An increasing number of institutional investors put sustainability at the core of their real estate investment strategies, with a predominant focus on reducing energy consumption and CO2 emissions. Meanwhile, other themes like water consumption are often overlooked. This represents a missed opportunity, as there are many avenues to explore and to proactively engage with the topic. In honour of World Water Day, Longevity Partners and Smartvatten have joint forces to discuss the topic and its relation to the Dutch Real estate industry. What makes water conservation necessary and what options exist for responsible water consumption?
The impact of water scarcity on real estate
In the past 20 years, 90% of global disasters have been caused by floods, storms, heat waves and other weather related events. These extreme weather conditions will only become more prevalent due to climate change. In some parts of the world, this will lead to an excess in water supply, while in others it will cause severe water shortages. Water has been an important theme throughout Dutch history. The significant investments made in dykes, the Delta Works, and other infrastructures, underline our focus on protecting the country from flooding. Meanwhile, however, we lag behind other European countries in terms of protection against droughts. The Dutch water infrastructure is primarily geared towards discharging water, rather than retaining it, of which the consequences became apparent in recent years. Dozens of water records were broken, while our country’s vulnerability was exposed during extended periods of heat and drought. Dutch water supply companies experience increased challenges in extracting potable water, due to rainfall deficits and lowering groundwater tables. Moreover, the National Institute for Public Health and Environment (Rijksinstituut voor Volksgezondheid en Milieu, RIVM) forecasts that, at current growth rates, consumption of drinking water will increase with 30% by 2040. This will not only pose challenges to drinking water companies, the agricultural sector, private citizens and dyke managers, but also to the real estate industry.
Extended periods of drought and subsequent lowering of the groundwater table leads to land subsidence, which can potentially damage foundations and cause cracks in facades. It is expected that these climate change induced effects will continue to negatively impact foundations until 2050, also outside the Netherlands. In France, for instance, maintenance costs for properties have increased by over 50% during the past 20 years as a result of land subsidence, forcing insurance companies to charge higher premiums. While in France foundations are covered under public insurance schemes, foundations are often not included in Dutch insurance policies. As a result, approximately one million residential and commercial buildings are uninsured, thus potentially facing higher costs in the future. Damages caused by land subsidence will be particularly prevalent in the Randstad area, as this features the highest urban density in the Netherlands. As damages are expected to be in the tens of billions of Euros, it is essential that The Netherlands focuses on climate change adaptation and on futureproofing its real estate.
Figure 1: Origin reports of foundational damage (KCAF; September 2020)
Stranded assets and the necessity of water conservation
Changing rules and regulations make an even stronger case for water conservation. The Dutch government has already taken measures against water shortages and drought, and regularly appeals to its citizens to conserve water. In the past few years, water prices have seen a slight annual increase, and additional increases are to be expected in the coming years. By not anticipating to these regulatory changes and changes in water prices, one might incur unnecessary costs. Moreover, a building’s value may decrease significantly, putting it at risk of turning into a stranded asset. This can potentially be caused by new, more stringent, governmental interventions, or investors’ sustainability requirements.
The power of sustainability within the real estate industry
An increasing number of investors in Europe and beyond value a comprehensive Environmental, Social and Corporate Governance policy. Furthermore, research demonstrates the added value of investing in sustainable real estate. It is becoming increasingly evident that incorporating ESG considerations into a corporate strategy can offer a solid business case. Building owners have reported that green buildings display an increase in asset value over conventional buildings. Moreover, green buildings are more energy efficient while they are also found to consume 11% less water on average. As a result, the operational costs of green buildings can decrease by 37%, while assets holding a green building certificate can be worth up to 43% more. Sustainability is therefore becoming an integral part of the valuation process. This requires a systematic approach to strategically assess the sustainability performance of real estate, including its water consumption.
To this end, investors often utilize the Global Real Estate Sustainability Benchmark (GRESB). The benchmark assesses the ESG performance of real estate players and their portfolios on an annual basis. Participants are scored between one and five stars, which also acts as a means of communication towards investors. Whereas GRESB assesses ESG performance on a fund level, other certification schemes provide a framework for assessing performance on an asset level. These schemes can simultaneously be used as input for an entity’s GRESB submission. One of the most widely adopted certification schemes on an asset level is the Building Research Establishment Environmental Assessment Method (BREEAM). The scheme measures a building’s performance in a series of categories, including water. It allows for comparison with other certified buildings, while also highlighting areas for improvement for, including but not limited to, water conservation.
