Greenomics. Cost Efficiency of Green Buildings in India

Transcription

1 Greenomics Cost Efficiency of Green Buildings in India

2 2 Cost Efficiency of Green Buildings in India As a significant contributor to global warming due to extensive use of energy causing greenhouse gases (GHGs) emissions, there is an imperative to develop sustainable building technologies and green buildings. Executive Summary 1. Real estate development uses about 40% of the energy and it is one of the prime contributors to global warming due to the emission of Green House Gas (GHG) caused by the energy used. Therefore there is an extreme need to develop green buildings. 2. Buildings in India consume about 20% of the country s total electricity and have a significant impact on the environment and resources indicating the need to develop green buildings in India. 3. Sustainable development has triple bottom line results which consider environmental development and social development along with economic development. 4. A green building uses less energy, water and natural resources. It generates less waste and provides a healthy living environment for the occupants. 5. The benefits of green buildings depend on the extent of sustainability features taken into consideration during its design stage. 6. The two green building rating systems in India are LEED 1 by IGBC 2 and GRIHA 3 by TERI. 4 LEED is most popular among the ratings and the credits earned through LEED ratings can be traded in the carbon market. 7. India is expected to develop about 110 million sq ft of green space in the next few years. In the next 3-4 years about 200 million sq ft of commercial space and 45 million of retail space is expected to be constructed across the major cities of India which indicates that there is a great opportunity for developers and occupiers to promote green buildings. 8. Green buildings have tangible and intangible benefits. The tangible benefits accrue from the operational cost savings and reduced carbon emission credits and high rentals or capital value. The intangible benefits are generated from the better working conditions within the building. 9. The prime sources of revenue generation for green buildings are from the non-sustainability discount which gives the green buildings a higher rental value than conventional buildings in the vicinity and the carbon credits earned due to the reduced GHG emissions. 10. The Cost Benefit Analysis of the One Indiabulls Centre resulted in a pay back period of 2-3 years on the cost premium for including sustainable features in the building aiming to achieve the LEED Gold certification. 11. The challenges faced for development of green buildings in India are the extra investment in an unstable real estate market scenario and difficulty in sourcing green building materials and sustainability consultants. 12. The government has launched the Energy Conservation Building Code (ECBC) under the National Building Codes and Standards to promote green buildings in India. 13. The Indian market has a huge potential estimated to about USD365 million to develop green building materials and equipment. 14. The CII IGBC and other professionals are working to mitigate the challenges faced by green buildings to enable developers to develop and operate green buildings with ease. IMTMA, Bangalore International Exhibition Centre, Bangalore 1 Leadership in Energy & Environmental Design 3 Green Rating for Integrated Habitat Assessment 2 Indian Green Buildings Council 4 The Energy research Institute

3 Cost Efficiency of Green Buildings in India 3 Introduction The tremendous growth in economic activity across the globe is placing pressure on natural and environmental resources. There is increasing evidence that human activities are causing an irreversible damage to the global environment, which will have an adverse impact on the quality of life of future generations. The rising concern for the environment in response to global warming is driving thinkers to seek sustainable solutions. The real estate industry is a significant contributor to the global warming due to extensive emissions of greenhouse gases (GHGs) from the energy use in buildings. In some countries, the built environment accounts for about 40% of the energy used. 5 Therefore, there is an imperative for the industry to develop sustainable building technologies and green buildings. The construction industry in India is growing rapidly at a rate of 10% compared with the world average of 5.2%. It is observed that buildings in India consume about 20% of the total electricity in the country. 6 Hence, real estate activity in India has a significant impact on the environment and resources. This indicates that there is a real opportunity to develop green buildings in the country. However, developers face a major challenge in the development of green buildings as in some cases this increases construction costs. Developers find it difficult to opt for green buildings due to price constraints difficulty in sourcing green building materials, technologies and service providers or facilitators in India. This paper attempts to understand and find solutions to these problems. It investigates the cost efficiency of green buildings through a cost-benefit analysis and a study on the payback period of the extra investment in developing green buildings. The paper simultaneously attempts to capture the ease of sourcing green technologies in India. We have considered One Indiabulls Centre in Mumbai, a building that is under construction and is applying for a LEED gold certification, as a case study. The Growing Crisis Global warming is the increase in the average measured temperature of the Earth s near-surface air and oceans since the mid-20th century. Global warming can cause a 20% recession in the world s GDP as this phenomenon increases the possibility of occurrence of natural disasters altering the world s GDP. 7 It threatens the melting of glacial ice, increasing the seawater level and causing devastating effects on the coastal world. It is learnt that GHGs, which are produced and emitted due to human activity, are responsible for global warming. The world is taking action in addressing the issues leading to global warming. The first step in this regard was the United Nations Framework Convention on Climate Change (UNFCCC) treaty in UNFCCC was formalised as the Kyoto Protocol on 11 December 1997, with the objective of reducing GHG emmisions to prevent the man-made global warming process. The Kyoto Protocol aims to be a holistic guideline restricting and reducing emissions in developed countries and at the same time facilitating emission reduction in the developing world. GHG emission Global warming can cause a 20% recession in the world s GDP as this phenomenon increases the possibility of occurrence of natural disasters altering the world s GDP 5 According to Monique Barbut, Director of United Nations Environment Programme- Division of Technology, Industry and Economics 6 Energy Efficiency in Building Design and Construction- CII 7 Report by Sir Nicholas Stern, a former World Bank economist

