NEWSLETTER Q1 2013

Emerging Asias accelerating activity in green

construction
If energy consumption in India and China rose to

American per capita levels, worldwide consumption

would increase by 139%, even if populations stayed
the same.
Buildings are a significant contributor to Asias
energy usage it is estimated that they consume 30%
to 40% of total energy usage. With more than two
thirds of the worlds population and a rapidly
emerging and urbanizing middle class, Asia and its
new buildings will have a decisive impact on
worldwide carbon emissions over the next few
decades.
Today, per capita emissions in emerging Asia are still
low compared to the ones of developed nations. But
as Asias rural population moves to the cities, per
capita emission will grow considerably. In general,
urban populations consume about five to ten times
more energy than rural populations. By 2030, urban
China is forecasted to account for 20% of global
energy consumption.
Figure 1: What emissions path will Asias urbanizing
nations take?
25"

tCO2%emi)ed%per%person%

The$size$of$the$circles$indicate$
todays$total$CO2$emissions %%
20"

USA%
15"

10"

Germany%

China%

France%

5"

India%

Switzerland%

Indonesia%

0"
0%"

10%"

20%"

30%"

40%"

50%"

60%"

70%"

80%"

90%"

100%"

urban%share%of%total%popula6on%

In China, new building stock nearly tripled between

1995 and 2005. In recent years, China has been
adding roughly two billion square meters of new
buildings annually of which 80% are deemed energyguzzling. Today, there are 40 billion square meters
of built-up area. Projections estimate that the Chinese
building stock will triple again over the next two
decades. Until 2020, 10 to 15 billion square meters of
residential and 10 billion square meters of public new
buildings will be constructed in Chinese cities. By
2030, the Peoples Republic will have built more new
properties than the total amount of properties that
exist today in the US. China is a giant construction
market, far ahead of other still huge emerging
markets in Asia.

Table 1: Size of construction market, USD billion

China
India
South Korea
Japan
Southeast Asia

2010
550
165
74
92
46

2015
955
300
140
102
81

The building sector in China is known for low

durability,
wasteful
energy
use
and
low
environmental
quality.
Developers
generally
emphasize building speed and will often do anything
to maximize profits, even if it means compromising
building quality. An average Chinese building lasts 25
to 30 years, compared with 74 years in the US and
132 years in the UK.
As Chinas huge cities frequently confront resource
limitations and intolerable pollution, the government
has recognized the need for more efficient and
sustainable buildings. Unlike countries that
industrialized earlier, China has the chance to marry
sustainable development with rapid growth. With
little or even no incremental cost, buildings that
consume only a fraction of the energy used in
conventional buildings are an obvious area to
incentivize action.
However, there is still little green building activity in
emerging Asia, mainly because developers in these
markets fear that building green will be too expensive
and take too long. Indeed it requires some knowhow
and experience to select the right measures that make
a development more sustainable and not too costly.
In addition, since property prices in emerging Asia
are generally much lower than in developed
countries, the incremental cost of the green attributes
needs to be lower and in an affordable relation to
basic construction cost. These issues, however, can be
overcome. For example, improvements in design and
insulation increase energy efficiency at little cost,
while the cost of geothermal or solar energy solutions
often still exceed their relative benefit. The challenge
is to select the most effective, cost efficient measures
to build green that appeal to a broad range of buyers.
Spreading the word
Over the last ten years, China has gone from just one
certified green building project to nearly 600 more
than 550 of them built after 2007. Drivers of the
trend include concern about climate change,
enhancement of brand image, and a better-informed
market. New green building floor area has grown to
over 8 million square meters by 2012. However, this
1

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Hong Kong | Infinitus Plaza, 199 Des Voeux Road | Central | Switzerland | Asylstrasse 77 | 8032 Zurich | www.dienersyz.com | info@dienersyz.com

NEWSLETTER Q1 2013

still amounts to less than 0.5% of annual new

construction floor space in urban China, just a small
fraction of its potential size.
While the few commercial buildings targeted at
multinationals typically choose the US LEED
(Leadership in Energy and Environmental Design)
certification due to its international recognition, the
Chinese Three-Star System introduced in 2006
has also seen strong growth, with roughly 200
buildings certified at the highest level of the program.
Besides residential developments, most of these
certifications are for government buildings. Chinese
leaders believe that to initiate change, the
government must step in as a pioneer.
However, the increasing popularity of the green
agenda in Asia is not just driven by governments but
also by an awakened civil society that is spurring
developers to engage in more conscientious
development programs.
Figure 2: Increasing searches for green buildings
on Baidu, Chinas leading internet search engine
800"
700"

A"er%last%years%launch%of%the%new%Five6Year%Plan,%there%
was%a%massive%peak%in%searches%for%green%buildings !!

search!index!

