Trends on the cost and business case of GREEN BUILDING: a South African perspective

Since 2014, Green Building Council South Africa (GBCSA), the Association of South African Quantity Surveyors and the University of Pretoria have joined forces in a long-term study on our Green Building Cost Premium to refute the unaffordability argument against green building.

Supported by grounded industry data from the MSCI South Africa Green Annual Property Index, the findings of this study reveal interesting and exciting trends regarding the capital expenditure and the business case for green building.

The joint study on the Green Building Cost Premium (GBCP) published its findings in three industry booklets, released in 2016, 2019 and 2022 to date, with the 2024 version of the study findings scheduled for the second half of this year.

With the average GBCP for 2009 – 2021 found to be only 3.63%, this study confirms that the South African green building industry is innovative, and quick to learn and adapt. The industry’s growing maturity is apparent from the declining trend of the GBCP over time, as shown in Table 1 below.

Larger office buildings and office buildings with a higher base building cost (R/m²) were found to achieve Green Star certification at a lower GBCP (Figures 1 and 2).

Green building cost data is sourced using an Excel spreadsheet developed for this purpose, named the Financial Transparency tool. Successful submission of financial transparency earns buildings Innovation credits towards achieving the desired Green Star rating from GBCSA.

The success of this study resulted in the submission of green building cost data being integrated into the new V2 Green Star tool.

New emerging trends

Although the GBCP study focused on the costs of green building, other interesting aspects were also revealed. One such green building aspect was the changing nature of the tenant makeup of green office buildings.

The first number of South African office buildings achieving Green Star status during 2009 and 2010 were all single-tenanted buildings occupied by large corporate tenants. From 2011 to 2013, a new trend emerged, with between 30% and 40% of the Green Star certifications being generic office buildings developed for multiple tenant occupations (Figure 3). Since 2014, this market share has increased to between 50% and 80% – a trend expected to stabilise and continue.

Another set of green trends was identified by a 2021 postgraduate study at University of Pretoria on the “Use and Achievability of Credits in the New Built and Major Renovations V1.1 Green Star SA rating tool”. Based on a similar 2016 Australian study on their Green Star rating tool, the research considered the frequency of projects applying for specific credits, defined as the Credit Application Rate (CAR). The CAR was expressed as a percentage of total number of certified projects applying for a specific credit. The Credit Achievement Degree (CAD) was defined as the points obtained as a percentage of the total points applied for, on a specific credit. The Credit Gain Index (CGI) was then calculated as:

CGI = CAR x CAD

indicating a measure of the achievability of specific Green Star credits. A total of 17 credits had a CGI of > 90%, while 15 credits had a CGI of < 10% (Table 2). This data was considered by the GBCSA committee responsible for developing the V2 Green Star SA tool.

The business case for green building

The study determining the up-front capital cost of green building is only part of the challenge towards a more sustainable industry. The business case for green building and comparing the cost of ownership and the return on investment achieved by green buildings are critical aspects of the drive towards a sustainable built environment.

A simple example can be used to evaluate the business case for green buildings, based on findings from the above GBCP study and data from the MSCI South Africa Green Annual Property Index 2022 (read more about the 2023 report on page 30). The example makes use of first-year and marginal returns to evaluate the modelled performance of a green building relative to a similar non-green building.

Assume the following in an A-grade office building:
Construction area: 10 000m2
Gross lettable area: 9 200m2
Estimated building cost: R15 000/m2
Green building cost premium: 3%
Estimated land cost: R30 million
Gross monthly rental: R170/m2

MSCI findings on their green property portfolio:
Green building rental premium: + 14.2%
Green building vacancy premium: – 4.3%
Green building operational cost: – 10.6%
Capitalisation (CAP) rate: – 0.5%

Total project cost

Based on the construction area and the estimated construction cost, the non-green building will cost
R150 million (10 000m² x R15 000/m²), and if you add the land cost (R30 million), the total project cost is
R180 million. The GBCP of 3% will result in an additional cost of R4.5 million (3% x R150 million) and a total project cost of R184.5 million for the green building.

Net annual income

The gross monthly income for the non-green building is R1 564 000 (9 200m² x R170/m²), and for the green building is R1 786 088, or R222 088 more, due to the 14.2% rental premium (14.2% x R1 564 000).
Assuming an average vacancy factor of 16.3%, this calculates to R254 932 per month (R1 564 000 x 16.3%) for the non-green building, and the vacancy factor for the green building is 15.6% (4.3% lower), calculating to R278 610 (R1 786 088 x 15.6%). The gross monthly income (after vacancies) is then R1 309 068 for the non-green building, compared to R1 507 478 for the green building.

Assuming an average operating cost of 15%, this calculates to R234 600pm (R1 564 000 x 15%) for the non-green building. The operating cost for the green building is 13.4% (10.6% lower), calculating to R239 510 (R1 786 088 x 13.4%). The net monthly income is then R1 074 468 for the non-green building, compared to R1 267 968 for the green building. The net annual income is then R12 893 616 for the non-green building, compared to R15 215 616 for the green building. The net annual income of the green building, therefore, exceeds that of the non-green building by R2 322 000.

First-year return

The first-year return of the non-green building is 7.16% (R12 893 616 / R180 000 000), compared to 8.25% for the green building (R15 215 616 / R184 500 000). The modelled first-year return of the green building exceeds that of the non-green building by 15.13%.

The marginal return on the R4.5 million additional investment required calculates to 51.60% (R2 322 000 / R4 500 000). Although this is a modelled exercise, these are significant performance numbers based on proven industry data and should be very achievable in the real world.

The results of this exercise confirm the widening acceptance of green buildings in the South African office space market and the growing maturity of the green building industry, which is doing well – while doing good.