4 4 Cost Efficiency of Green Buildings in India Sustainability is not just limited to energy conservation, but it has also been expanded to resource usage, the neighbouring environment and working conditions for tenants. This concern has led to the development of green buildings. in developed countries is capped with a fixed quota. However, if countries or companies exceed their quota of emission, they can still earn carbon reduction credits either by buying credits in the international carbon credit market and/or through clean development mechanisms (CDMs). The framework provided by UNFCCC has revived the concept of sustainability and placed the focus squarely on GHGs emissions. It has also given a fillip to the green industry movement such as renewable energy production and the efficient usage of energy resources and other resources. Sustainable Real Estate Development and Green Buildings Sustainable development is defined as Meeting the needs of the present generation without compromising the ability of future generations to meet their needs. (Brundtland 1987). The field of sustainable development can be conceptually broken into three constituent parts- social sustainability, environmental sustainability and economic sustainability (Figure 1). The performance of the industrial economy has always been measured through single bottom-line (financial) results. However, striking a balance between environmental, social and economic performance is a key to achieving sustainable outcomes. This has given rise to the concept of triple bottom line. Figure 1: Constituent Parts of Sustainability Environmental Bearable Social Sustainable Viable Equitable Source: Sustainability model developed by environmentalist John Elkington-1999 Economical The real estate industry is one the major energy consumers and GHG emitters. According to a report by the Intergovernmental Panel on Climate Change (IPCC) in 1996, the real estate industry is expected to consume 38% of the global energy and emit 3,800 mega tonnes of GHGs every year. This does not include the usage of other resources such as water. Therefore, the increasing crises of global warming, depleting resources and consumer pressures have pushed the agenda of sustainability in the real estate sector. Growing human activity has increased the concern for sustainability even more in recent times. Sustainability in the real estate context is not only limited to energy conservation, but also includes resource usage, impact on the neighbouring environment and working conditions for tenants. This concern has led to the development of green buildings. The green building concept broadly integrates many interests and aspects of sustainability emphasising reduction of environmental impacts through a holistic approach to land and building uses and construction strategies. A green building uses less energy, water and natural resources than a conventional building. It also creates less waste and provides a healthier living environment for people living inside it compared to a conventional building. Green buildings incorporate several sustainable features such as efficient use of water, energy-efficient and eco-friendly environment, use of renewable energy and recycled/recyclable materials, effective use of landscapes, effective control and building management systems and improved indoor quality for health and comfort. The overall benefits of green buildings mostly depend on the extent to which the sustainable features are addressed during the initial planning and design. A green building is most likely to succeed in its objective if sustainable features are envisioned and incorporated right at the design stage. The design has to take into consideration the entire supply chain from material sourcing,