600"

Singapore, named greenest city by the Asian

Green City Index that compares 22 cities in Asia,
has attracted numerous multinational companies
to base their regional headquarters there. Many
multinationals have strict corporate sustainability
measures and the wide availability of green office
buildings and infrastructure make Singapore an
attractive choice.
Besides new construction, retrofits take an even
more important role to green the city, but green
measures are also more expensive for retrofits
than for new buildings. Singapores Building and
Construction Authority (BCA) launched a
Building Retrofit Energy Efficiency Financing
pilot scheme last September. By collaborating
with financial institutions, the program helps
facilitate loans of up to SGD 5 million (USD 3.95
million) for commercial building owners and
energy services companies to carry out retrofits
under an energy performance contract that
specifies a minimum level of energy savings to be
achieved. Under the scheme, BCA shares the risk
of default with the banks issuing the loans.
Singapores target is to green 80% of its building
stock by 2030. When the target was launched in
2005, there were only 17 green building projects
on the island state. Today, the number is more
than 940. This translates to more than 28 million
square meters of gross floor area (or 12% of the
total gross floor area) in Singapore.

500"
400"
300"
200"
100"
0"
2006"

Singapore as a role model

2007"

2008"

2009"

2010"

2011"

2012"

2013"

Despite growing public awareness about the

environmental benefits of green buildings, as well as
increasing governmental support, there is still limited
public awareness of the health and comfort benefits,
as well as of the associated economic rewards, that
green buildings provide. As a result, genuine demand
from the market to construct green buildings is also
limited. A 2012 survey reports that energy cost
savings and energy security are the most important
drivers to build green, followed by government policy
and enhanced brand or public image.
If the word spreads that green also means healthier
and more comfortable living, there could be a much
greater boom, especially since health issues are
becoming increasingly more important to Asian
families. As we spend 90% of our time indoors,
buildings largely determine the quality of the air we
breathe, as well as the temperature and light quality
we experience. At home, this means healthier sleep,
better learning, and more comfort. At work it leads to
more motivation, fewer sick days, and higher
productivity. As incomes and living standards rise
and awareness improves, consumers will demand
more durable, safe and healthy buildings.

Further, Singapore inspired governments in

Thailand and Malaysia that have also started to
incentivize green buildings over the last 10 years.
In Europe and the US, studies show that the market
pays a premium for green buildings that not only
outweighs the additional construction cost, but also
the expected energy savings. It seems homeowners
are ready to pay for better indoor quality at home,
and corporations for a better environment in office
buildings. Because salaries represent by far the
largest cost factor for the average corporate tenant,
sustainable buildings create value by reducing sick
days and improving productivity.
In the 2009 China Greentech Initiative Green
Building Survey, the majority of Chinese building
professionals believed that buyers were willing to pay
a massive premium up to 20% for green buildings.
The RICS Global Property Sustainability Survey of the
same year found similar results, although not as
extreme. Owners and investors in the BRIC countries
would pay up to 10% more for sustainable buildings,
with governments of India and China supporting the
stance. For developed nations, owners and investors
willingness to pay is lower as basic building standards
are already high. Governments on the other hand
traditionally act as role models.
2

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NEWSLETTER Q1 2013

Table 2: Up to what premium would you be willing

to pay for a sustainable building (RICS survey)?
Russia
Brazil
India
China
Australia
Canada
Germany
UK
USA

Owners
10%
10%
10%
10%

Investors Governments
10%
3%
10%
0%
10%
12%
10%
10%

5%
5%
5%
5%
7%

5%
5%
8%
5%
5%

13%
15%
15%
10%
10%

This indicates that emerging markets can generate

demand to self-sustain green building activity in the
mid to long run. For now, governmental incentives
are still needed.
Governmental catalysts
China has set a goal of reducing the economys carbon
intensity by 40% to 45% by 2020 compared to 2005
levels. As improving energy efficiency in buildings is
the least costly carbon abatement strategy available,
the Chinese government has a strong motivation to
promote green buildings.
In 2010, the central government mandated that new
buildings should use 50% less energy compared to the
existing building stock, with a more ambitious target
of 65% for major cities such as Beijing, Shanghai and
Tianjin to be extended to the rest of the country
over time. The government will step up enforcement
of national building energy codes beyond first tier
cities, where substantial progress is made, to the
faster growing second, third and fourth tier cities
where compliance still lags.
The goal is that energy-efficient buildings account for
30% of all new construction projects nationwide by
2020 in order to bring its building energy
consumption ratio closer to that of developed
countries.
A document jointly released by the Ministry of
Finance and the Ministry of Housing and UrbanRural Development (MOHURD) stated that policy
incentives will be increased, industry standards
improved, and related industries will be developed to
meet the target.
According to the document, construction of energyefficient buildings will be subsidized according to the
Three-Star System. Buildings with the highest, three
star certification are eligible to get up to RMB 80
(USD 12) per square meter, and those with two stars
can get up to RMB 45 (USD 7). The first subsidies for
green buildings were already granted in 2010.
Further, all government-funded public welfare
projects and low-income housing projects shall apply
green construction standards by 2014.
Chinas new Five-Year Plan issued in 2012, the
greenest ever, aims to accelerate the green building
market. It consists of 24 general targets, whereof 12
are mandatory. Out of these 12, six are environment
related. Once a policy is established at a central
government
level,
one
can
assume
that

