The Business Case for Green Buildings Helping enhance financial returns with green building features

Chungha Cha Vice Chairman, Korea Green Building Council

cha@koreagbc.org W: +822.773.0115 M: +8210.9560.0888

Table of Contents

I. Executive Summary

II. Introduction

III. The Business Case for Green Buildings

IV. What is the value of Passive Design to investors?

V. What is the value of BIM to investors?

VI. Bringing it all together

Executive Summary

Green buildings are profitable. New Construction • First year cash-on-cash yield, IRR, and Asset Value increase is

possible without additional construction costs • Even when construction costs increase, there is a range where

investment returns will be higher due to increased NOI! Exisiting Construction: • First 5-10% savings may be achieved at no upfront costs, just

through proper facility management • Low or no-cost energy modeling services help identify where you

are wasting energy and money • Next, target savings with 2-3 year paybacks!

Executive Summary Passive Design… First! • Utilizing elements such as building orientation, insulation, shading

and windows to cut reliance on artificial heating and cooling • Passive design is the cheapest way to build green • Saves construction costs (CAPEX) and operational costs (OPEX) Building Information Modeling (BIM) • Utilizes 3D models that automatically identify design conflicts and

constructability issues at an early stage • Can reduce construction costs by 5-10% • Can shorten construction time by 4-6 months

Design Right

Operate Right

Build Right

FOR MORE

PROFIT!

Conceptual Approach Incorporating Green, Passive Design and BIM elements produces higher investment returns!

Introduction

Out of 109 UK and European institutional investors surveyed,

48% believe ESG factors are not important when assessing direct property investments.

https://www.hermes-investment.com/no/blog/2015/10/19/responsible-capitalism-survey-many-

institutional-investors-believe-esg-is-not-important-when-investing-in-direct-property/

“Given all the information available to these investors, the results here are astounding. Nearly half the investors believe energy efficiency is, by and large, unimportant, and yet it is easy to

demonstrate financial savings…

These survey results suggest such investors are short-sighted…

which is problematic for pension funds.”

Hermes Investment Management Survey, October 2015 £29.8 billion manager’s survey

My background is 20+ years in finance, during which I worked at a private equity firm investing in real estate. During a four year period, we invested over US$2 billion in the Korean real estate market and we were primarily driven by financial returns. Now, after spending over seven years in the green building sector, I am beginning to understand how we can bridge green buildings with profitability.

Who am I?

…I wholeheartedly believe that the key to changing the attitudes of skeptics lies in showing them the financial benefit of sustainable real estate investing...

Because I was one of those skeptics.

Hello, I’m Chungha Cha, Vice Chairman of the Korea Green Building Council.

Bridging the Language Gap

Building Community Real Estate Investor Community

Higher Rents

Higher Occupancies Higher Resale Prices

Life Cycle Costs Value Engineering

Increased Worker Productivity Superior IEQ and Health

We are speaking different languages

Reluctant to price in higher rents Reluctant to price in lower costs Green Buildings more expensive

1st Year Cash on Cash Yields Need to maximize IRR

Risk-adjusted IRR Post leverage IRR

So how should we explain green buildings …to real estate investors?

The Business Case for Green Buildings • Green Buildings are profitable • New Construction • Existing Buildings

Green Buildings are Profitable

Higher Occupancy Rate Higher Rental Rate Per ft2 Higher Sales Price Per ft2

Source: The Business Case for Green Buildings, WGBC (2013)

Various studies including the World Green Building Council (WGBC)’s “Business Case for Green Buildings” report indicate that green buildings have various financial benefits, including: 1. Higher rents, higher occupancies and higher sales prices 2. Improved worker satisfaction and worker productivity 3. Improved risk mitigation

…But most investors are reluctant to price these factors into their financial valuation models.

Therefore, we would like to show that even excluding these benefits, green buildings can increase your profitability!

New AIA Study Reports “Green” Buildings are on the rise (2009)

New Construction

• Building green does not necessarily need to cost more

• 30~40% energy savings are possible without any increased construction costs

• In your language: Saved energy

costs means increased NOI, IRR, first-year cash-on-cash yield and increase in asset value!