5 Cost Efficiency of Green Buildings in India 5 energy modelling, resource reuse, civic amenities and waste disposal to tenant education. Green Rating Systems The green building movement has led to the emergence of various green rating systems. The predominant ones are: BREEAM -Building Research Establishment Environmental Assessment Method, which is widely used in the UK; LEED- Leadership in Energy and Environmental Design, which was developed by the US Green Building Council (USGBC) and used in the US; Green Star- developed by the Green Building Council of Australia and used in Australia. The New Zealand Green Building Council have also developed their own version of the Green Star tool; CASBEE- Comprehensive Assessment System for Building Environmental Efficiency, which was developed by Japan Sustainable Building Consortium and is used in Japan; Green Mark- used in Singapore and mandated by the Building & Construction Authority for all new development and retrofit works; NABERS - National Australian Built Environment Rating System managed by the NSW (New South Wales) Department of Environment and Climate Change. The only rating system to measure ongoing operational performance. The green rating systems followed in India are: LEED India- administered by the Indian Green Building Council (IGBC); GRIHA -Green Rating for Integrated Habitat Assessment developed by TERI (The Energy and Research Institute). These tools are relatively new and have not fully evolved. There is no doubt that more and more developers are resorting to these systems to get their buildings certified. Rating systems provide a tool to enable comparison of buildings on their sustainability credentials. Many occupiers and investors are using these tools as a guide to selecting properties for lease or acquisition. Meanwhile, these systems are also being constantly improved. Therefore, the entire green building ecosystem is getting in place. Among all these rating systems, LEED has emerged as the most popular and is followed across 24 countries across the globe, including India. A green building is most likely to succeed in its objective if sustainable features are envisioned and incorporated right at the design stage. Figure 2: Buildings as a Key Consumer of Environmental Resources Energy, water and material resource usage Buildings Air emissions Solid wastes Wastewater effluents Environment as warehouse of resources and sink for wastes Source: Jones Lang LaSalle Meghraj Research

6 6 Cost Efficiency of Green Buildings in India Leadership in Energy and Environmental Design (LEED) has emerged as one of the most popular green rating system and is followed in 24 countries across the globe, including India. LEED Rating System The LEED rating system, developed by the USGBC, is a recognised and popular international green rating system. It has been adopted by the IGBC to suit Indian green building requirements. The LEED rating system broadly encompasses five environmental categories sustainable sites, water efficiency, energy and atmosphere, materials and resources and indoor environmental quality (IEQ). Additionally, it emphasises the innovation and design process to address sustainable building expertise and other design measures that are not already covered in the five environmental categories. The system is designed to be comprehensive in scope and simple in operation. There are credits for each criterion under the broad categories. These criteria credits are earned by addressing the specific environmental impact in design and construction. Different levels of green building certification are awarded based on the total credits earned. A total of up to 61 credits can be earned. The credit requirement for different levels of rating is as follows: Table 1: LEED India Certification Levels 8 Ratings Credits Required LEED certified LEED silver LEED gold LEED platinum Source: CII-ICBC TERI- GRIHA Rating System TERI s green building rating system GRIHA (Green Rating for Integrated Habitat Assessment) has been developed as an instrumental tool to evaluate and rate the environmental performance of a building. The rating can be applied to new and existing buildings of various uses. The rating system is based on national and international energy and environmental principles. The guidelines or criteria appraisal will be revised every three years to take into account the latest scientific developments during this period. GRIHA has derived inputs from the codes and guidelines developed by the Bureau of Energy Efficiency, the Ministry of Non-Conventional Energy Sources, MoEF (Ministry of Environment and Forests), Government of India, and the Bureau of Indian Standards. The rating system aims to achieve efficient resource utilization, enhanced resource efficiency, and better quality of life in the buildings. Green Buildings in India The green building movement in India started with the establishment of the IGBC in 2001, which was an initiative of the Confederation of Indian Industries (CII) along with the World Green Building Council and the USGBC. The first green building in India, CII-Sohrabji Godrej Green Business Centre in Hyderabad, was inaugurated on 14 July This was a great symbolic achievement. Since then, the number and volume of green buildings in India has been phenomenal. The movement started with 20,000 sq ft in 2004 and has grown exponentially, with an expected green building footprint of 15 million sq ft by end There are 18 LEED certified buildings with a total area of about 8.5 million sq ft and 195 projects registered for LEED certification with a total area of about 110 million sq ft 9 as of year end The real estate industry is one of the biggest emitter of GHGs in India. According to a report by the Ministry of Power in June 2004, 20 25% of the electricity consumed in government buildings is wasted due to inefficient design. The scenario is almost the same in the private sector. 8 IGBC: Green Building Rating System, September CII- Energy Efficiency in Building Design and Construction

