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;

Sustainability Role In Real Estate Investments

Due to increasing global population and climate change effects knocking on the door, the importance of effective and sustainable use of energy forms becomes more crucial than ever before. The calculations for primary energy consumption account buildings for 30% of total C02 emission production on a global scale. The merits that will derive for new or updated government legislations to promote sustainability in real estate market will face geographical, demographical, environmental and corporate challenges. These challenges related to market conditions and asset class flexibility to accept or accommodate new regulations. Cost versus benefit analysis tool is the simplistic form to assess financial and non financial benefits derived to applying new standards in energy, waste management, water consumption, air quality and well being of working environment. It is less expensive in terms of time, cost and effectiveness to apply sustainable standards on new developments rather then upgrading existing buildings. In either case effects will take place on buildings direct attractiveness to the market place reducing void periods and bringing long term tenants, reduction of C02 emissions during asset life cycle and becoming a sample of efficient modern living.

Sustainability levels will vary with investment objectives; however they should satisfy minimum mandatory standards. The sustainable investment strategies listed below can be used as a guideline to determine personal investment path:

1.   Selection / Screening: Purchase and/or disposal of property assets that meet / don’t meet predefined environmental and social performance requirements;

2.   Build and operate / Build and sell: Investments into new building projects that are designed, constructed and subsequently managed according to the requirements of sustainable buildings;

3.   Optimization: Investments into the existing building stock in order to systematically improve sustainability performance;

4.   Cause-based investment: Investments into community projects such as affordable housing and urban revitalization in order to foster a more sustainable society“

Table 1: Different aspects of property value –Superior building performance adds value in many ways

The questions that come after reviewing these strategies are:

1.   How is sustainability likely to affect property performance?

To enhance value, buildings and their landlords must be flexible to accept environmental changes dictated by central government. Failure of compliance to new standards may lead to penalties and loss of tenants. The level of savings will be related to primary fuel prices replaced with sustainable alternatives and competiveness of the asset in the market place.

           2.   What makes a sustainable building?

Well planned, designed, constructed or upgraded and managed building will deliver tangible savings over time. Primarily focus falls on energy conservation, however secondary attributes must be treated with a favorable response:

a.    Green leases – part of sustainability transferred to building tenants;

b.   Good access to the public transport – reduces travel time and dependency on personal transport;

c.    Effective Monitoring/Management of the building system – smart energy saving controls, micro power station installation;

d.   High level of water efficiency – collection of rain water, water percolation and economic management systems;

e.   High standards of lighting, ventilation and humidity levels – passive building design;

Sustainability standards changed the paradigm of real estate investing. It is more oriented into efficient use of the asset through integrated management systems.

Table 3: Return and Security is achieved through sustainability

Is Real Estate The Investment Vehicle To Begin?

Many people are living with a dream that may never become a reality due to errors in judgements they make every single day. There is no blame on your living habits from the outside world; they do not care. The only person you can blame is yourself and the personal wealth that wasn’t created during your earning years. Get in a regular saving habits first for your rich retirement. The message I want to pass with this article is dedicated to all age group people that are planning to retire rich.

Why real estate for a first investment? The money you earn depends on how prudent you are on your subject, same principle relates to real estate. If you do not understand how economic basics works, why inflation or interest rates are rising or never been in a stock exchange it would make a common sense to stay away to from complicated investment vehicles.

Real estate is simple tangible living space that secures you from the outside world. It has many names but 95% of population calling it home and dedicates to it most of their time. So why not to take an advantage of this fact and invest in a living space that somebody calls home.

Where or how to begin? If you are a beginner, your main incentive is to make as much money from your first investment as possible as quick as possible, therefore the crucial mistake first time investors do is investing into off plan properties. I have nothing against off plan investments, but in your case you are not ready for this investment yet. The area you should choose for your investment is your neighbourhood. Why – simple, you know it already and you can control it. Forget about the magic stories about buying and flipping properties without no money down or getting tremendous returns without money down or hard work. It is possible, but people who gained and bragging now about were working diligently for a number of years: building contacts, market knowledge, capital, etc. There are no get quick rich schemes, but it is possible to become very wealthy slowly. Real estate will always have value no matter what, where stocks, bonds can lose their value to 0.

Before you start your first investment, make a little plan: how you are planning to go about it, what assistance you may need, how much time to allocate, what’s your budget and what’s the outcome you want to achieve, than follow that plan.

In my opinion first item you have on your plan is to visit local real estate agent to get the price and properties for sale in the area. This will give you info on capital requirements, property volumes available and rent returns achievable. Having all that in mind your hunt to secure best finance deal available. Do not fall with unnecessary depth to much with your first investment, maintain balance you can afford. It may take a good few weeks to swallow and digest all this info, but stay patient and maintain your composure, you on a way to retire rich. Do not fall in love with your first property or do not search for the property that is ideal for you, you making an investment not buying your own home, remember that suits you may not suit your tenants. Buy something way below market value and add value, make it better when you bought, the returns you will receive will exceed all sweating hours spent many times over. 

The rule with you investment should be based on a simple logic: the rental income your property generates each month should cover your loan repayments and bring profit each month into your pocket. Use profits wisely; allocate some portion for unforeseen rainy days as they will come. Live well with you tenants, they are your business - they are bringing you into rich retirement. 

As final reward for all your hard work you done for your asset comes capital appreciation, which will be released after your property sold. Property holding times depends on your real estate business wisdom and goals, but as a starter you should keep your real estate asset at least for 5 years.