Driven by the more ambitious and stringent sustainability objectives that investors set, property managers, owners, and users experience increased pressure to conserve water. Meanwhile however, BREEAM and GRESB scores on both national and European levels show that many assets lack performance in the water category. Property owners often lack detailed insights into their assets’ water consumption. Moreover, meter readings are often processed offline, while water reuse is only a rarity. Without complete consumption data, it is often challenging to create awareness around water use and identify appropriate water conservation solutions. Insights, however, can be gained through smart meters, sub-meters, and automatic leak detection systems as they allow for identification of anomalies in an asset’s consumption. Meanwhile, the implementation of these systems is also valued by BREEAM. Until now, a relative low score for the water category had a limited impact on the overall BREEAM rating. This is set to change in the new BREEAM International 2020 version, as the category’s relative weight to the overall rating will increase. As a result, property owners need to invest in water conserving technologies and policies to attain a higher BREEAM rating. Moreover, the new version introduces the ‘Resilience’ category, emphasising the need for taking climate change mitigation steps. This is also underlined by Peter Gabriëls, project manager at the Dutch Green Building Council (DGBC):
"With this new category, a risk assessment of every climate related risk is accounted for – in addition to the already existing flood risk assessment – such as water damage due to peak downpours and the effects of drought. An extra incentive was added by introducing so-called 'Exemplary Credits', which translate climate related risks to the value of the building."
- Peter Gabriëls, DGBC -”
Figure 2: The NOW Building in Hoofddorp with a BREEAM-NL In Use rating of 4 stars, in part due to water-saving measures.
Although water efficient technologies are only applied to a limited extend, their added value is clearly demonstrated by the aforementioned cost reductions and future rises in water prices.
The NOW Building in Hoofddorp is a prime example of successful integration of water efficiency measures on an asset level. It features water efficient sanitary facilities, appliances, fixtures, and sub-metres, while rainwater is used for flushing toilets. A green roof collects and buffers rain water while the asset is also connected to a separate sewerage system. This minimises runoff and alleviates pressure on sewerage treatment during extreme downpours. Partly because of these measures, the NOW Building was awarded four out of five stars (Excellent) for its BREEAM-NL In Use assessment.
On an organisational level, institutional landlords also recognise the importance and possibilities of water conservation. Heimstaden, for example, has committed itself to a portfolio-wide objective to reduce water consumption with 1% per square meter per annum by 2030. By defining this objective, and defining a roadmap accordingly, the company has created the urgency to start implementing the required measures today.
A focus on water efficient and climate-adaptive real estate
UN predictions show that approximately 40% of the world population will face water scarcity by 2030. Consequently, water is a crucial item for the Sustainable Development Goals (SDGs). Without water – and without acceptable water management – none of these SDGs can be achieved. The construction sector in the Netherlands is responsible for 30% of the country’s water consumption. This means that the real estate industry can and must take a leading role in sustainable water management. At the Climate Adaptation Summit of 2021 the Minister of Infrastructure and Water Management Cora van Nieuwenhuizen, emphasized that our country will continue to innovate in order to make our water management system more sustainable. Regulations will become more stringent and objectives more ambitious. Combined with the risks involved in non-sustainable investments, entities that fail to adequately respond to water scarcity will expose investment portfolios to increased risks. Transparency in sustainability performance will simultaneously play a more significant role, making insight into water consumption, among others, even more important.
Fortunately, there is an increasing interest in sustainable water management, both in large pan-European real estate funds on the one hand and local real estate managers on the other. Although awareness around water consumption is increasing, there is still much room for improvement. We collectively hold a shared responsibility for future generations, and it is clear that sound water management solutions are critical. We can no longer ignore the fact that water-efficient and climate-adaptive real estate is an integral part of sustainable development.
Longevity Partners B.V. : Olaf Amersfoort, Sustainability & Energy Analyst - [email protected]
With thanks to L’Etoile Properties (manager NOW building) and Heimstaden