Whole life cost in real estate: Sustainability by design (part two)

Are we seeing a significant transition towards whole life costs over CapEx in real estate? What factors are driving this shift and what challenges are impeding adoption?  In a recent webinar, a panel of experts discussed whether a whole life cost strategy can enhance decision-making in the design and operation of assets and lead to more informed investment decisions.

Moderated by RICS’ director of surveying practice, Charlotte Neal MRICS, a recent webinar discussed whether we are seeing a significant transition towards whole life costs in real estate and the challenges and benefits of such an approach.

Why adopt a whole life costing approach?

Whole life costing and modelling allows stakeholders to make informed decisions and compare options on the potential costs, savings, return on investment and sustainability of an asset throughout its lifespan. That includes construction, operational, maintenance and end of life costs, explains Riz Cader, whole life costing lead at global property and construction consultancy Gleeds.

Adopting a whole life cost approach upholds the value of a building through better operational and maintenance efficiency, cost optimisation, sustainability and risk management. ‘Lenders want to know that you will maintain your building so that its value is preserved. They don't want to lend and then see the building's value drop’, says Riz.

As an ESG example of whole life cost, Riz compares the costs between naturally ventilated and mechanically ventilated buildings. Naturally ventilated buildings require more effort and higher initial costs to design, especially on a larger scale. However, utilising natural ventilation results in lower operational costs due to the absence of mechanical equipment running for extended hours. This leads to reduced energy consumption and lower carbon emissions, offering better, long-term outcomes over the lifetime of the asset.

Spending now to save later

Generali Real Estate is a long-term investor and has therefore adopted a whole life cost strategy for its projects, says Paolo Micucci, head of engineering and project management at Generali, and CEO of Generali’s CityLife redevelopment scheme. While we may spend a bit more initially, we achieve savings in the long run, which also benefits our tenants, says Paolo. In recent years, Generali has been also addressing the mandatory energy transition to renewable energy, driven by Italian national policies and European Union directives.

Generali’s CityWave is a sustainable office development situated in Milan’s CityLife, one of the largest redevelopment projects in Europe. Owned by Generali Group and managed by Generali Real Estate, CityLife covers an area of 366,000sqm and features residential, business and shopping districts, together with a public park.

CityWave’s two office buildings are connected by a wave-shaped photovoltaic roof, generating green energy. The design emphasises flexible, comfortable, and collaborative spaces to accommodate modern work styles. It is compliant with the EU taxonomy for sustainable activities, an EU classification system that specifies what constitutes environmentally sustainable economic activities. Compliance is mandatory for issuing green bonds. While CityWave’s green credentials resulted in higher upfront costs, the sustainable features are expected to reduce operational and maintenance costs over time, says Paolo.

Climate risk and sustainability

When considering whole life costs, there is now a greater focus on climate risk in the clients' decision-making process, says Jeff Blaylock, head of UK delivery at ESG data intelligence firm Deepki. ‘A lot of our conversation is helping our client base through that process’, adds Jeff. When considering environmental and climate risks at a portfolio level, it can significantly influence capital allocation decisions across a business, impacting long-term investment strategies and asset value, explains Jeff. Assets at risk of stranding can be managed proactively and action taken sooner rather than later, adds Jeff.

‘One of the things we've been hearing from talking to our client base is an increase of purchasing of poor energy performing buildings with the goal of retrofitting them and adding value’, says Jeff.

Riz agrees that there has been a significant increase in retrofitting buildings rather than new builds and adds that ‘the most carbon-efficient building is an existing one’. One recent trend he has observed in the Middle East is that buildings are now being remodelled instead of rebuilt simply due to aesthetics.

While Generali includes operation and maintenance costs in its projections, it does not factor in disposal costs, as it usually renovates the buildings after 20 years, says Paolo.

Making the business case

With a building’s life cycle spanning a variety of different stakeholders, formulating a whole life cost strategy can sometimes be challenging.

Convincing each stakeholder requires presenting the benefits from their specific perspectives, explains Riz. For instance, he says, a finance director might be persuaded by showing them that the net present value of expenditures over 25 to 50 years offers a better rate of return, despite higher initial capital costs. From an environmental stance, reducing carbon output by not frequently replacing fixtures and fittings aligns with sustainability goals. Overall, a building with better whole life costs will likely have lower maintenance costs, resulting in a more efficient and cost-effective asset, says Riz. While for a property investor, for example, higher initial expenditure on sustainable features can result in higher rents due to tenants willing to pay more for lower operating costs. Sourcing renewable energy is a condition for tenants of Generali’s green leases, says Paolo. Initially this approach was challenging but has now gained much wider acceptance, he adds.

Making data more accessible for the industry

Trust in the underlying data is crucial for determining whether tenants are willing to pay more for sustainability measures. Confidence in this data allows investors to move forward with the decision-making process and CapEx planning, using various benchmarks and maintain clear transparency, says Jeff.

Working out the base cost of a building is straightforward with the help of cost managers and quantity surveyors. The challenge lies in assessing additional costs, such as a school's annual energy use or a company's maintenance expense, says Riz. Not everyone is willing to share this data, and even when they do, it often lacks the necessary quality or detail. Riz believes that organisations such as RICS can help by acting as gatekeepers of this information, making it available to all third parties.

Jeff acknowledges that access to quality data has been a pain point for the industry. There are new tools available that can automate data flow across hundreds of buildings, using different tools across Europe and globally, says Jeff. For example, Deepki has over 1,300 different connectors with suppliers and data source operators to pull in automatic data feeds. This automation helps move past data collection to achieve transparency in understanding costs and move to the action stage, says Jeff.

Ten to 15 years ago, whole life costing was only a tick box exercise, but now that’s changing and clients are taking an interest in whole life costing and trying to understand it better, and that’s really good to see, says Riz.

Are we seeing a significant transition towards whole life costs over CapEx in real estate?

This webinar examines which factors are driving a shift towards whole life cost in real estate. The panel also discuss the best strategies for adopting a whole life cost approach to real estate to maximise efficiency, sustainability and value throughout the asset's life cycle.