Real Estate Development and Investment: Fiscal Benefits of Sustainable Buildings - Term Paper Example

 Table of Contents Introduction 3 Costs associated with usage 5 Implications on Occupiers 6 Other aspects 9 Property Valuation and the Investment factor 9 Property as an Investment 10 Premium vs. Valuation 10 Health Benefits 11 Emission Standards by BREEAM 11 Conclusion and Recommendations 12 Works Cited 13 Bibliography 14 Table of Figures 15 Introduction A constantly sprouting growth in the demand of sustainable buildings has been witnessed since the early years of the millennium, for which most of the credit goes to green activists and warming scientists, also a major chunk of credit must be bestowed upon the government of the UK, because of their radical efforts and fiscal as well as architectural promotion schemes for sustainable architecture. Gazing across the most recent available figures of the property markets and the demand for sustainable property in the UK it may easily be ascertained that the demand for sustainable buildings far surpasses their rather asymmetrical supply. This essay discusses various primary studies conducted upon recent occupiers which helps ascertain the prime factors that corporate and retail buyers or renters consider while making their respective decisions. Even though the property markets have faced a appalling crunch since the before-recession years starting from 2002, and the records of property from estate agent books shows that a major chunk of property was let out after a minor recovery in the property markets in the year 2007-08, which gives rise to another speculation according to which, obsolete property is still blocked with some investors who are willing to sell it as soon as the prices recover to a more desirable stage, which may again devalue property further. Figure 2: Property in estate agent books (Earley, 2009) But even when the demand of property is lower than that in the late 90’s, the new sustainable architectural platform has been superlatively successful in being able to attain the confidence of customer, so much in fact that occupiers are willing to pay a premium of up to 10% to purchase sustainable property, mostly because of the creditability of sustainable architecture to help them save money in the longer run. (Elliott, et al., 2008 p. 4) Costs associated with usage It is a widely accepted and factual principle that certain sustainable projects have been proven to be cheaper in the longer run. The only disadvantage being that sustainable projects bring with them additional development and planning expenses, which is mostly credited to a significantly superior use of technology and R&D costs associated with building everlasting sustainable techniques. Sustainable architecture is a considerably novel concept and therefore is still under experimentation even in developed kingdoms such as the UK. Even though analysts are stressing that sustainable projects are the prime requirement of the time, considering that over 41% of energy is consumed by buildings (Eicker, 2009 pp. 1-24); the populace still hesitates to pay the hefty premium associated with green projects, specifically the retail occupiers, as the costs associated with green-ifying their homes will be much higher, whereas, in a commercial or a residential apartment type structure, these costs would be divided amongst the occupants (Yudelson, 2006 pp. 71-74). Under some cases, a significant portion of these costs might also be taken over by the maintenance societies of the respective structure, and these societies or companies could increase the maintenance costs of the premises. Figure 3: Energy Consumption in the UK (Eicker, 2009 p. 2) Implications on Occupiers Considering the cost of usage factor, it may be agreed that buyers would undoubtedly choose to use green buildings or other forms of sustainable buildings, as ultimately, purchasing property is a long-term resolution. Also considering the fact that sustainable architecture is the way of the future, and a similar theory might also suggest that since sustainable buildings are going to face a greater demand in the coming years, the prices of such structures might rise more than normal buildings. Again, according to this theory, a safer investment is in sustainable structures as the prices of normal buildings might even descend. Knowing the afore mentioned, the populace is still confused whilst deciding on the ‘premium viability’ factor, as the prices of sustainable structures are remarkably higher as compared to generic structures, this is because the difference does not only lies in the usage of technology, but also in the construction process. Then again, considering the fact that buyers generically pay a hefty premium for other factors such as locality, construction quality, and amenities; so maybe if the investors are informed about the health or fiscal benefits of sustainable architecture, they might be willing to pay the premium. Besides, only those companies, which usually are very experienced take up sustainable projects being significantly