7 Cost Efficiency of Green Buildings in India 7 It is heartening to know that the green building concept is widely being adopted in the Indian real estate industry. However, efforts are not enough and a greater push is required to make real estate development sustainable. In the next 3-4 years about 200 million sq ft of commercial space and 45 million of retail space is expected to be constructed across the major cities of India which indicates that there is a great opportunity for developers and occupiers to promote green buildings. Cost and Benefits of Green Buildings in India In terms of appearance or use, there is no difference between green buildings and conventional ones. The major differences are that green buildings have improved indoor environment and they offer operational savings. Green buildings have been observed to have tangible and intangible benefits. The tangible benefits such as the economical advantages are not immediately visible. However, the lifetime payback is much higher compared with that of conventional buildings, which mainly accrue from operational cost savings, reduced carbon emission credits and potentially higher rental or capital values. The intangible benefits such as social advantages are due to the positive impact of green buildings in the neighbourhood environment. Moreover, due to better working conditions, the productivity of occupiers increase and health problems decreases. The performance of green buildings in India, as mentioned in Table 2 below, indicates that platinum-rated buildings have a higher payback period of five to seven years, while gold-rated and silver-rated buildings have a payback period of three to four years. These tangible and intangible benefits define the triple-bottom-line returns of green buildings. Cost Premium of Green Buildings The general sentiment among the developer community is that green buildings cost higher than similar conventional buildings, and it is difficult to get positive returns on this extra investment. This issue is mainly due to: The still-evolving nature of green buildings; The lack of technical information; The incomplete/inefficient execution of green projects; The short-term view on returns, instead of focusing on lifetime return on investment (ROI) of these buildings. In mature markets the cost premium range from 1-6%. Cost premium in India is in the range of 6 18% (Table 2) depending on the level of rating. This can be attributed to lack of technical know-how, immaturity of the market and lack of resources. We foresee the cost premium in India to realign to the mature markets with the increase in awareness and availability of resources. The tangible benefits such as the economical advantages are not immediately visible. However, the lifetime payback is much higher compared with that of conventional buildings, which mainly accrue from operational cost savings, reduced carbon emission credits and probably higher rental or capital values. Table 2: Performance of Green Buildings in India Name of the Project Location Built-up Area (sq ft) Rating Achieved Increase in Cost (%) Payback Period (years) CII-Sorabji Godrej GBC Hyderabad 20,000 Platinum 18 7 ITC Green Centre Gurgaon 170,000 Platinum 15 6 Wipro Gurgaon 175,000 Platinum 8 5 Technopolis Kolkata 72,000 Gold 6 3 Spectral Services Consultants Office Noida 15,000 Platinum 8 4 HITAM Hyderabad 78,000 Silver 2 3 Grundfos Pump Chennai 40,000 Gold 6 3 Source: CII

8 8 Cost Efficiency of Green Buildings in India Green buildings tend to reduce the absenteeism rate by 40% and increase productivity by 5%. Hence the health and productivity gains could be quantified to USD 130 for each US employee. Tangible Benefits Operational Savings Green buildings are operationally very efficient compared with similar conventional buildings. The various operational savings and other benefits are stated below. Energy Efficiency Green buildings are around 25 30% more energy efficient, with gold-rated buildings as much as 37% efficient. On an average, green buildings obtain 2% of their energy from renewable or green sources. This energy efficiency proves beneficial during peak periods, when energy costs rise due to higher demand. This reduces the demand for fossil fuel-generated electricity and reduces pollution and the emission of GHGs. Water Efficiency Green buildings use 20 30% less water compared with similar conventional buildings. This reduces the operational water expenses and the pressure on civic amenities. Moreover, % of used water is treated and reused for landscaping and air conditioning. This reduces the load on an area s sewage system. Through these measures of conservation and the reuse of water, green buildings save on operational costs and simultaneously promote sustainability. Waste Reduction Green buildings emphasise waste reduction. Construction wastes and demolition debris are the main wastes produced during the construction process, and these wastes degrade the quality of the environment. Green buildings ensure waste reduction by: the reuse and minimisation of construction wastes and debris and diverting them to recycling units; the use of existing building structure and reclaimed building materials in the core and shell of a project; the increased use of recycled content in construction materials; designing the structure to produce less scrap and execute it according to the plan. Green buildings reduce construction waste by approximately 50% compared with that of similar conventional buildings, hence accruing all the above-mentioned benefits.

