for increasing demand for green buildings across sectors, which can further ensure a premium.

To ensure cost-efficiency in green construction, the green principles should be identified and applied from the start of the project, at the onset, additional design analysis, computer modeling, product research, and lifecycle cost analysis for alternative materials require an added investment.

However, over the long term, these investments contribute to reducing the maintenance and operational costs, leading to resource optimization through energy and water savings with lesser dependency on mechanical systems, and reduced infrastructural strain. These returns compensate more than the initial investments to a large extent.

Climate activists, government initiatives, social media, and the digital landscape have accelerated the awareness of green buildings. Several developers have started taking up LEED certifications as a mandate for their projects making ‘being climate conscious’ a part of their brand values.

There will be a time when green buildings will be an expected norm by the occupiers and developers will have to swiftly move towards that in the next few years.

From the perspective of the buyers, housing finance companies in India are now beginning to offer special loans to green building buyers. There are incidences of financial institutions that have earmarked part of the portfolio to finance buyers of green affordable homes – increasing the spread to all segments of the market. States are offering incentives such as additional FAR, the subsidy of fixed capital invested in projects to developers that construct green-certified buildings.

The discussion on Green Buildings has witnessed a shift of perspectives, with developers, occupiers, and homebuyers. Increasing exposure to sustainability through media is evidently resulting in consumers being more educated about the environment, and consequently, this has an impact on their purchase decisions and buying behavior. This trend has been intensifying amongst the millennials, which offers significant potential for a higher resale value of Green buildings, in the next 10-15 years.

With growing awareness of the climate crisis on the planet, customers have started adopting more sustainable forms of living and started expecting the same from the spaces they operate in.

While the commercial landscape is booming in this regard, residential consumers are still segmented – the luxury segment being a more dominant typology for green buildings. A key challenge in mainstreaming a sustainable built environment is having the affordable segment of consumers come on board, as these buyers tend to value immediate gratification over long-term gains.

Despite the increased initial capex associated with Green Buildings, it is key to approach it as an investment in the present that is capable of reaping for the planet and the occupants, long-term and impactful ecological and monetary benefits.

At COP26, India demonstrated its commitment to join the global race to achieve net-zero, pledging to become a “net-zero” carbon emitter by 2070. India announced targets for renewable energy (50% of energy requirements to come from renewable energy by 2030) and commitments towards reductions in carbon emissions (reduction in total projected carbon emissions by one billion tonnes by 2030). This makes the decarbonization of the real estate sector a key opportunity for countries like India to meet their decarbonization roadmaps.

Chaitanya Kalia is Partner and National Leader, Climate Change & Sustainability Services (CCaSS), EY India; Chaitanya Seth is Partner, Consulting, Real Estate. Tarika Kumar, Director, Climate Change and Sustainability Services, EY India also contributed to the article.

first published: Mar 30, 2022 12:55 pm