heavier and novel projects, and thus such projects are bound to be in a good location, with premium construction quality, and fully loaded with basic or even sophisticated amenities. A 2004 survey indicates that people still choose their homes or offices by locality and construction quality as prime factors, distantly followed by environmental impacts and sustainability (Canada Mortgage and Housing Corporation, 2006 p. 3). However, energy subsidies on generic or government funded projects could help overcome the ‘higher cost’ issue, alternatively, imposing additional taxes on construction projects with lower sustainability could also help cope up with the problem; but the latter decision could significantly affect the property markets and could bring about tremendous spitefulness from the constructers, especially smaller companies. In a manner, such a decision could also be harmful for the economy in the shorter run. Irrespective of higher costs of such projects, there still lies a new dilemma within the property markets, which is the belief of the populace that apartments within a newer building would cost higher than that of those within older buildings within the same locality. Now this concept may be correct if one compares the energy efficiency ratio of newer buildings with older ones, the heating and cooling systems in older buildings were unfussy, whereas, new buildings are somewhat more sustainable in terms of energy use. Nevertheless, this does not hold true for all the new projects. Undoubtedly cost of use is a major factor while deciding the purchase of a property, yet still the populace still demands that the initial pricing of sustainable projects should be even lower than their present levels. Then considering the factor concerning the redundancy of old property, the premium seems quite feasible. Furthermore, considering the constantly rising prices of property on an elongated scale of about 60 years (see fig. 4), a speculation could be put forward which suggests that the premium would soon be countered within a short duration of time due to price rise of the property. Besides this another fact stands tall, which suggests that the prices of green property will be higher than those of normal buildings. Figure 4: UK Property prices [1969-Present], (Talbot, 2009) Other aspects Property Valuation and the Investment factor With the constant rise of energy prices and persistent tightening of the leash of emission standards in the UK are further giving the rise to the demand in the sustainable architecture commerce whilst giving rise to a rather peculiar risk factor according to which the "old" buildings would become obsolete and outdated sometime in the near future which will further cause the devaluation of that particular archaic property; after all, buildings are not just used to stay and use it as a commercial or a residential address, but a major factor which helps the investor decide on the right property is the dynamic investment aspect of the property index, which has proven to be somewhat safer than investing in other liquid investments whilst providing not only comparable, but even higher returns, even as compared to some major liquid markets such as derivatives (see fig 4). Then again, many corporate and retail investors hesitate to pay a hefty premium to "save the planet", and especially the corporate occupiers, for which renting or purchasing a property at a higher rate might mean a significant increase in the ROI or in some cases even the costing of a product, which might be a major hurdle in the way of sustainable development projects; contradicting this thought was a recently accessed survey on "corporate buyers view" about sustainable buildings, which states that more than 62% of corporate players are willing to pay a premium of about 1-10% for a sustainable location, but only 8% are willing to pay the price if it is more than 10%, the rest are expecting the prices to be lower or even comparable to regular development. (Elliott, et al., 2008 p. 4) Property as an Investment As discussed in the preceding segment of this essay, the rise in the demand of sustainable property will mean a decreased demand of old and generic construction projects, which must also act as a major factor for rise in the prices of sustainable buildings, as the present supply of sustainable projects is lower than the actual demand. If the property prices are compared to those of stock markets, commodities, or ETFs for the last 3 decades, the property market emerges as the winner; although the recent recession has left the market dry and the scale of the last 5-10 years might not be able to surpass some of the afore mentioned investments. Premium vs. Valuation One of the major investment gains that may arise out of investment in office spaces is the rental factor, many investors invest in the property markets to get the property inflation benefits as well as rental income, which may even surpass the inflation in a shorter duration of valuation. Sustainable buildings might prove to be a poor investment decision for such