The growth of green certified buildings in the South African commercial property market has dominated industry attention since the certification of the first green office building in 2009. Office, retail, industrial and educational buildings have obtained certification via one of the Green Star certification tools. The Green Building Council South Africa (GBCSA) subsequently incorporated Excellence in Design for Greater Efficiencies (EDGE) into their suite of certification tools, specifically for the residential property sector.

THE BACKGROUND

South Africa continues to face multiple infrastructure challenges, especially with regard to electricity reliability (load shedding), coupled with above-inflationary year-on-year price increases. This has resulted in residential property owners and developers implementing solar photo voltaic (PV) energy systems in an effort to future-proof real estate assets via renewable energy, as a form of green building features and initiatives (GBFIs). Fortunately, a favourable climate, encourages the implementation of solar PV. The convergence of electricity challenges and high quantities of sunlight have created an opportunity for residential real estate developers to produce mid- to high-end housing solutions that incorporate solar PV from project inception. Furthermore, these housing products are EDGE-certified, which guarantee a minimum level of energy efficiency.

Research conducted by UCT’s Urban Real Estate Research Unit (URERU), in collaboration with a prominent South African residential property development company, attempted to determine how electricity savings (via solar PV) could be used to generate real-world savings for owners of EDGE-certified residential units, comprising one, two and three bedrooms.

THE RESEARCH

The investigation looked into the impact of electricity savings on tangible investment options for professionals owning and residing in an EDGE-certified residential estate located in Gauteng, South Africa. The residential estate contained 503 units, comprising 219 one-bedroom units, 232 two-bedroom units, and 52 three-bedroom units. The monthly electricity savings for the one-, two- and three-bedroom units were R157, R320 and R684, respectively. These savings were underpinned by actual kilowatt hour (kWh) usage for each of the unit types, and the energy savings were compared to the energy consumption of a non-EDGE rated residential estate (also containing one-, two- and three-bedroom units).

Research was conducted to determine the market price of the three residential typologies. Moreover, assumptions were made in terms of bond finance, which was an 80% loan-to-value (LTV), for a period of 20 years, with a cost of finance of 11.75% (prime interest rate) for non-EDGE units and of 10.75% (prime less 1%) for EDGE units. The monthly electricity saving was added to the monthly bond repayment to determine at what rate the loan duration would decrease, which would also result in an interest saving for the debt.

Figure 1: One-bedroom unit accelerated repayment schedule

THE FINDINGS

For a one-bedroom unit where the monthly electricity saving was R157, the loan duration reduced by 56 months (Figure 1), resulting in an interest saving of R81 748. The two-bedroom units experienced a monthly electricity saving of R320, and indicated a loan duration reduction of 61 months (Figure 2), resulting in an interest saving of R129 221. The three-bedroom units, with a monthly electricity saving of R684, exhibited a reduction in the loan period of 77 months (Figure 3), producing an interest saving of R204 807. Table 1 provides a breakdown of the electricity savings and loan details.

Figure 2: Two-bedroom unit accelerated repayment schedule

Figure 3: Three-bedroom unit accelerated repayment schedule

INVESTING THE SAVINGS

A hypothetical, proposed form of investment for the electricity savings plus the notional bond repayment, is the EDGE Alternative Investment (EAI) Fund. This would be an exclusive balanced fund, where owner/residents could start investing when the mortgage bond is settled, as a form of long-term wealth creation. The asset allocation of the EAI Fund is similar to other balanced funds currently offered in the investment market. The future value (FV) of the EAI Fund contribution until the original maturity of loan (240 months) is calculated, where a present value (PrVa) is calculated, applying an annual inflation rate of 5%.

The PrVa is compared to the original loan amount for each typology. The PrVa for a one-bedroom unit is R164 557, compared to a loan of R560 000, resulting in a real-world saving (RWS) loan ratio of 29%. This means that in today’s money, the EAI Fund returns represent slightly over a quarter of the loan amount. For the two- and three-bedroom units, the RWS loan ratio is 33% and 46%, respectively. In today’s money, the EAI Fund returns equate to a third and almost half of the respective loan amounts (Table 2).

Green building features and initiatives in the form of electricity efficiency can have a greater impact than the obvious direct financial (savings) and a positive contribution to the environment, which has been the standard argument since the emergence of certified green buildings in the South African commercial real estate market. The research exhibited the potential for real-world savings and future wealth creation for owners and residents of EDGE-certified residential units.