Pictured: JW Marriott Dongdaemun (Cho, DongA.com)

Success Case: JW Marriott Dongdaemun, Seoul

• Energy efficiency improved by 31% • NO additional construction costs • Energy savings of $297,000/year

Success Case: JW Marriott Dongdaemun Total 30% energy savings after reduction strategies

0

2000000

4000000

6000000

8000000

10000000

12000000

14000000

16000000

18000000

Design Proposal Wall/Roof Window Variable flow volume Heat recovery VAV Our Suggestion

Water heating/General electricity Plug load Fan Cooling tower Pump Cooling Heating Lighting

0%

90%

40%

80%

70%

60%

50%

30%

20%

10%

30%

16,722,541

13,433,000 13,368,000

12,501,000 12,486,000 11,720,000 11,720,000

kWh/year

Success Case: JW Marriott Dongdaemun Comparison of energy usage to other domestic hotels

31% energy reduction with no additional construction costs

Improved Plan 871 kWh/m2.yr

Seoul Hotel Average 871 kWh/m2.yr

Original Plan 764 kWh/m2.yr

Shilla Hotel 1,605 kWh/m2.yr

Grand Hyatt 1,550 kWh/m2.yr

Chosun Hotel 1,092 kWh/m2.yr

Imperial Palace 1,057 kWh/m2.yr

JW Marriott 1,014 kWh/m2.yr

Plaza Hotel 934 kWh/m2.yr

Millennium Hilton 928 kWh/m2.yr

Ritz Carlton 876 kWh/m2.yr

Walker Hill 858 kWh/m2.yr

Lotte Hotel 807 kWh/m2.yr

Lotte World Hotel 701 kWh/m2.yr

Coex Intercontinental 700 kWh/m2.yr

Grand Intercontinental 694 kWh/m2.yr

Grand Hilton 480 kWh/m2.yr

“Domestic Hotel Energy Usage” Korea Solar Energy Association Journal Vol.29 (2009)

“

You can’t manage what you can’t measure.

Peter Drucker, Educator and Management Consultant

Energy monitoring provides real-time energy usage data, which is crucial for

creating an effective energy saving strategy.

Existing Buildings

• We like to focus on low hanging fruits first • Just by implementing proper facility

management, electricity and gas costs can be reduced 5-10%

In your language: • After saving energy costs through proper

facility management, investors can target energy saving strategies with a 2~3 year payback period

• This means increased NOI and IRR for your investment portfolio!

Can 5.6% CoC yield be increased? Office Tower Valuation Example - Cash on Cash

Year 1

Rental Income 3,812,987,664

Maintenance Income 3,336,364,206

Interest Income from Deposit 158,874,486

Total Revenue 7,308,226,356

Maintenance Expenses

- FM fees 893,817,323

- Electricity & Gas 753,573,750

- Water 50,408,090

- Insurance 28,707,608

- Taxes 255,038,931

Total Maintenance Expense 1,981,545,702

Net Operating Income 5,326,680,654

Terminal Value

Total Cash Flow 5,326,680,654

Total Equity (30%) ₩24,230,924,485

Total Loan (70%) ₩56,538,823,799

Total Investment ₩80,769,748,284

Interest Rate 7%

Total Revenue 7,308,226,356

- Electricity 753,573,750

- Other 1,227,971,952

Total Maintenance Expense 1,981,545,702

NOI (Pre-Leverage) 5,326,680,654

Interest Payments 3,957,717,666

NOI (Post Leverage) 1,368,962,988

Cash on Cash Yield 5.6%

Busan Office Tower

51,480 square meters

Unit: Korean Won

Assumptions

GFA, PY 15,576

Deposit/PY 300,000

Monthly Rent/PY 24,000

Monthly Maintenance/PY 21,000

Total Deposit 3,971,862,150

Total Mth. Rent 317,748,972

Total Mth.

Maintenance - 278,030,351

Vacancy 15.0%

Interest Rate on Deposit 4.0%

Annual Escalation (Rent, Maint.) 3.0%

Discount Rate 8.0%

Terminal Cap. Rate 7.0%

Property Value (W mm) 80,770

Is this too much? Is it energy efficient?

How much can we improve?

Example: Busan Office Tower, South Korea

Description Current Baseline

Utility Costs Down 20%

Utility Costs Down 30%

Gross Revenues KRW 7,308 mil KRW 7,308 mil KRW 7,308 mil

SG&A Expenses KRW 1,982 mil KRW 1,831 mil KRW 1,755 mil

Net Operating Income KRW 5,326 mil KRW 5,477 mil KRW 5,553 mil

Annual Savings KRW 151 mil KRW 227 mil

Cash-on-cash profitability in year 1 5.6% 6.3% 6.6%

Increase over baseline 0.6% 1.0%

Valuation (KRW million) (DCF valuation @ 8% discount rate)

KRW 80,770 KRW 83,056 KRW 84,198

Increase in Asset Value (over baseline) KRW 2,285 KRW 3,428

Example: Office Tower, South Korea As utility costs decrease, % cash-on-cash yield increases!

What is the Value of “Passive Design” to Investors? • What is Passive Design? • Why Passive Design FIRST? • High performance opportunities at minimum cost!

