How should Singapore’s property sector navigate sustainability, and are Singapore’s regulator and bourse doing enough to encourage decarbonisation? In a special commentary, OCBC Credit Research analysts offer a snapshot of Singapore’s status on green buildings, green financing, strategies and disclosures.
Property is a major contributor to emissions. “The buildings and construction sector accounted for 39% of carbon dioxide emissions globally in 2018, according to the International Energy Agency, mainly due to building materials and energy generated to power buildings,” write OCBC’s Wong Hong Wei, Andrew Wong, Ezien Hoo, Chin Meng Tee and Ong Shu Yi in a Jan 19 note. “Due to the sector’s outsized impact, regulators, investors, tenants and even homebuyers have begun to react, which results in a shifting landscape for the property development sector.”
Stakeholders are taking action, and regulators are stepping in as well, they add.
In Singapore, the Singapore Green Building Masterplan was introduced as part of the Singapore Green Plan 2030, with “80-80-80” key targets to be achieved by 2030. These include greening 80% of buildings (by gross floor area), attaining Super Low Energy (SLE) rating for 80% of new developments and improving energy efficiency for best-in-class green buildings by 80% (from 2005 levels).
According to Building and Construction Authority (BCA), 49% of Singapore’s buildings have been greened as of December 2021. This is “still a distance” from the stated targets, says OCBC. “In any case, all new buildings and major retrofitting of existing buildings with more than 5,000 sqm of gross floor area must adhere to a minimum environmental sustainability standard.”
Listed real estate companies are also eyeing this closely, with climate-related disclosures becoming mandatory for Singapore Exchange (SGX) names from FY2024.
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Citing the Singapore Governance and Transparency Index (SGTI) 2022, OCBC notes that listed real estate companies and developers score higher on relevant disclosures than most industries, including utilities, health care, industrials and consumer staples. “That said, the range of outcomes are wide, with the larger developers scoring better.”
The green wave has reached real estate’s issuers, lenders and investors, too. Low-Carbon Buildings accounted for 30% of the use of proceeds of green investment in 2021, according to Climate Bonds Market Intelligence. These projects include new buildings that meet energy efficiency targets, as well as enhancements to existing buildings.
“While issuances have dipped in 2022 due to rising interest rates, we believe there is room for green bond issuances to grow given its increasing focus,” says OCBC.
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Tenants and homebuyers are similarly onboard, says OCBC. “According to CBRE’s 2021 Global Investor Intentions Survey, 60% of respondents have included environmental, social and governance (ESG) considerations as part of their investment strategies and we think this may grow with ESG being an increasing focus.”
Tenants and homebuyers are willing to pay a premium for rental or purchase of green units, they add. According to JLL, green certified offices in Singapore can fetch a rental premium of 4% to 9%.
Green buildings command green premium
In Singapore, the Green Mark certification scheme launched by BCA provides sustainability guidelines for property developers. The ratings are aimed at recognising efforts which go beyond mandatory regulation standards.
This includes higher standards on energy efficiency, indoor air quality, greenery provision, active mobility considerations, materials and waste management and water efficiency.
Over time, BCA has progressively set higher standards, with the latest updated Green Mark 2021 scheme raising the requirements for energy efficiency standards. A Super Low Energy category was also added, which ranks higher than the categories of Platinum, GoldPlus and Gold.
BCA has undertaken a consultancy study of the life cycle costing analysis of Green Mark projects, which found net positive savings due to energy savings outweighing upfront investment costs, note OCBC’s analysts.
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In another study conducted by Dodge Construction Network in 2021, Singapore green renovations and retrofits resulted in lower operating costs in the first 12 months by 10.7%, which increased to an average of 16.3% from the second to sixth years.
New green buildings, meanwhile, see 10.8% lower costs in the first 12 months, average 14.6% from the second to sixth years.
The same applies to residential properties. In a Frost & Sullivan study commissioned by BCA in 2016, 54% of homeowners were willing to pay 3%-4% more for a Green Mark building. More than 90% of homeowners agree that green buildings provide utilities cost savings, reduced impact to the environment and/or health benefits.
“While it is difficult for us to further conclude that such willingness would translate into actual purchases at higher prices, the willingness to pay a premium should increase amid higher electricity prices,” says OCBC.
According to the same Frost & Sullivan survey, office tenants are willing to pay an average of 3.5% more for leasing an office in a Green Mark certified building. Similar to homeowners, office tenants perceive benefits through cost savings from utilities, health benefits for employees, higher productivity and increase in job applications.
OCBC adds that multinational companies typically prefer Green Mark-certified buildings, which help their sustainability credentials.
According to CapitaLand Investment, institutional tenants have begun to avoid buildings that do not meet their minimum green standards.
