Bricks and mortar – the places where we work, live and play. We might rent it, own it, or build it. For some this physical asset will simply be a line item on the balance sheet.
But real estate is so much more than that: from the moment we extract raw materials from the ground to build it, via occupying it and benefiting from its form and function, through to knocking it down and recycling it, real estate performs in a number of ways and can impact society positively and negatively, directly and indirectly. Responsibly owning, developing, or occupying real estate means being aware of these hidden costs and benefits to society.
A negative impact could be the number of modern slaves or child labourers – not necessarily on the construction site, but the victims hidden in the supply chain of every construction project.
Our analysis of the supply chain impacts of construction in the UK found that for every £1 million of revenue, there are globally: 0.03 victims of modern slavery, 0.5 victims of child labour, and 85 tonnes of carbon dioxide emissions.
A positive impact could be the improved productivity and wellbeing of employees working in well-designed space. This in turn increases company profits and tax revenues for the government. Equally important is the way real estate impacts local communities, positively through public realm or access to nature, or negatively if communities lose social cohesion and are not provided with local employment opportunities.
Real estate must serve the needs of the investor, occupier, community, and natural environment.
Climate, rightly, is high on the list of current priorities, but there are hundreds of other ways built capital impacts our lives – through the diverse ways in which it erodes, enhances and interrelates with our human, intellectual, social and environmental capital.
The coronavirus pandemic has highlighted these needs and the vitality of serving them. The pandemic and home-working has forced office occupiers to re-think the amount of space they need in a centralised location; the industrial sector to consider re-shoring its supply chain; retailers to prepare for even more on-line shopping; and the hospitality sector to ready itself for a ‘new normal’. All these realities have a sustainability angle.
It has also exposed the necessity of healthy working environments. The impact of real estate on our mental as well as physical wellbeing was already being considered by real estate owners in a pre-Covid world but has now been heightened. With many trapped working from home, the features of our houses – from energy efficiency to access to greenspaces – have also become focalised by lockdown as our relationship with real estate evolves.
Real estate owners and developers are increasingly integrating a number of sustainability considerations, as shown by the number of assets certified via third-party reporting initiatives such as GRESB, LEED, BREEAM & WELL. GRESB alone certifies buildings globally with a gross asset value of $4.1 trillion. This is a response to changing stakeholder requirements; planners, investors, occupiers and their employees are demanding better evidence of how a building will perform in terms of its Value2Society, throughout its lifecycle.
While valuable, the mainstream providers of third-party reporting fall short of providing real estate owners and developers with a comprehensive and coherent framework to measure, manage, and message the societal performance of their assets.
Route2’s Total Capital Accounting framework enables the evaluation of the wider economic costs and benefits of real estate, throughout its lifecycle. An owner or developer can better understand and prioritise various initiatives through translating their impacts into financial terms.
For example, investing in an on-site fitness facility and external landscaping will both provide an economic benefit in terms of increased health and wellbeing, but the gym might only benefit the occupier, while the landscaping might share the benefit with local community. As real estate owners consider their response to coronavirus, interventions must deliver Value2Society if they are to ensure business resilience.
It is through measuring and understanding the net impact to occupiers, local community, and wider society that more informed conversations can be had with key stakeholders, and Value2Society can be effectively demonstrated. Total Capital Accounting also provides a platform for investors to establish the causal links between sustainability and financial performance.
In the future, Value2Society and Value to Brand will become more closely aligned, with customers increasingly demanding evidence of how real estate delivers long-term value creation for all stakeholders. Ultimately, traditional real estate metrics such as ‘price’, ‘rent’, ‘yield’, ‘developer’s profit’ and ‘IRR’ will be interwoven with a quantitative measure of societal performance. We are not there yet, but it might not be too far away.