9 Cost Efficiency of Green Buildings in India 9 Intangible Benefits Green buildings provide better air quality, natural light and an optimal and pleasant indoor environment. Enhanced IEQ (Indoor Environmental Quality) for occupants can be achieved by initiatives such as: Using less toxic interiors, low-emitting adhesives, paints, carpets and composite wood; Illuminating 75 90% of the space with natural light; Thermal comfort due to local control over air conditioning and better ventilation. These factors are most important in improving the quality of work life and the efficiency of occupiers. It directly translates into improved productivity and decreased ailments for occupants. The productivity loss due to the lack of IEQ is estimated to be USD 250 billion for US commercial buildings. However, green buildings tend to reduce the absenteeism rate by 40% and increase productivity by 5%. Therefore, green buildings health and productivity gains could be quantified to USD 130 for each US employee. 10 A similar result can be expected in case of India. Cost-Benefit Analysis of a Green Building A Case Study of One Indiabulls Centre There is a cost premium in developing green buildings in some cases. However, if lifetime ROI is considered, savings of USD 1 million can be generated over 20 years if USD 100,000 is spent for green initiatives for a USD 5-million project. 11 The benefits discussed above highlight the economics of green buildings in a broad sense. However, to come up with the cost-benefit analysis of each and every green building, the general criteria cannot be applied. The cost-benefit analysis of any individual building must take into account the following: LEED certification level and corresponding credit points of the building; Investment required to attain each credit; Operational cost savings; Revenue-generation opportunities. Thereafter, a cash flow analysis can be conducted to calculate the payback period and hence, the ROI. It is highly improbable that a building will match the LEED credits of another building as no two buildings are the same. Even if they do, the The tangible benefits such as the economical advantages are not immediately visible. However, the lifetime payback is much higher compared with that of conventional buildings, which mainly accrue from operational cost savings, reduced carbon emission credits and probably higher rental or capital values. Table 3: Green initiatives considered in the One Indiabulls Centre 1 High quality steel with recycled metal content for construction 2 Concrete has 22% fly ash 3 Water fixtures have fixed flow rate due to use of Ultra low plumbing Fixtures 4 The interior paints have low VOC (volatile organic compounds) that evaporate and become intoxic air particles. 5 HVAC chillers with Coefficient of Performance (CoP) of 6.5 has been designed and used 6 30% of the material was sourced from the distance of less than 500 miles 7 Solar water heaters are used for heating the water for domestic use purpose 8 Recycle materia such as rock and rubble on the basement of the old mill which was existing on the site earlier was used as a base for One Indiabulls Centre s foundation 9 The Sewerage Treatment Plant (STP) treats 100% of the used water and the same is reused for landscaping and AC (meeting their 100% demand). 10 The storm water drainage system traps 100% of the storm water and does not add to the burden on sewage system 11 The heat island effect on the roof of the mall will be reduced by developing a roof/terrace garden. Source: Indiabulls Real Estate Ltd 10 Annual Review of energy & environment 25 (1): Health & productivity gains from better indoor environments W.J. Fisk 11 The American Institute of Architects: The economics of green, August 2006

10 10 Cost Efficiency of Green Buildings in India systems and processes deployed to achieve a particular credit can differ. Hence, it is extremely difficult to develop a generic cost-benefit analysis for green buildings. However, a case study on a particular building can be conducted to assess whether all the beneficial claims of green buildings are actually available for the particular building being studied. The objective of the case study is to understand the cost premiums and the tangible benefits more closely. The understanding of this study will provide us a more realistic picture of the tangible benefits, and will also help us in understanding the constraints and challenges of developing green buildings. For this study, we have chosen One Indiabulls Centre in Lower Parel, Mumbai. The building is aspiring for a LEED gold certification. Project Description One Indiabulls Centre is being developed by Indiabulls Real Estate Limited, a group company of Indiabulls Limited. It is one of the first commercial projects to come up on the erstwhile textile mill land situated in central Mumbai. It is strategically located between Nariman Point (CBD) and Bandra Kurla Complex (SBD). It is a Grade A commercial property that is spread over 11 acres of land. It has a total built-up area of 1.89 million sq ft, 1.54 million sq ft of which is commercial space and 0.35 million sq ft is retail space. Table 4: Credits Aimed by One Indiabulls Centre S No Attribute Maximum Credits for LEED Core and Shell Credits Aimed Prerequisites (mandatory) Sustainable site Water efficiency Energy and atmosphere Materials and resources Indoor environmental air quality Innovation and accredited professional points Total points 1 to (gold certification) Gold certification credits Source: Indiabulls Real Estate Ltd One Indiabulls Centre, Lower Parel, Mumbai