investors as “sustainability” will hold significantly less emphasis on the customers who are looking to rent the property, as rental of sustainable property will be higher due to the premium in price. In addition, under most circumstances rental property is not considered as a long-term business decision, instead some customers may have planned to purchase their own office once their business gets on track. Therefore, under such circumstances, sustainable buildings are only better investments for those corporate and retail customers that have planned to use it for an elongated duration. Health Benefits The health benefits bestowed by sustainable architecture such as cleaner air and water, increased productivity, and poor bacterial growth credited to the mixture of organic materials used in construction; are also a major factor that promotes corporate as well as retail buyers to purchase sustainable apartments. Emission Standards by BREEAM The present regulations regarding emissions from buildings are exceedingly at liberty. This is because of the fact that property is a very long-term investment and houses and offices even last for generations. So implementing any new policy regarding this matter might create a major uproar within the populace, especially after the present decline in property prices. Conclusion and Recommendations An investor who is looking for a property for self-commercial or personal use would undoubtedly opt for a location in a sustainable building or plant, as property usually falls under the long term capital investment and gains acts, and in the longer run, sustainable buildings will prove to be tremendously cheaper in terms of usage, as the energy efficiency of these buildings may not necessarily be lower, but uses renewable resources. This will help save a corporation or even a retail user monstrous amount of money. Especially for corporate users, because even if the ROI of their investment increases sufficiently, it will prove to be beneficial in the latter stages of their expansion plans. The premium issue of green buildings may not be a major problem in the future, when these new technologies have been experimented with and the expenses of R&D will significantly reduce causing the prices of such buildings to come closer to a more feasible level. Besides, if as predicted, the future will only consist of sustainable construction, then the scale of prices will change and psychologically the prices will be comparable to those of others. As price comparison is still used as the most trustworthy method of property valuation in the UK. A great recommendation for sustainable apartment buildings (commercial or residential) may be that the maintenance companies or societies could take over the initial development costs and then charge a higher maintenance, which might not seem as heavy as paying the complete technological premium up front. This way the maintenance companies could also make a decent amount of profits. Works Cited Canada Mortgage and Housing Corporation. 2006. UniverCity: Assessing Consumer Demand for Sustainable Development. Montreal : CMHC, 2006. Earley, Fionnuala. 2009. Summer Sun Shines on Rising UK House Prices in June. marketoracle.co.uk. [Online] June 30, 2009. [Cited: November 09, 2009.] http://www.marketoracle.co.uk/Article11684.html. Eicker, Ursula. 2009. Low Energy Cooling for Sustainable Buildings. Washington : John Wiley and Sons, 2009. ISBN 047069744X, 9780470697443 . Elliott, Lee, Breslau, Benjamin and Wolody, Dan. 2008. Global Trends in Sustainable Real Estate: An Occupier’s Perspective. London : © JONES LANG LASALLE IP, INC., 2008. p. 4. Haynes, Jonathan. N.D.. Windmill2. Jonathan Haynes. [Online] N.D. [Cited: November 9, 2009.] http://jonathanhaynes.com/windmill2.jpg. Talbot, Richard. 2009. Debt Statistics / October 2009 . creditaction.co.uk. [Online] October 2009. [Cited: November 09, 2009.] http://www.creditaction.org.uk/debt-statistics/2009/october-2009.html. Yudelson, Jerry. 2006. Marketing green buildings: guide for engineering, construction and architecture. New York : The Fairmont Press, Inc., 2006. ISBN 0881735280, 9780881735284 . Bibliography Hasegawa, Takahiko. 2003. Environmentally sustainable buildings: challenges and policies. s.l. : OECD Publishing, 2003. ISBN 9264198253, 9789264198258 . Hoesli, Martin and MacGregor, Bryan D. 2000. Property investment: principles and practice of portfolio management. s.l. : Longman, 2000. ISBN 058231612X, 9780582316126 . Isaac, David. 1996. Property development: appraisal and finance. s.l. : Macmillan, 1996. ISBN 0333646908, 9780333646908 . Table of Figures Figure 1: Image Courtesy: (Haynes, N.D.) 1 Figure 2: Property in estate agent books (Earley, 2009) 4 Figure 3: Energy Consumption in the UK (Eicker, 2009 p. 2) 6 Figure 4: UK Property prices [1969-Present], (Talbot, 2009) 8 NOTE: In this text, two entities have been used to describe potential purchasers; these are ‘corporate’ and ‘retail’. ‘Corporate’ includes office / commercial users as well as industrial users, and ‘retail’ includes residential users. Read More