Profitability of Green Buildings

Mark Chieshe

An EDGE-certified green building

As the world remodels towards a carbon-free economy, green buildings are fast gaining global acceptance and adoption as the future-proof standard for the construction industry.
This is because of their capacity to mitigate the negative impact of construction work on the environment.

Studies show that the conventional building sector accounts for about 28 percent of greenhouse gas emissions, 35 percent of energy usage; 60 per cent of the electricity for heating, cooling, and lighting; as well as 25 percent of global water and 40 per cent of materials extracted.

On the other hand, green buildings incorporate climate-smart practices and technologies that enable them to use key resources like energy, water, materials, and land more responsibly than traditional buildings.

This includes energy-efficient lighting and cooling, shading, natural ventilation, and low-flow water fixtures. As a result, they are able to leave a lighter carbon footprint, reduce operations and maintenance costs that lead to lower utility bills and more comfortable and healthy spaces for occupants.

Aside from climate mitigation, there is a compelling business case for building green. Green buildings present a solid investment opportunity for smart investors who are keen to lead a profitable change in the built industry.

Banks and developers can leverage the unique resource efficiencies arising from a more intelligent and environmentally sensitive use of resources to expand and differentiate their product offerings, build brand equity, and gain a competitive edge over their peers in a fast-changing industry.
The market potential for investors is huge globally. International Finance Corporation (IFC) estimates green building to represent a $24.7 trillion investment opportunity across emerging markets by 2030, one of the biggest of the decade.

The residential construction component alone is estimated at $15.7 trillion. Around the world, leading construction companies are partnering with financial institutions to gain market shares in their regions.

At the early stages, establishing what constitutes a green building posed a huge challenge to investors. This was understandable. While the benefits of building green to the environment were well established, the metrics for measuring the “green” credentials of buildings were not yet standardised, leading to confusion.

This has changed over the years. The green building trend has matured in depth and scope and the advent of smart certification systems by reputable third parties not only provide banks, developers, and business leaders with a clear definition of what makes a building green, but also an easy, transparent, and scientific platform that helps optimize designs, establish cost, and project utility savings over the lifetime of the asset.

The EDGE Advantage

A good example is EDGE. An innovation of IFC, a member of the World Bank Group, EDGE (Excellence in Design for Greater Efficiencies) provides a measurable way for design teams to optimize their designs to achieve certification as “green”.

It includes a cloud-based platform to calculate the cost of going green and utility savings. Fast, smart, affordable, and inclusive, EDGE is powered by a state-of-the-art engine that possesses reliable city-based climate and cost data, consumption patterns, and algorithms for predicting the most accurate performance results.

EDGE sets clear benchmarks for its green certification program, which it administers through reputable third parties. To qualify for EDGE certification, a building must achieve a 20 per cent reduction in energy, water, and embodied energy in materials compared to a conventionally built building.
In Nigeria, EDGE certification is offered by Sintali-SGS. This has brought transparency to the definition of what constitutes a green building, a quantitative approach to resource efficiency measurements, and the factoring of critical local data and variables in the design of buildings for optimal performance.

With EDGE, investors can establish baseline costs and make projections on profitability of their green portfolios. Data sourced from owners/occupants of EDGE-certified buildings from over 170 countries show that although green buildings generally incur a slight premium over conventional ones, the benefits over the life cycle of the property outstrip the increased initial cost. An additional two percent Capex produces savings of over ten times the value of the initial investment over the lifetime of a certified building by decreasing operational costs by up to 37 per cent.

With advancements and technological innovation, the additional cost of going green is projected to reduce and eventually cancel out over time. All these further justify the business case for sustainable buildings.

What this Means for Banks, Developers

Like their counterparts in other established markets like Mexico, China, South Africa, Ghana, and Kenya, Nigerian banks and developers have a chance to define the future outlook of a climate-smart built environment that is good for the environment and good for business. EDGE offers a unique opportunity for innovation and strategic partnerships to differentiate their brands, build climate-smart real estate portfolios that reflect global trends and meet the demands of a more educated and environment-sensitive market.

Doing so would help them increase incomes and grow their businesses sustainably. Global trends show that certified green buildings command a higher value than conventional buildings. This includes higher sale premiums of up to 31 per cent and faster sale times, up to 23 per cent higher occupancy rates and higher rental income of up to eight per cent.