What is passive design? ◉Quality passive design reduces both the bills and carbon footprint by cutting reliance on artificial heating and cooling. ◉There are a number of factors that go into passive design including orientation, insulation, shading and windows.

Pictured: Sefaira, a high-performance building design program

What is Passive Design FIRST?

Passive Design is the cheapest way to build green!

High performance opportunities at minimum cost!

• Passive design saves construction costs (CAPEX) and operational costs (OPEX)

• In the case of new buildings, investors should check whether their architects and engineers are using passive design to maximize profits!

Energy Modeling

Smaller HVAC (Right Sizing)

Save CAPEX

Save OPEX

Increased Profits!

Passive Design First! (Energy Load Reduction)

What is the Value of BIM to Investors? • The Cost to Owners • What is BIM? • BIM Saves Time and Money • BIM “Clash Detection” Testimonial

3

The Cost to Owners

30% of construction cost is rework

Over 60% of major capital programs fail to meet cost and schedule targets

55% of maintenance remains reactive

Source: The Value of BIM for Owners: Save Time and Money During the Building Lifecycle (Autodesk, 2016)

◉A 3D-modeling process that equips building professionals with the insight and tools to more efficiently plan, design, construct, and manage buildings and infrastructure.

◉BIM saves owners’ time and money during the building lifecycle.

Pictured: A 3D BIM model

What is Building Information Modeling (BIM)?

BIM Saves Time and Money

Virtual Design and Construction (VDC) utilizes 3D models that automatically identify design conflicts and constructability issues at an early stage when they are easy to resolve. This means:

◉More accurate cost estimates

◉More accurate bill of quantities, less change orders during construction

◉5~10% lower construction costs ◉4~6 months shorter construction period

BIM “Clash Detection” Testimonial 2016.01.27

“Not too long ago, [a BIM company] was hired by [a Japanese contractor] who was working on subway stations in [a city in the Asia Pacific]. Our job was to take 2D/DWG Construction Drawings made by the

architects and engineers and produce new 3D Construction Drawings that were “clash free” prior to construction. The objective was to minimize unforeseen change orders due to conflicts and clashes. By

identifying them virtually in BIM, we were able to identify and resolve the conflicts in the design stage.

And so, there are savings by avoiding potential conflicts and clashes during the construction phase. Other developers use BIM not only for better coordinated drawings (“clash free”) but to also generate the Bill of Quantities (BOQ) while the drawings are being produced. This enables them to

determine their cost of materials prior to bidding. We are starting to see this requirement to be more in demand to ensure contractors’ proposals are price competitive.

It takes time to create and execute a BIM Strategy. It may take 20% more time to produce better drawings (well-coordinated and clash free). But using BIM saves money because there are less change orders

during construction. These change orders may range from 10 to 25% of the contingency budget. ”

Governments are Getting Committed Increased building regulations to combat climate change

EU: Member States have to ensure that from 2019, new buildings occupied and owned by public authorities are nearly zero-energy buildings, and that from 2021 all new buildings are nearly zero-energy buildings

Japan: the Energy Conservation Law obliges building owners to submit a report on the energy conservation measures prior to construction

Philippines: the government’s Green Building Act provides developers and landlords tax breaks and other benefits if they comply with the green building standards

Australia: the Commercial Building Disclosure Program requires the disclosure of Building Energy Efficiency Certificates during the sale, lease or sub-lease of office space larger than 2,000 sqm

China: updated its Environmental Protection Law, with soaring pollution penalties in Beijing. China also pledged to cap its rapidly growing carbon emissions by 2030, or earlier if possible

Indonesia: the government has recently established a National Green Building Code, with requirements already implemented in Jakarta and planned for other cities

Singapore: the Building Control Act mandates environmental sustainability standards for new and existing buildings, as well as monitoring of overall energy performance of the building stock

UK: under the Energy Act 2011, the government intends to mandate a minimum building energy performance rating of E on letting residential and non-domestic buildings by 2018

US: besides Obama’s Clean Power Plan, mandatory disclosure of building energy use is already adopted in most of the largest US cities (and some states)

= FINANCIAL RISK to REAL ESTATE VALUES! Source: Global Real Estate Sustainability Benchmark (GRESB)

Bringing it all together…

BUILD RIGHT

DESIGN RIGHT

OPERATE RIGHT

To maximize PROFIT!

Any questions ?

Thank you! Contact us at the Korea Green Building Council: Chungha Cha, Vice Chairman cha@koreagbc.org Kristin Kim, Marketing and Communications Manager kristin.kim@koreagbc.org 62, Itaewo-ro 27-gil, Yongsan-gu Seoul, Republic of Korea 04349 T: 82.2.773.0115 F: 82.2.773.2560 www.koreagbc.com