Kenya, like many other countries, faces the dual challenge of rapid urbanization and environmental sustainability. As the population grows and cities expand, the demand for housing and infrastructure increases, putting pressure on natural resources and exacerbating climate change. In response to these challenges, sustainable real estate development has emerged as a viable solution.
Given that the commercial real estate industry accounts for 40% of the total global carbon emissions, investors are increasingly incorporating Principles of Responsible Investing (PRI) in their real estate investment decision-making processes. PRI can be traced to 2005 when the former United Nations Secretary-General Kofi Annan hosted the world’s largest institutional investors to aid in the development of guidelines for responsible and sustainable investing. Consequently, this resulted in the formation of a common set of guidelines (the PRI) that encourage investors to instigate Environmental, Social and Corporate governance (ESG) principles in real estate projects in a way that would benefit stakeholders and impact the environment positively.
Investors have recognised that embracing responsible investing through sustainable real estate is not only a good public relations strategy but also constitutes sound business. For instance, the International Finance Corporation (IFC) has indicated that the green real estate (also known as sustainable real estate) sector is a multitrillion-dollar business opportunity and predicts that the industry will accumulate a USD 24.7 trillion investment opportunity by 2030 across all emerging market cities with a population spanning half a million people. It is further reported that a significant portion of this investment opportunity lies in East Asia Pacific and South Asia. Nevertheless, there is a growing recognition of this opportunity in African countries which has seen an escalating interest in the green building industry. Statista, a leading research company that specializes in market and consumer data, has issued projections that Kenya’s urban population will reach 44 million people by 2050. This presents an opportunity for real estate developers and investors to tap into sustainable real estate with a view to providing affordable housing, mitigating climate change while making profits.
What is sustainable real estate?
Sustainable real estate refers to the design, construction, and operation of buildings and communities that are environmentally responsible, socially equitable, and economically viable. These include green building materials such as energy-efficient heating and cooling systems; rainwater harvesting systems; green roofs; solar panels; energy-efficient lighting appliances; and onsite renewable energy systems such as solar photovoltaic and wind micro-hydropower systems. These can be installed as new builds or retrofits (added installations on constructed materials). The goal of sustainable real estate is to minimise the building’s environmental impact while lowering operational costs, and improving the resale value and occupancy rates of these buildings.
Sustainable real estate plays a significant role in reducing greenhouse gas emissions and mitigating the impacts of climate change given that the commercial real estate industry contributes to global carbon emissions significantly. Further, sustainable real estate plays an instrumental role in reducing energy consumption and saving money spent on utility bills given that green buildings utilize less energy. For instance, green buildings are estimated to consume 29 to 50% less energy, 40% less water and exude approximately 33 to 39% less carbon dioxide emissions and 50 to 70% solid waste. This is due to the installation of technologies such as smart LED lighting and energy-efficient heating, air-conditioning and ventilation systems. Green buildings provide a more comfortable living and working environment through improved air quality. Its social impact is seen in job creation, especially in emerging markets.
Why are investors and financiers gravitating towards sustainable real estate?
First, there is a growing demand for sustainable real estate from consumers who are becoming more environmentally conscious: this presents an investment opportunity for stakeholders.
Second, a strong case is made for the growing green buildings market given that these buildings have a higher value and a lower-risk asset in comparison to conventional standard structures. The IFC estimates that they could aid in savings ranging from 0.5% to 12% in additional costs or even higher, decreasing operational costs by up to 37%, attaining higher sale premiums of up to 31%, 23% higher occupancy rates and having a higher rental income return of up to 8%.
Aside from the commercial value, market players in green building can mitigate potential risks that arise from the global transition to low-carbon economies. Statistics from the IFC indicate that the commercial real estate sector consumes more than half of all electricity for heating, cooling and lighting while it accounts for 28% of energy-related greenhouse gas emissions. This necessitates the supply of an estimated 50 per cent more energy by 2050. In turn, it estimated that resource-inefficient buildings run the massive risk of losing economic value or devolving into stranded assets because of rising stringent environmental regulations, increased pressure from financial regulators to manage and disclose climate risks, and the growing change in consumer preference and shareholder demands.
Statistics from the IFC further indicate that the floor area of global buildings will rise by double in 2060, especially in middle-income and low-income countries experiencing high population growth and rapid urbanization. This change spawns an opportunity in the construction industry for integration of energy-efficient building design from the outset to not only meet environmental requirements but also elude the costly retrofits that will be required later.
How can investors and financiers gravitate towards sustainable real estate?
Real estate investors and financiers wield tremendous influence in shaping the market for green buildings. There are manifold market incentives that span from the opportunities and risks that investors and financiers can hinge on. For instance, commercial banks are an instrumental source of financing. Construction finance, mortgages, home improvement loans, green financial products for resource-efficient buildings will incentivise and accelerate the uptake of green buildings while lowering interest rates and enabling longer tenors. In return, these banks can expand their client net and product offerings while building higher value and lowering risk portfolios, accessing new sources of financing through products such as green bonds, green securitizations, green credit facilities and hence minimise the cost of the capital.
Moreover, there is more opportunity for institutional investors in sustainable real estate markets where they can aid in injecting liquidity and enabling primary lenders to bring up capital to develop new green lending products. They will equally be imperative in scaling up local currency financing through direct lending or equity investments. The role of national and multinational development finance institutions will be instrumental in endorsing new markets and facilitating the entry of private investors given that they provide financial products that are not readily available in emerging markets.
Locally, investors can participate in the development of green buildings, including those which can achieve green building certifications such as LEED (Leadership in Energy and Environmental Design) or BREEAM (Building Research Establishment Environmental Assessment Method). Retrofitting existing buildings to improve their energy efficiency and environmental performance presents another investment opportunity. Addressing the housing needs of low-income communities is a critical aspect of sustainable real estate development. Investors can support the construction of affordable housing units that incorporate sustainable design principles, benefiting both residents and the environment.
Conclusion
Voluntary adoption of sustainable real estate has seen surging momentum from real estate developers, investors and financiers. This seismic shift from conventional commercial real estate to sustainable real estate is indicative of the customer demand, the competitive advantage that sustainable real estate harbours and the cost savings prospects. This presents an opportunity for stakeholders to join the wagon and obtain optimum benefits from sustainable real estate investments while contributing towards net-zero carbon emission goals to combat climate change.