11 Cost Efficiency of Green Buildings in India 11 Project Target Credits for LEED Gold Certification One India bulls Centre is aspiring for a LEED gold certification. To achieve this, the project has followed LEED standards in the construction process, materials, energy efficiency and resource management equipment and technology. Table 4 shows the credits that must be achieved for each attribute to claim a gold certification. The prerequisite credits of seven points were not counted as they are mandatory for any project claiming LEED certification. Pay back of the Cost Premium The payback period of the cost premium is calculated through the discounted cash flow method. Cost premiums, cost savings and revenue are calculated and the cash flow of ten years is taken into consideration. Generally, a life cycle cost calculation is done for 15 years. However, we have done the calculation for a ten-year span as there is an active revenue generation in the first ten years from the carbon credits. The project cash flow is discounted on the rate of opportunity cost, and the ROI is derived. Cost premiums(table 5) were considered based on the premium on attributes catering to the LEED certification. These are: Construction materials - Steel with recycled metal - Cement with fly ash content - Aerated blocks - Double-glazed glass Water efficiency technology cost - Ultra-low plumbing fixtures - Storm water control system cost Energy efficiency costs - Special chillers COP = Low side HVAC Rooftop landscaping costs Consultant costs - Energy modelling consultant cost - LEED consultant cost - Building systems consultant cost The revenue outflow(table 6) generated from the following: Cost savings in energy and operational costs that have been considered. These are: - Electricity cost savings - Water cost savings Sustainability premium India bulls Real Estate said that it is not claiming any rental premium on One Indiabulls Centre. However, we understand that under the circumstance that the development is the only green project in the micro-market, it will have an impact on tenant s perspective. Jones Lang LaSalle s white paper entitled Assessing the Value of Sustainability states the following based on a tenant s perspective: Table 5: Cost Premiums on Green Materials, Equipment and Techniques Green Materials Equipment and Techniques Cost Premiums Unit Value High-quality steel with recycled metal content INR per tonne 5,000 Fly ash content in cement % 22 Aerated blocks for solid masonry INR psf Double-glazed glass INR psf 10 Ultra-low plumbing fixtures % 3 Storm water management system INR million 30 Special chillers COP (coefficients-of-performance) = 6.5 % 15 Low side HVAC (Heating and Ventilation % 10 Rooftop garden INR psf 250 Energy modelling consultant INR million 1.2 Source: Indiabulls Real Estate Ltd, Jones Lang LaSalle Meghraj Project Management and Research

12 12 Cost Efficiency of Green Buildings in India The payback period for the cost premium to develop One Indiabulls Centre as a green building ranges between two to three years. The results are similar to the performance of other gold-rated buildings that are operational across India. Surveys conducted by Jones Lang LaSalle have indicated that while tenants may not be willing to pay a premium rental for buildings with sustainability features currently, some will very soon come to expect a discount to occupy buildings that do not have these features. This switch from a sustainability premium to a non-sustainability discount is expected. We have compared rental values of operational green buildings in India and those of non-green buildings in the same vicinity. We have observed a similar trend, wherein non-green buildings in the vicinity of green buildings lease out space at discounted prices than green buildings. This resulted in a non-sustainability discount ranging from 1% to 2%. Hence, considering this tenant behaviour, we feel that the other non-green buildings in the vicinity of One Indiabulls Centre will witness a non-sustainability discount, which poses as a rental premium to our case study. Carbon credits Carbon credits are key components of national and international GHG emission trading schemes that have been implemented to mitigate global warming. They provide a way to reduce GHG emissions on an industrial scale by capping the total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged among businesses or can be bought and sold in international markets at the prevailing market price. Credits can be used to finance carbon reduction schemes between trading partners and around the world. Table 6: Revenue Outflows Cost Savings Units Value Electricity cost savings % 25 Water cost savings % 30 Revenue Generation Rental premium (nonsustainability discount) Carbon credits in ten years % 1 2 INR million 90 Source: CII, Indiabulls Real Estate, Jones Lang LaSalle Meghraj PDS and Research Hence, the credits earned by One Indiabulls Centre can be traded, and this will generate monetary benefits. Indiabulls Real Estate has estimated its earnings from carbon credits, which have been considered in the revenue calculation. The results of the cost-benefit analysis using discounted cash flow are outlined in table 7: Table 7: Results of the Cost-Benefit Analysis With Sensitivity Analysis Non-sustainability Discount 1 IRR Payback period The cost-benefit analysis (Table 7) demonstrates a payback period for the cost premium to develop One Indiabulls Centre as a green building range between two to three years. The results are similar to the performance of other gold-rated buildings that are operational across India as mentioned in Table 1. Therefore, the quantitative cost-benefit analysis proves that green buildings are beneficial in spite of the extra investment needed to develop such buildings. % Years Non-sustainability Discount 1.5% IRR Payback period % Years Non-sustainability Discount 2% IRR Payback period % Years The payback period achieved was based on the LEED rating system. However, green buildings can be designed and constructed for various levels of classifications using other rating systems to achieve respective certification. In such cases, the payback period can be different depending on the investment. As there are two certifications in India LEED India and GRIHA the payback period for each certification may differ Source: Jones Lang LaSalle Meghraj Research As per our discussions with Indiabulls Real Estate, the procurement of materials for green buildings in Mumbai was not difficult. Consultants that were

