Sustainability Meaning to Real Estate Investors

To value sustainability more accurately costs vs benefit data into decision making, analytical data gathering model needs to be employed. This process may cause confusion among property professionals; therefore assessing property performance on a multiple levels and use of time tested valuation models, like DCF, will act as cornerstone for investment decisions making process. Environmental building certifications (LEED or BREEAM) capture environmental performance not financial data therefore cannot be solely used in investment profitability or health determination. ‘Five types of performance are most important: process performance; feature performance; building performance, market performance, and financial performance’ (Scott Muldavin, RICS 2009). The level of performance assessment to be undertaken in directly dependent on the status, condition, size, geographical location and investor aims. As a most significant performance assessment, that investment decisions will be forecasted on Muldavin highlights ‘building performance (energy use, occupant performance, development costs, etc’). Application of sustainable systems or futures into the development will derive number of benefits: on one side it will mitigate development risk and uncertainty; on the other it will enhance value, position and demand of the building in the market place

For landlords/investors point of view a sustainable building provides an adequate long term yield, as the onus in investment is on wealth creation, and in turn the monetary value. This can be achieved through lease structures. 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. ((Sustainable Property Investment & Management Key Issues & Major Challenges)

Value is created through energy efficient investments in buildings because either:

•• Expenses decrease for a sufficient time to increase NOI. A market cap rate would be used in converting this increased NOI to a purchase price, or

• The energy efficiency investments have not had enough time to prove that they permanently increase NOI. In this case, a slightly lower than market cap rate would be applied based on the potential that NOI will increase in the near future (Sustainable Property Investment & Management Key Issues & Major Challenges)

Lease structure: The structure of the lease between tenants and landlords also has a large effect on whether or not an investment in energy efficiency was made. Not only do leases dictate who benefits from a reduction in energy costs, but they also dictate who pays the initial cost. The leases in place were considered a major factor in whether or not a landlord is willing to make investments in energy efficiency. In the case of a gross lease, the landlord is more likely to make the investment because the landlord may capture energy savings. A lower expense for the building flows through to a higher net operating income and greater capitalization of the income at property disposition. (Sustainable Property Investment & Management Key Issues & Major Challenges)

Owners and landlords may find investments in energy efficiency projects to be more liquid as the improved building performance becomes visible and desirable to the market. Knowledge of these benefits, both decreased volatility and decreased expenses, (Economics of sustainability in Commercial Real estate)

The shoring up of conventional design and the undervaluing of sustainability may ease some of the short-term pain for investors who are heavily committed to unsustainable property, but the long-term pain will only be exacerbated when the tidal shift to more sustainable stock finally arrives. And when this happens, conventional design may no longer be tolerated by anybody seeking to maintain a minimum level of prestige and image. (Sustainable Property Investment & Management Key Issues & Major Challenges)

A lower expense for the building flows through to a higher net operating income and greater capitalization of the income at property disposition. (IFMA foundation 2010)

Sustainable property investments qualify through the following issues:

• Active portfolio management which adheres to the principles of sustainable development

• Inclusion of sustainability issues within the product prospectus

• Inclusion of sustainability issues within the annual report;

Responsible Property Investing (RPI)

‘Responsible Property Investment (RPI) is an approach to property investing that recognizes environmental and social considerations along with more conventional financial objectives. It goes beyond minimum legal requirements, to improving the environmental or social performance of property, through strategies such as urban revitalization, or the conservation of natural resources.’ (UNEP-FI, 2010.What meaning does it hold for real estate investor, can be explained through current sustainability risks/problems and their affect on property value:

1. Resource use:  Volatility to energy and water supply costs will lead to increased replacement, renovation and running costs of the property.

2.   Obsolescence: 
• Physical –  natural wearing out of the building;
• Functional – arises where new tenant needs  existing building is no longer capable to accommodate;
• Legal – where building standards are forced to change;
• Aesthetic – appears when design or specific use features becomes out-dated;        (IFMA, 2010)

3.  Transparency and stakeholder Influences; higher disclosure of energy efficiency and reporting. (Runde, Thoyre 2010) 

As result this leads to decreasing return on investment yields, longer void periods and status of “second best” in the market place. (Dent, Patrick, XU, 2012). Expectations and Reasons for Investments in Sustainable Property:  Fiscal benefits, Improved usability by third parties, Longer economic life, lower transaction period at resale, lower risk and reputation erosion, lower risk of changes in asset value, expected higher returns at resale, Improved competitiveness, command higher returns, decrease of vacancy risk, increased tenant demand, lower operating expenses, corporate social responsibility; (IFMA foundation 2010) Motivators Behind Energy Efficiency Financial consideration, marketing advantage, market differentiator, indicator of management and paradigm shift are the key motivators identified behind energy efficiency. (IFMA foundation 2010)Summarizing (RPI) is ‘pursuit of greater durability, adaptability, usability and efficiency of buildings and the building stock, leading to enhanced productivity, well-being, and economic benefit measured in terms of financial, natural, manufactured, human and social capital.’ (RICS 2008) RPI should be implemented from the property planning, design, and development stages and continually practiced throughout the property lifecycle. (UNEP-FI, 2010)