This may result in demand for green buildings outstripping supply, says OCBC. According to JLL, in Hong Kong where only 29% of Grade A offices are green-certified, the rental premium for LEED Platinum buildings is 28%, in comparison to 4%-9% in Singapore, where 90% of Grade A offices are green-certified.
The UK reports similar findings for green buildings. According to a study by Knight Frank in 2021, prime Central London office rents with Building Research Establishment Environmental Assessment Method (BREEAM) certifications enjoy rental premiums ranging from 3.7%-12.3%.
Green financing the mainstream
Real estate green financing is becoming mainstream in Singapore, says OCBC. This involves developers taking up green loans, sustainability linked loans, issuing green and/or sustainability bonds, with the use of proceeds slated for green/sustainable/sustainability-linked projects.
Examples of significant borrowers/issuance include Frasers Property ($9.11 billion total financing from FY2018 to FY2022), City Developments (more than $3 billion as of Dec 31, 2021) and GuocoLand ($730 million from a project green loan).
OCBC, for one, marked $34 billion of loans in its sustainable finance portfolio as of 2021, ahead of its $25 billion sustainable finance portfolio target by 2025.
Further, the three local banks have joined the Net-Zero Banking Alliance, targeting reduced emissions by 2030 and a much further reduction by 2050 for several sectors including real estate.
“We think real estate companies who are reliant on funding, may in time to come, could be compelled to comply with the required sustainability practices, or they may face reduced funding opportunities,” says OCBC.
Regulators are also supporting the rollout of sustainability finance. The government announced through Budget 2022 that up to $35 billion of green bonds will be issued by the government and statutory boards by 2030.
The Singapore Green Bond Framework, which will be used as a reference, was structured to align with the core components and key recommendations of the International Capital Market Association (ICMA) Green Bond Principles 2021 and Asean Green Bond Standards 2018.
According to the Ministry of Finance, proceeds will be used in eight categories of projects, with green buildings as one of the categories.
Selected strategies
To tackle their carbon footprint, real estate companies have several approaches, including retrofitting buildings and improving energy efficiency, on-site renewables and carbon offsets and renewable energy certificates.
OCBC believes retrofitting is a “quick win” for aged buildings. “Primarily, this delivers positive net present value with short-term payback, according to findings from URA. Such retrofits may include replacing aged chiller systems with modern ones which are energy efficient, usage of energy-efficient light bulbs and installations that filter out heat.”
In addition, there can be investments in technology to increase energy efficiency, which can yield 8%-15% operational return on investments, according to CapitaLand Investment.
With steep declines in the cost of production in solar energy and soaring prices of electricity, on-site renewables, such as rooftop solar panels, can partly or more than fully offset energy usage.
For example, Keppel Infrastructure @ Changi building was awarded the Green Mark Platinum Positive Energy certification, with the building fitted with 4,000 sq m of solar panels producing more than double the energy it consumes.
But this has its limitations too. “In practice, we think it is a challenge for higher density buildings to reach net-zero energy with just on-site renewables. After all, these buildings are the exceptions but not the norm. According to the Solar Energy Research Institute of Singapore, Singapore’s potential to deploy 8.6 gigawatt-peak of solar energy by 2050 would only satisfy 10% of the projected energy demand,” says OCBC.
For carbon emissions that cannot be reduced or replaced, renewable energy certificates (REC) and carbon offsets can be purchased, notes OCBC.
Examples include CapitaLand purchasing REC from CapitaLand Ascendas REIT which has installed solar panels on its industrial properties, as well as City Developments purchasing REC on SP Group’s blockchain platform for electricity consumed at its headquarters and part of its commercial buildings operations to offset 734 tonnes of carbon emissions.
CDL has also purchased high-quality carbon credits to offset its emissions through Climate Impact X, a global carbon credit exchange. The credits are expected to offset 6%-7% of CDL’s emissions over three years.
New rules and disclosures
SGX already requires sustainability reports to be issued for its listed companies. This includes the disclosures on material ESG factors, policies, practices, performance and targets in relation to the material ESG factors.
Further to this, climate-related reporting based on the Task Force on Climate-related Financial Disclosures (TCFD) will be required for the real estate industry from FY2024, along with disclosures on board diversity.
The SGX does not prescribe the specific sustainability framework to use, though listed companies have to explain its choice for the framework that is chosen.
Specific to the real estate industry, the Global Real Estate Sustainability Benchmark (GRESB) is an industry-led organisation that provides standardised and validated ESG data to financial markets.
Other frameworks include Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), International Integrated Reporting Council (IIRC), TCFD, CDP Global (CDP) and Climate Disclosure Standards Board (CDSB).
“With the adoption of one or more of such frameworks, a standardised approach should mitigate concerns on greenwashing while potentially providing information on financially material sustainability factors which helps to inform investors on the relevant risks and opportunities,” notes OCBC.