13 Cost Efficiency of Green Buildings in India 13 needed for the development of green buildings were also approachable in Mumbai. However the ease of sourcing green building materials and equipment may differ in other parts of India. Constraints and Challenges The first and foremost constraint for the proliferation of green buildings is the lack of information and incorrect perception. It is generally believed that green buildings cost more and have long gestation periods. Although experts highlight the advantages of green buildings, this information does not reach developers and customers. Second, any turbulence in the real estate industry will directly affect developers propensity to invest in additional cost centres such as a premium on green buildings. Third, stand-alone green buildings do not fulfil the larger goal of sustainability. The current green building criteria must be modified according to the local requirement. In the Indian context, green real estate must also include town planning, sanitation and relevant social infrastructure. Hence, standalone green building developments do not fully adhere to the overall green building concept. Fourth, the sourcing of materials for green buildings can be difficult. IGBC s requirement of sourcing materials locally has noble intentions. However, the lack of available materials might also discourage developers to pursue green building developments. Fifth is the lack of professional support for facilitation of LEED certification and consultancy services for earning carbon credits. However with the growing awareness on sustainability within India, competency among consultants in the construction and real estate industry will increase. This will in turn facilitate developers with their professional support. As the green building phenomenon grows in India, concerns about the availability of information and local materials will eventually improve. However, the prospect of a recession in the real estate sector and the need to modify the green building criteria to suit local standards can still cast a shadow of uncertainty over the development of green buildings The concept of developing green buildings is envisaged as a voluntary action. Hence, the government was unable to take any proactive action to make the development of green buildings mandatory. However, it has launched the Energy Conservation Building Code (ECBC) under the National Building Codes and Standards. This code is voluntary and is applicable to buildings or building complexes that have a connected load of 500 KW or a contract demand of 600 KVA, whichever is greater. This code addresses the minimum performance standards for a building s energy efficiency, which cover building envelope, mechanical systems and equipment, service hot water heating, interior and exterior lighting and electrical power and motors. This is an excellent initiative, which will enable the design of highperformance buildings. Future Trends Hubs of Green Real Estate in India Most green buildings in India are coming up in Mumbai and Chennai. Mumbai, being the financial hub of India, is more preferred by large MNCs, especially financial conglomerates. Similarly, Chennai has seen a tremendous influx of IT and multinational manufacturing firms. Although Hyderabad has been the pioneer in developing green buildings, with India s first green building grounded in the city, it did not witness many green developments after that. However, it is seen that the concept of green buildings is eventually catching up in other cities like the Kolkata, NCR, Bangalore and Hyderabad, along with Mumbai and Chennai. The growing awareness on the benefits of green buildings among international and domestic occupiers is eventually driving the demand for green buildings. As a result, developers are taking a keen interest in developing green buildings. Large green buildings are being developed to