Economical Factors No Real Estate Agent Will Explain You: Part 4 - Local Economic Factors

The set of articles should act as a guideline for current and future real estate investors and it will explain some basic fundamentals to follow, that no real estate agent explain you about.

Local economic factors:

Local and national indicators cooperate together, however they occur within different time frame and impact on investment.

Job Growth – can be defined as economic growth by sector. To satisfy aggregated demand companies expand their production lines therefore new work places are created to cope with increased demand. It appears on economic boom cycle with rising inflation.

Migration – flow of human capital from out or into the county due to economical, political or social reasons. Migration from the country may be related to economic slowdown, political instability, warfare or natural disasters, where migration into the country can be stipulated due to economical growth ( where people move freely) due to  natural disasters or warfare ( where people are forced to migrate). When we talk about economic migration, work force is attracted by more advanced living conditions (social, financial), however it may be restricted entry for certain nationalities.

Path of Progress – is closely related to economic growth of selected investment region. In a scenario where well known brands are moving into the area, new transportation links are established or major improvements are on the way to economic wellbeing- these are the signs to look and follow towards lucrative investments. To purchased properties in early economic progress area is investors dream as rewards for purchasing and holding may exceed even most optimistic expectations.

New Construction – occurs due to economic growth of the region. Local and National factors form scope, location and capacity of new construction. To build a new building it is lengthy process and may take number of years, therefore having that in mind it is essential to follow planning permissions approved and new construction commencements in the area. This will allow understanding the supply of real estate stock and determining your investment strategy, now and for the next 2-3 years. Future demand cannot be ignored by any means, as commercial space purchased off plan now, may be off demand when building is completed, this scenario will lead your property to increased area competition and lower rent yields.

Success in real estate investing is based on data accessibility; your knowledge how to interpret this data and investment aims. For more diversity and security use modern portfolio strategies, never neglect due diligence and do not fall in “love” with properties.

 

Brazil Tops Residential Growth In 2012 But Globally Property Markets Are Slowing

Brazil has recorded the highest annual increase in prices, up 15.2% year on year, but the pace of growth is slowing in residential real estate markets across the globe.

The latest global house price index from Knight Frank shows that overall house prices in mainstream residential markets increased by just 0.1% in the three months to the end of September and by 1% in the last 12 months.

It means that mainstream global property prices stand just 5.2% above the lows hit in the wake of the financial crisis in the second quarter of 2009 The international real estate firm says that this stagnation is likely continue well into 2013.

Six markets, Brazil, Hong Kong, Turkey, Russia, Columbia and Austria recorded double digit annual price growth in the year to September and Europe was the only world region to see prices decline, the index shows.

The Eurozone's 17 member states have on average seen prices fall by 1.8% in the 12 months to September, Greece is positioned at the bottom of the rankings, with a 11.7% decline in prices. Greece has now pushed Ireland off the bottom slot where it has been for five consecutive quarters. Ireland has seen its rate of decline improve, up from -14.3% a year ago to -9.6%.

With the Eurozone now in its second recession in three years buyer confidence is at an all time low and it is no coincidence that all the bottom 12 rankings are occupied by European countries this quarter,ђ said Kate Everett-Allen, of Knight Franks international residential research department.

South America has seen growth of 9.8% and Asia Pacific is up 4.2%. But the markets in Asia Pacific are slowing. ґLooking east, Asias policymakers are offering little hope of an Asian driven recovery. ChinaҒs new leadership looks set to continue with stringent property cooling measures and new lending restrictions in Hong Kong are likely to limit the availability of credit, explained Everett-Allen.

The United States is showing signs of growth. Prices are now 3.6% higher than in the third quarter of 2011, vacancy rates are at their lowest level since 2005 and housing starts are up 49% year on year.

 

But Everett-Allen warns that the US fiscal cliff, the crunch point when tax benefits are due to end and spending cuts commence at the end of 2012, could extinguish this hope.

ґIn summary, confidence, affordability and debt are constraining Europe. Strict lending and the looming fiscal cliff may dent the early signs of growth in the US while regulatory measures in Asia are keeping housing markets in check, she said.

ґThe current period of stagnation looks set to continue well into 2013, she added.