implementation will start kicking in as these plans are

strictly enforced.
Moreover, the government also allows banks to grant
mortgage discounts to eco-friendly homes. Finally,
small towns where newly-built green buildings take
up over 30% of the total land area will be named
green towns and will be granted one-off subsidies of
RMB 10 to 20 million.
Truly green?
There are still numerous obstacles to the
development of green buildings, but one of the
biggest is lack of consensus over what makes a
building green. Only if there is a widely accepted
definition of green buildings that certifies that the
associated benefits are true, buyers and investors will
be willing to pay for it. It is likely the only path by
which a sustainable green building market will
emerge.
In China, the Three-Star System is by now widely
known and accepted by the public. However, the
standard, originally modeled upon the US LEED
criteria, needs to be developed further and made
simpler and more transparent. It is still quite
subjective and has more qualitative than quantitative
indicators. While it already offers some provincial
flexibility, local certification offices may eliminate
specific items if they are not compatible with
geographic or climate conditions of the local area. The
impact is that green building certification practices
vary, and the rigidity in measurement differs from
province to province.

Short history of green building ratings

Up until the early 1990s, there was no widely
accepted method to assess the overall impact of a
building in terms of its environmental
performance. The UK took a leadership role in
measuring and rating green buildings, an
approach that was adopted in various guises
across the globe.
1990: UKs BRE Environmental Assessment
Method (BREEAM) is the first scheme launched
to address energy efficiency in buildings
1994: Switzerland introduces the MINERGIE
standard. Today it boasts the highest density of
certified green properties in the world
1996: Hong Kong launches the Building
Environmental Assessment Method (HKBEAM)
1998: US launches LEED
1998: Australia introduces NABERS and later
Green Star in 2005
2002: Japan establishes CASBEE
2005: Singapore launches Green Mark
2006: China initiates the Three-Star System
2009: Malaysia launches the Green Building
Index
3

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NEWSLETTER Q1 2013

Because building code enforcement is inconsistent

across provinces, developers may sometimes have
little incentive to follow legitimate green building
measures. There are 21 so-called Green Building
Label Management Offices that are authorized to
review projects across China for one or two star
certification, while a three star rating must be
evaluated by a centralized institute in Beijing. As
building green expands, the challenge will be to
ensure consistent and objective evaluators across
certification levels. A lack of uniformity limits the
reach and market impact of Chinas green building
activities. The application process for the new
government subsidies is also unclear at both the
central and local levels, and streamlining is required
to make the incentives calculable for developers.

specifications. Developers are accustomed to building

quickly and cheaply. In the long run without
government support, stakeholders can only be aligned
if buyers and tenants are willing to pay more for
green buildings, if the premium paid outweighs the
upfront cost, and if both investors/owners and
developers are aligned to split the associated profit.
A number of actions must be taken to overcome the
challenges, to close the information gap, and to
improve market demand:

How to tackle the remaining challenges

Another 2012 survey in China reveals that lack of
technical expertise was named the top barrier to
energy efficient buildings, named by 23% of the
executives interviewed. Interestingly, this number
was only 16% the year before, indicating that decision
makers are only now becoming aware of what
building green actually means.
Figure 3: Barriers to invest in green buildings in
China, 2012 versus 2011

16%$

Lack$of$technical$exper;se$

23%$

Uncertainty$regarding$savings/
performance$

16%$
16%$
17%$

Insucient$payback/ROI$

14%$

Lack$of$funding$

14%$

17%$

12%$
13%$

Landlord/tenant$split$incen;ves$
No$organiza;onal$ownership/$
dedicated$aMen;on$

8%$
11%$

Lack$of$awareness$about$
opportuni;es$

13%$
8%$

0%$
2011$

5%$

10%$ 15%$ 20%$ 25%$

2012$

China has a shortage of professionals who are

qualified to execute integrated green building design
and to perform operations and maintenance for these
buildings. International education and experience is
highly welcomed by governments, developers, and
constructions companies to improve the quality
standards.
Further, Chinese developers have stated they are
hesitant to build green because of higher upfront
installation and labor costs due to green design