14 14 Cost Efficiency of Green Buildings in India cater to the rising demand for green high-end commercial space. Green Industry A green building needs special materials and systems to adapt sustainability compared with a conventional building. In line with the growing trend of green building development, the industry of green materials and services is also developing in India. IGBC-LEED provides two credits for sourcing more than 50% of construction materials locally to promote these green materials and services industries. Local sourcing of construction materials is also to reduce the environmental impact of transportation or the embodied energy. The commonly required green raw materials include fly ash cement and aerated blocks, recycled aluminium, steel, tiles and wood, low VOC paints, bamboo-based products, HFC-based high-efficiency chillers, green roofs etc. By 2010, the total estimated market potential for green building materials and equipment is about USD 365 million. However, the market size will rise to USD 3.65 billion if the usage of these materials in non-leed certified buildings is also taken into account. 12 Sustainable Real Estate Infrastructure Sustainable real estate infrastructure takes the sustainability concept in the real estate industry to a higher level. The idea is to incorporate the economical, environmental, social, cultural and political aspects in sustainable architecture. Sustainable real estate infrastructure involves the development of sustainable communities. It includes the reduction of resource usage and regeneration, communal and social development, civic infrastructure and tackling contemporary local issues such as sanitation and public transport in Indian urban areas. Green buildings are stand-alone structures. Green building rating systems such as the LEED certification or any other certification does not take into account the larger context in terms of the surrounding environment, society and culture. Moreover, green buildings are heavily concentrated on energy and water savings and the natural ambience of the building. To meet these criteria, green buildings end up consuming large amount of materials that might have a higher embodied energy. The reason is that the suppliers of green building materials do not get a critical mass to start their business which pushes developers to source materials from remote places. However, infrastructure development can reduce this embodied energy to a considerable level. Green Funds Sustainable development has led to the emergence of the concept of socially responsible investing (SRI). Initially, SRI started with funds dedicated to investment in non-polluting industries Eventually, these funds started investing in other industries that promote sustainability. One of the most prominent funds that focuses on SRI is Portfolio 21 in the US. The SRI concept is now being adopted in the real estate sector. Many green funds are set up in the US, Western Europe and Australia and are dedicated for green buildings (greenfield, brownfield, redevelopment and retrofitting projects). Prominent among such funds is the USD 500-million High Performance Green Fund of Thomas Properties Group. There are many more such funds in the pipeline. Green funds in the real estate sector are not yet a popular thing in India, primarily because green building development is still in its nascent stages. However, CII-IGBC has taken an important initiative to set up an INR 4 billion green fund to support the development of green buildings. As the green building industry matures, the green funds industry shall likewise emerge. This can be the next level for the Indian real estate business, which promotes green and sustainable buildings and opens new investment opportunities in India. 12 CII: Green Buildings in India Emerging opportunities February 2008

15 Cost Efficiency of Green Buildings in India 15 Conclusion The growing global crisis has created the need to adopt the concept of sustainability. Real estate activity, being one of the significant contributors to energy consumption and usage of resources, is working towards the development of green buildings to reduce energy consumption and the environmental impact. The IGBC has adopted the LEED rating system for evaluating green buildings in India. The payback period for existing green buildings range from two to seven years, depending upon their certification level. The case study of One Indiabulls Centre shows that the payback period for a gold-rated LEED certification building is likely to range from two to three years. The key challenges for the development of green buildings in India are mostly in the lines of awareness on the benefits of green buildings, materials and technology. The CII-IGBC and other professionals are working towards addressing these challenges to enable developers to operate with ease. Although there is an additional investment involved in the development of green buildings, they are certainly ideal developments due to their triple-bottom-line benefits, which can be seen once these buildings are operational. Authors Trivita Roy Assistant Manager, Research & REIS trivita.roy@jllm.co.in tel Trivita Roy has joined Jones Lang LaSalle Meghraj Research team in 2007.Based out of Hyderabad; she contributes to topical whitepapers, property market digest and research deliverables on industrial, commercial, retail and residential real estate markets in India. She is also responsible for Indian real estate intelligence service (REIS). Trivita is trained as City Planner from Indian Institute of Technology Kharagpur and has a two years experience in real estate research. Abhishek Kiran Gupta Associate Director, Research & REIS abhishekkiran.gupta@jllm.co.in tel Abhishek Kiran Gupta leads the Jones Lang LaSalle Meghraj India Research team of 12 professionals and is based in Mumbai. He manages research operations on a Pan-India level and is responsible for the team s outputs including research reports such as topical white papers, property market digests and bespoke research projects based on specific client requirements. Prior to joining Jones Lang LaSalle, he had seven years of experience in market research, business analysis and market strategy consulting, servicing diversified industries including pharmaceutical, software publishing and insurance. Acknowledgements We would like to acknowledge the contribution of representatives of Indiabulls Real Estate. We would like to acknowledge the support of Jones Lang LaSalle Meghraj Project Development and Services Team for sharing their knowledge and expertise. We would also like to sincerely acknowledge the contribution of Sandeep Muley MBA student of Babson College who has worked on this project during his internship.

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