Notes/Spring 2019/Sustainability? Only with a good business case!
Sustainability?
Only with a
good business
case!’

Professor Piet Eichholtz on the financial value of sustainable buildings

Professor Piet Eichholtz is the Department Chair and Professor of Real Estate Finance for Maastricht University. Previously, he worked for the University of Amsterdam and the investment strategy department of the ABP pension fund. Thanks to a unique combination of scientific research and practical experience, he has become a world-renowned expert in the field of property investments. As of 2010, he and his team have been investigating the financial value of sustainability in property.
Notes-Piet-Eichholz-01.jpg
Text Martijn Kagenaar
Photography Gregor Ramaekers

Sustainability: a cost item or an investment?

‘About ten years ago, I decided to investigate the financial performance of sustainable buildings. Honestly, I initially had little faith in it. We began our investigation from a sceptical position, thinking ‘sustainable will probably equal expensive’. That investigation turned out to be groundbreaking. Energy and sustainability labels had just started to become commonplace, so there was no wealth of data available. Even so, in our investigation, we were able to include around 700 buildings in the USA that had energy labels. The results were rather surprising: sustainable buildings were better suited for rental compared with non-sustainable buildings. They have a higher and more stable occupation rate and are rented out at higher prices. We noted this effect in both residential accommodation and in commercial property. This result was a sort of wakeup call. Much more research has been done since then, and our findings have been confirmed again and again: sustainable buildings are lowerrisk and result in higher returns compared with non-sustainable counterparts.’

Money talks

‘The tables turned quickly. In 2010, I was a speaker at the annual congress of the European Public Real Estate Association. Concerns regarding the climate were not even considered at the event, as it was only about earning money. I’m sure you can imagine how much of a joke sustainability was there. I presented our research in that context. The best-performing fund that year on the topic of sustainability was Big Yellow, like the British company Shurgard. Their owner has a few hundred million on their bank account. The likes who attend events of this nature listen to people who have attained such success. That’s the reason I – while on stage – asked him why he made his sustainable investments. He put it very simply and said, ‘Firstly, I save a lot of money because I make huge savings on energy use. My returns have grown significantly. Secondly, I install solar panels, even if I make a loss in doing so. I do that as a gesture towards municipalities. Municipalities want business owners to set an example. Now, I’m allowed to expand my branches more quickly. I’m not green; I’m interested in the bottom line.’ It really is egoism executed to perfection. But it’s a way of giving those property investors food for thought!’

Notes-Piet-Eichholz-02.jpg
Notes-inzet-sustainability-only-with-a-good-business-case.png

Sustainability as a hygienic factor

‘By now, professional property investors know how to be more sustainable (even if it’s often only because shareholders are demanding it). The greatest challenge lies in the existing supply of property, the building stock. On an annual basis, we only add 1% to this stock. The vast majority of that supply was built back when building standards regarding sustainability were non-existent. A lot of renovation is required in this area, which will cost huge amounts of money. Currently, even mainstream banks including ING and ABN AMRO politely refuse to finance renovations of buildings with an energy (EPC) label ‘C’ or lower, a trend that first started with niche players such as Triodos and ASN. Nowadays, such investment is no longer reserved for the ‘green banks’. Investing in sustainability for new buildings isn’t difficult at all. The main issue lies with existing buildings. If you approach ING with a renovation plan for a building with an F label, they’ll require you to convert it into an A-label building, otherwise they simply won’t finance it. The Munichbased HypoVereinsbank takes this one step further, as their advisors calculate the exact amount required to improve your building. If you implement the advice they give, they’ll provide you with a higher advance and lower interest. This helps people take that first step towards more sustainability.’

What’s in it for users of sustainable buildings?

Firstly, it’s not more expensive, with research showing that every dollar in energy savings results in an extra 0.95 dollars in extra rent. That means that the situation evens out. Sustainability is also a factor in the war on talent. With its ‘digital first’ office called The Edge at the Zuidas in Amsterdam, Deloitte says, ‘We are cutting-edge technology advisors, not boring accountants. We have the most sustainable, smartest, and basically coolest building in the Netherlands. You can work here, too!’ We also think it has a positive effect on health.

Sustainability 2.0: healthy buildings

‘Three years ago, we started wondering why people pay more for a sustainable building. We suspect it has something to do with human capital. People in such buildings may be healthier and therefore more productive, which is a benefit to the user of the building. There’s plenty of literature available on the effects of air pollution, but that’s an external factor. We didn’t yet know what happens inside the building. At present, we’re investigating the aspects that may be indicators of the health of the people and of the building itself, including the state of maintenance, the welfare of office users, and their sick leave. We’re currently gathering the results of those investigations. Although I haven’t analysed everything yet, I’m convinced that there are significant differences between how healthy the buildings are and the performance levels of people in ‘healthier’ buildings. A healthy building results in less absence through illness.’


The effects of materials used?

‘We can identify two types of labels for sustainable buildings in the Netherlands. The obligatory EPC label only takes energy performance into account as a result of double glazing or the thickness of walls and cavities. The materials used in the construction don’t count towards achieving that label. Voluntary labels such as BREEAM and LEED are more holistic and also account for location, how green a roof is, and use of sustainable materials. This second group of labels has created a community of engineers who know everything about how the use of certain materials can influence the label allocation process. For this second group of labels, engineers can then give much more input to the architect by saying, ‘If you do it this way, it will result in a LEED Gold label, but if you do this and that, then you’ll get LEED Platinum.’ After all, the engineer is hired by the investor.’

Familiarity among architects

‘There are a number of architects who talk about sustainability from a moralistic point of view. Unfortunately, that doesn’t do enough to convince investors such as pension funds, because their purpose is not to improve the world. Their ‘moral duty’ is to ensure that people who are entitled to pensions receive what they have spent decades saving for. Therefore, you have to think in their terms and ask, ‘What’s in it for the investor?’ What’s the risk? What’s the return? If there’s an imbalance, then they may as well stop right there. So, as an architect or contractor working for a developer and investor, it’s better to first review what the shareholder wants. You need to speak their financial language. We know it’s not rocket science, as the returns on sustainable buildings are much higher. If you’d ask me, that’s a much better way of selling it to investors compared with moralistic fingerwagging.’

‘Investing in sustainability for new buildings isn’t difficult at all. The main issue lies with existing buildings.’

Piet Eichholtz