Improve
measurements
and
quantitative
indicators for green building certification
Execute a clear and accessible process for
developers to take advantage of green building
subsidies
Ensure and monitor adequate training for the
green building construction and facilities
management workforce
Improve public awareness of the benefits of green
buildings, specifically regarding healthier indoor
environment and reduced operation costs

Implications for Investors

Emerging Asia has the opportunity to avoid the
unsustainable development patterns of the 50ies to
the 80ies in the west. Building green is one, if not the
most, crucial part of the solution, and will also prove
to be commercially very rewarding if challenges such
as public awareness, unambiguous definitions, and
proper alignment between all stakeholders are
overcome.
Encouragingly, evidence suggests that green building
economics in emerging Asia are favorable. Consumers
are increasingly willing to pay more for green
buildings, the cost premium for developers can be
modest, and energy savings can translate into short
payback periods for owners. In addition, as Asian
governments continue to reduce the carbon intensity
of their economies, green buildings are the ideal area
for carbon reduction at minimal cost.
To start with, the 2% to 10% increased building cost
(compared to very low cost conventional buildings)
can easily be recovered within two to four years
through the 30% to 50% reduction in operating costs
and energy savings that green buildings offer.
Further, rents are typically 3% to 10% higher for
green buildings compared to conventional buildings,
and the resale value of green buildings increases by
5% to 15%, considerably improving the return of the
investment.
From a risk perspective, green properties are less
exposed to business cycle volatility and less prone to
vacancy risks since they are generally preferred to
conventional buildings. As the market anticipates
stricter future regulation and as resale risk is also
mitigated, capitalization rates are generally about
0.50% to 0.60% lower. Finally and maybe even most
importantly, building life is massively extended, from
an average of 20 years to at least 50 years. In
4

China | Suite 706, 291 Fumin Road | 200031 Shanghai | Indonesia | PT ENKA, ANZ Tower 17F, Jl. Jenderal Sudirman Kav. 33A, 10220 Jakarta
Hong Kong | Infinitus Plaza, 199 Des Voeux Road | Central | Switzerland | Asylstrasse 77 | 8032 Zurich | www.dienersyz.com | info@dienersyz.com

NEWSLETTER Q1 2013

addition, if the floor layout is designed to be flexible

in use, the building value will also depreciate much
slower than normal.
Non-certified buildings on the other hand face
valuation downgrades and substantial investment in
increasingly mandatory sustainability enhancement.
Business behavior is changing rapidly as well.
Corporate responsibility policies require firms to
occupy green real estate globally, which also has a
substantial impact on the demand in the commercial
real estate sector. More and more firms realize that
occupying green space improves their corporate
reputation and their ability to attract and retain
employees.
The premium for green buildings observed in the
market is hence not just attributed to energy cost
savings, but also to softer factors valued by tenants.
Higher comfort, better ventilation and more natural
light result in improved health, higher performance of
students or employees as well as lower sick rates.
Given that salaries are the bulk part of the cost for an
office based corporation, the improvement in
employee productivity and the reduction in
absenteeism pays for the green premium many times
over. n

Diener Syz Real Estate

Diener Syz Real Estate is an investment manager
offering specialized expertise in Asias real estate
markets. Our strong local presence allows direct
access to the most attractive investment
opportunities. We strongly believe that
sustainable real estate provides both financial and
environmental benefits.
Our investment approach takes advantage of a
broad range of investment instruments to
optimally address prevailing market cycles in
Asias very dynamic market environment. We
invest both capital and knowhow into sustainable
real estate development projects in Asia, sourced
through our strong network of local developers in
cooperation with government agencies.
Contact:
Dr. Juerg Syz, MBA INSEAD, CFA
juerg.syz@dienersyz.com
www.dienersyz.com

Sources
CB Richard Ellis; China Daily; CEIC; Centaline; CitiBank; Colliers International; Credit Suisse Research; Cushman & Wakefield;
Deloitte; Diener Syz Real Estate; DTZ Research; Economist Intelligence Unit; Frost and Sullivan; GaveKal Dragonomics; IMF;
institute for building efficiency; Jones Lang LaSalle; Knight Frank Research; KPMG; LaSalle Investment Management; McKinsey
Global Institute; Morgan Stanley Research; National, Provincial, and Municipal Bureaus of Statistics; Nomura Research; Peoples
Bank of China; Political & Economic Risk Consultancy Ltd; PricewaterhouseCoopers; Reuters Real Estate; Savills; Shanghai Daily;
UBS Research; WTO; Xinhuanet

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5
China | Suite 706, 291 Fumin Road | 200031 Shanghai | Indonesia | PT ENKA, ANZ Tower 17F, Jl. Jenderal Sudirman Kav. 33A, 10220 Jakarta
Hong Kong | Infinitus Plaza, 199 Des Voeux Road | Central | Switzerland | Asylstrasse 77 | 8032 Zurich | www.dienersyz.com | info@dienersyz.com