Impacts of climate change for Real Estate sector in India

Green buildings are gaining momentum around the world, given their financial benefits and smaller environmental and resource use footprint.

Energy insecurity, water scarcity, and climate change pose growing risks for the real estate sector India, however the connections between these trends and financial impacts are not well understood by analysts, investors, companies, and governments. These problems will affect the risk and return associated with investments in (1) commercial creating projects and (2) companies involved in commercial real estate development and investing. The limited energy and water infrastructure rapidly growing demand for energy and water resources and physical exposure and vulnerability to climate alter impacts, all increase the likelihood and magnitude of monetary impacts. Green creating investments can reduce energy and water-related risks even though achieving net positive returns in as few as three years.

Evaluating the risks

The risks are in the following categories

Energy insecurity risks – which includes higher electricity/diesel costs and shortages—will likely impact main cities in as energy demand is expected to outpace production capacity and energy infrastructure. India faces the fantastic price and shortage risks, thinking about the already existing—and worsening—energy supply-demand gap.

Water scarcity risks – which includes poor availability and quality—are greatest in India. Many river basins in the country are expected to face acute anxiety or shortage by 2025, and groundwater sources are rapidly declining.  The seasonal shortages are expected to worsen (and already have) around significant metropolitan areas due to high demand, water pollution, and climate change impacts.

Climate alter risks – developed by much more frequent and intense floods, droughts, storms, and precipitation—are difficult to predict with certainty, but are expected to have considerable physical and economic impacts on all the focus countries over the next decade. Coastal and low-lying cities like Mumbai, Kolkata, and Chennai face severe flood and storm risks.

These three trends are interrelated, thus further exacerbating the magnitude and likelihood of their impacts on the building sector. For example, water scarcity can worsen energy insecurity due to the fact water is required for cooling in thermal and nuclear power plants, and as an input in hydropower plants. Similarly, climate change can constrain water supply (through changes in precipitation, for example) and enhance the demand for energy and water during heat waves.

Some of the direct outcomes of energy insecurity, water scarcity, and climate alter trends on existing and planned commercial buildings can consist of:

Higher utility costs – driven by growing prices and unreliable power/water. This can lead to greater/uncertain operating cash flows, much less competitive rental rates, and lower occupancy rates. Constructing utility use intensity is also expected to increase as customers demand contemporary building characteristics like air conditioning and landscaping, therefore further growing utility costs.

Higher nonutility operating expenses – such as accelerated creating depreciation, greater operations maintenance, reserve and replacement (OMRR) expenses and greater insurance premiums—which can lead to much less competitive rental rates and lower occupancy. OMRR price increases are driven by:

Physical developing deterioration due to more frequent/intense weather events and
Obsolescence arising from energy- and water-inefficient developing systems.

Higher construction expenses- which includes input costs, capital costs, and lost rental income—driven by:

Project/permitting delays caused by local energy insecurity, water scarcity, and the increased frequency of extreme weather events due to climate alter and
Pass-by way of of fuel expenses from transportation of material inputs, particularly imports

These effects on individual projects will pass via to the investors and developers, affecting them adversely.

Real Estate Investment Trusts (REITs) – Greater nonutility operating expenses from a REIT’s portfolio—like insurance premiums and maintenance expenses—will flow directly to the REIT’s operating cash flow. Higher utility expenses may possibly be passed on to tenants though this might have adverse impacts on rental/occupancy rates, depending on prevailing marketplace conditions.

Real Estate Developers – Regardless of market conditions, real estate developers will have to contend with higher capital costs developed by project/permitting delays. Developers who hold and lease completed projects (more typical under unfavorable marketplace conditions) will also face the risk of operating price increases and lost rental income in the case of project delays.

This therefore creates significant marketplace opportunities for Green Buildings. Green building investments can minimize vulnerability to operational risks and offer net monetary returns relative to conventional buildings.

Energy and water-saving technologies (like targeted task lighting, solar water heating, and rainwater harvesting) can minimize utility expenses for constructing owners and/or tenants (thus decreasing operating costs and/or enhancing rentability).
Green constructing marketplace in India are nascent, but growth is likely, specifically as (1) water scarcity, energy insecurity, and climate change impacts worsen and (2) awareness of monetary and social positive aspects grows in the private and public sectors.

New and retrofitted green buildings in this region have demonstrated net positive returns on energy and water efficiency investments. According to a 2008 Asia Business Council report:

The very first Leadership in Energy and Environmental Design (LEED, a green developing rating system) Platinum constructing in India—the 2003 CII-Godrej Green Organization Center (CIIGodrej GBC)—achieved a 55 percent reduction (120,000 kWh/year) in energy use, and a 35 percent reduction in potable water consumption, with an expected seven-year payback period on green investments
Much more recently built LEED Platinum/Gold buildings in India, such as the Patni Understanding Center, have achieved payback periods on green investments of just 3 to four years.

Energy efficiency investments also safeguard operating expenses from rising electricity costs. For a typical Indian commercial building, HSBC estimates that a 10 percent increase in power expenses increases total operating costs by 1 percent in a normal developing. In a green developing, the pass-by means of effect is only .50 to .85 percent of expenses due to the energy savings.

Green buildings in India

Green creating investments in India have demonstrated a net positive return in as few as three years. Green buildings offer a range of cost and revenue benefits over their lifetime. These include utility price savings, rental premiums, and longer creating lifetimes. A considerable sales or rental premium is presently challenging to achieve, particularly given the present economic downturn. Even so, operational savings are achievable instantly by means of reduced water and energy use. Though green buildings typically call for extra design and construction expenses, payback periods in recent buildings have been reasonable. In India, for example, numerous green buildings constructed since 2005 have achieved positive returns on green investments in three to five years.

Given the growth prospective of Indian metropolitan cities with the rapid rise of IT/ITES, there is growing interest in green buildings. As of 2009, more than 140 buildings were expected to be awaiting evaluation and certification. It is expected that by year 2012, there will be around 1000 certified green buildings. This translates into a marketplace possible of USD 4 billion.

Although the National Building Code (2005) is voluntary, Energy Conservation Building Code (ECBC) will shortly become mandatory for commercial buildings with a connected load of 500kW or greater, and applicable to all buildings with a big air-conditioned floor region of 1000sqm or higher, and is recommended for all other buildings. Energy Service Organizations (ESCO) marketplace is developing with government support. The Government of India is planning an expenditure of INR490m by means of the Ministry of New and Renewable Energy (MNRE) in the course of 2008-12 for the promotion of energy efficient solar or green buildings in India.

Regardless of all these efforts, the potential to be tapped is immense as compared to the market tapped. In 2008, green buildings accounted for only around 8 percent of total Grade-A commercial construction in India. There remains an enormous energy savings possible. Some specialists project that total built-up green developing area will increase three-fold to approximately 100 million square feet by 2014. Green buildings therefore represent the future of commercial infrastructure creation in India.

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