Impacts of climate change for Real Estate sector in India

Posted on January 25, 2011 by

Green buildings are gaining momentum around the world, given their financial benefits and smaller environmental and resource use footprint.

Energy insecurity, water scarcity, and climate change pose growing risks for the real estate sector India, yet the connections between these trends and financial impacts are not well understood by analysts, investors, companies, and governments. These issues will affect the risk and return associated with investments in (1) commercial building projects and (2) companies involved in commercial real estate development and investing. The limited energy and water infrastructure; rapidly growing demand for energy and water resources; and physical exposure and vulnerability to climate change impacts, all increase the likelihood and magnitude of financial impacts. Green building investments can minimize energy and water-related risks while achieving net positive returns in as few as three years.

Evaluating the risks

The risks are in the following categories

Energy insecurity risks – including higher electricity/diesel prices and shortages—will likely affect major cities in as energy demand is expected to outpace production capacity and energy infrastructure. India faces the great price and shortage risks, considering the already existing—and worsening—energy supply-demand gap.

Water scarcity risks – including poor availability and quality—are greatest in India. Several river basins in the country are expected to face acute stress or shortage by 2025, and groundwater sources are rapidly declining. The seasonal shortages are expected to worsen (and already have) around major metropolitan areas due to high demand, water pollution, and climate change impacts.

Climate change risks – created by more frequent and intense floods, droughts, storms, and precipitation—are difficult to predict with certainty, but are expected to have significant physical and economic impacts on all the focus countries over the next decade. Coastal and low-lying cities like Mumbai, Kolkata, and Chennai face severe flood and storm risks.

These three trends are interrelated, thus further exacerbating the magnitude and likelihood of their impacts on the building sector. For example, water scarcity can worsen energy insecurity because water is necessary for cooling in thermal and nuclear power plants, and as an input in hydropower plants. Similarly, climate change can constrain water supply (through changes in precipitation, for example) and increase the demand for energy and water during heat waves.

Some of the direct results of energy insecurity, water scarcity, and climate change trends on existing and planned commercial buildings can include:

Higher utility costs – driven by increasing prices and unreliable power/water. This can lead to higher/uncertain operating cash flows, less competitive rental rates, and lower occupancy rates. Building utility use intensity is also expected to increase as consumers demand modern building features like air conditioning and landscaping, thus further increasing utility costs.

Higher nonutility operating costs – including accelerated building depreciation, higher operations maintenance, reserve and replacement (OMRR) costs and higher insurance premiums—which can lead to less competitive rental rates and lower occupancy. OMRR cost increases are driven by:

• Physical building deterioration due to more frequent/intense weather events; and

• Obsolescence arising from energy- and water-inefficient building systems.

Higher construction costs – including input costs, capital costs, and lost rental income—driven by:

• Project/permitting delays caused by local energy insecurity, water scarcity, and the increased frequency of extreme weather events due to climate change; and

• Pass-through of fuel costs from transportation of material inputs, particularly imports

These effects on individual projects will pass through to the investors and developers, affecting them adversely.

Real Estate Investment Trusts (REITs) – Higher nonutility operating costs from a REIT’s portfolio—like insurance premiums and maintenance expenses—will flow directly to the REIT’s operating cash flow. Higher utility costs may be passed on to tenants although this may have adverse impacts on rental/occupancy rates, depending on prevailing market conditions.

Real Estate Developers – Regardless of market conditions, real estate developers will have to contend with higher capital costs created by project/permitting delays. Developers who hold and lease completed projects (more common under unfavorable market conditions) will also face the risk of operating cost increases and lost rental income in the case of project delays.

This therefore creates significant market opportunities for Green Buildings. Green building investments can reduce vulnerability to operational risks and provide net financial returns relative to conventional buildings.

• Energy and water-saving technologies (like targeted task lighting, solar water heating, and rainwater harvesting) can reduce utility costs for building owners and/or tenants (thus reducing operating costs and/or improving rentability).

• Green building market in India are nascent, but growth is likely, especially as (1) water scarcity, energy insecurity, and climate change impacts worsen and (2) awareness of financial and social benefits grows in the private and public sectors.

New and retrofitted green buildings in this region have demonstrated net positive returns on energy and water efficiency investments. According to a 2008 Asia Business Council report:

• The first Leadership in Energy and Environmental Design (LEED, a green building rating system) Platinum building in India—the 2003 CII-Godrej Green Business Center (CIIGodrej GBC)—achieved a 55 percent reduction (120,000 kWh/year) in energy use, and a 35 percent reduction in potable water consumption, with an expected seven-year payback period on green investments;

• More recently built LEED Platinum/Gold buildings in India, such as the Patni Knowledge Center, have achieved payback periods on green investments of just three to four years.

Energy efficiency investments also protect operating costs from rising electricity prices. For a typical Indian commercial building, HSBC estimates that a 10 percent increase in power costs increases total operating costs by 1 percent in a normal building. In a green building, the pass-through effect is only 0.50 to 0.85 percent of expenses due to the energy savings.

Green buildings in India

Green building investments in India have demonstrated a net positive return in as few as three years. Green buildings provide a range of cost and revenue benefits over their lifetime. These include utility cost savings, rental premiums, and longer building lifetimes. A significant sales or rental premium is currently hard to achieve, especially given the current economic downturn. However, operational savings are achievable immediately through reduced water and energy use. Although green buildings typically require additional design and construction costs, payback periods in recent buildings have been reasonable. In India, for example, several green buildings constructed since 2005 have achieved positive returns on green investments in three to five years.

Given the growth potential of Indian metropolitan cities with the rapid rise of IT/ITES, there is growing interest in green buildings. As of 2009, more than 140 buildings were expected to be awaiting evaluation and certification. It is expected that by year 2012, there will be around 1000 certified green buildings. This translates into a market potential of USD 4 billion.

Though the National Building Code (2005) is voluntary, Energy Conservation Building Code (ECBC) will shortly become mandatory for commercial buildings with a connected load of 500kW or greater, and applicable to all buildings with a large air-conditioned floor area of 1000sqm or greater, and is recommended for all other buildings. Energy Service Companies (ESCO) market is developing with government support. The Government of India is planning an expenditure of INR490m through the Ministry of New and Renewable Energy (MNRE) during 2008-12 for the promotion of energy efficient solar or green buildings in India.

Despite all these efforts, the potential to be tapped is immense as compared to the market tapped. In 2008, green buildings accounted for only around 8 percent of total Grade-A commercial construction in India. There remains an enormous energy savings potential. Some experts project that total built-up green building area will increase three-fold to approximately 100 million square feet by 2014. Green buildings thus represent the future of commercial infrastructure creation in India.

Contact Agneya Carbon Ventures for knowing more about the Green buildings and Carbon footprinting

Posted in: Sustainability