Through creative product development and marketing, Nigerian developers can leverage the utility savings and other associated benefits of living in a green house, such as comfortable and well-ventilated spaces to expand their client base using innovative product offerings that guarantee higher and quicker sales and increased tenant income.

A top market segment to explore is green commercial buildings targeting international and upscale local businesses and occupants who are educated and climate change sensitive. This class of occupants, as evidence shows from other climes, understand the broad benefits of living in climate-smart and comfortable spaces and possess the capacity to pay a premium in rents or outright sale prices.
Leveraging the Green Advantage

EDGE also offers market players in Nigeria the opportunity to chart a new, profitable, and more climate-friendly path towards tackling the rising housing deficit by exploring more innovative financing options.

In 2015, a World Bank study estimated that Nigeria had a 17 million housing unit deficit. The report stated that fixing the gap would require the annual production of about 700,000 housing units annually at the cost of N3.5 million each. About N60 trillion was estimated as the expenditure outlay.
At the time, Nigeria had a population of about 180 million. Today, with the increasing population size and increasing urbanization, experts estimate the figure to be over 22 million units and the cost above N100 trillion.

This is no doubt a huge challenge. Yet, it provides a huge opportunity for forward-looking investors, banks, and developers who on their own, or in collaboration with government at the national and state levels are involved in the process of delivering affordable housing. By building green and using EDGE, they could leverage the benefits and investment potential of resource-efficient buildings unlock finance from international development partners. This includes exploring green bonds, green securitizations and green credit facilities potentially reducing their cost of capital.

Although the electricity supply is generally unstable in Nigeria, when it is available it eats up a huge chunk of worker’s income.

Even so, the country is set to move forward with plans to deregulate the market and make pricing more competitive and reflective of cost to deepen private sector investment. For investors, expanding offerings to include climate-smart products with utility savings would be a major attraction for occupants and tenants.

For commercial and mortgage lenders in Nigeria, this could take the form of developing green financial products around construction finance, mortgages, and home improvement loans.

Another key benefit of going green for Nigerian market players is risk mitigation. The global rally around the adoption of climate-friendly solutions makes the transition to a carbon economy inevitable. Countries and corporate leaders have set targets for zero emissions and both local and international governments are establishing systems and regulations that would eventually make building green the norm. Moreover, in a carbon-free economy, inefficient resource assets are most likely to lose their profit edge.

EDGE Trailblazers in Nigeria

The good news for Nigeria is that there are some notable financial institutions and developers who have recognised the business value of building green and have blazed the trail in adopting EDGE certification for their green building portfolios.

From championing a new breed of climate-smart affordable residential housing, premium office accommodation to innovative student hostel accommodation, early adopters of EDGE in Nigeria are breaking new grounds and leading the country’s drive to a new era where building green would be the norm.

The most recent example is Greenage Development Managers. In May, Greenage , a private equity-driven fund and provider of on-campus student and faculty housing projects announced a long-term commitment to IFC’s EDGE.

The company aims to transform the student housing sector by delivering purpose-built, resource-efficient hostel accommodation in higher institutions across Nigeria using a $150m sustainable housing fund. The fund commits to developing 100,000 bed spaces across Nigeria over 10 years, with an initial ticket size of $50 million for its first phase of delivery, which began with the groundbreaking development of 500-1,000 bed spaces at Veritas University, Bwari Abuja.

The development at Veritas University will be followed in quick succession by other engagements to be delivered by Greenage at the Arthur Jarvis University in Calabar and the University of Nigeria, Nsukka Enugu, among other targeted locations.

Another example is EchoStone, an EDGE Champion that plans to build 100,000 EDGE-certified homes across Nigeria over the next five years. In February, EchoStone delivered 252 units of affordable homes in Idale Badagry in partnership with the Lagos State Government. The green homes incorporate resource-efficient features that deliver 53 per cent energy savings, 42 per cet water savings and 35 per cent embodied energy in materials savings.

Accelerating the growth of EDGE certified buildings would help Nigerian market players to re-define the built environment, build more sustainable product offerings, and boost their incomes while helping the country to reduce greenhouse emissions. This is good for their brands and good for the planet.

Chieshe wrote in from Abuja